After months of flirting with the idea, President Andrés Manuel López Obrador has just taken the most significant step toward a thorough review of the Mexican electric model. The preferred initiative that I sent to Congress on Monday for discussion changes the balance. If approved, the plants of the state-owned Federal Electricity Commission (CFE) will have preference over private power plants to upload their production to the grid. The change in the order of preference would deal a major blow to renewable energy plants, mainly in private hands, and would complicate their future expansion in the country.
The measure points to one of the pillars of the energy reform promoted by Enrique Peña Nieto in 2013 to open the sector to private investment. Then an electricity market was created based on the principle of “economic dispatch”: the plants with the lowest production cost, that is, the most efficient, were the first to upload their electricity to the grid. This principle favored renewables and combined cycle plants in private hands, generally cheaper. Meanwhile, CFE’s hydroelectric and thermoelectric plants, with higher production costs, had to wait their turn.
In explaining the reasons for the initiative, López Obrador considers that this element granted “great privileges” to the private companies and caused “serious damage” to the CFE, since it sometimes prevented the parastatal’s centrals from emptying their cargo. The reform erases the principle of economic dispatch. From article 4 of the Electricity Industry Law, the reference to “the generation and commercialization of electrical energy are services that are provided in a free competition regime” disappears.
The new scheme turns the old system upside down. The CFE hydroelectric plants will be the first to dispatch. This responds, in part, to the president’s belief that the impediments for hydroelectric plants to raise their production to the network are behind the frequent floods in his native Tabasco. Second, will come the other plants of the parastatal, including thermoelectric and combined cycles. Finally, they will dispatch wind and solar plants and combined cycles in private hands.
As the installed electrical capacity is higher than the demand, it is likely that the latter, paradoxically the cleanest and cheapest, will be left without being able to dispatch. This would complicate the sustainability of the renewable plants that currently supply the wholesale electricity market and would potentially threaten to raise the price of electricity. “The scenario could not be more adverse and more hostile and counterproductive for investors in renewable energies, both for those who have projects already completed or in progress, as well as those who would like to invest in this sector in the future,” says Agustín Bravo, a lawyer specialized in environmental and Former director of the Mexican Center for Environmental Law (Cemda).
The initiative poses a kind of forced renegotiation of the existing contracts between renewables and the Mexican State, alleging alleged defects, Bravo explains, something very serious. “In addition to what already exists, other negotiating battles are foreseen, as happened with the gas exploitation companies last year,” says Bravo.
The buzz about a possible counter-reform comes from afar. Since it was approved in 2014, López Obrador has openly expressed his hostility towards the energy reform, which he has described as “neoliberal” and “corrupt.” Once in power, the president promised to respect the contracts signed by the previous Administration, but his Government began to introduce changes to the electricity model through administrative actions, without modifying the legislation. It canceled the electricity auctions, tightened the conditions to access new permits and increased the transmission prices that renewables had to pay by up to eight times, among other actions.
The administrative assault, however, has run into legal conflicts. The companies affected have alleged that the changes contradict current legislation and the Constitution and have filed dozens of appeals before the courts that have led to the definitive suspension of the modifications. In addition, the Federal Economic Competition Commission (Cofece) has brought a constitutional controversy to the Supreme Court, considering that the measures go against the principles of competition and free competition established in the Constitution.
The rain of legal actions has been greeted with frustration by López Obrador, who has been considering for months the option of changing the constitutional text to accommodate his aspirations. For now, the government has chosen to modify the law. There are doubts, however, that this is sufficient to circumvent the limits imposed by the Constitution.
Bravo anticipates that the initiative, which must be discussed in Congress in the next 30 days, will face legal obstacles after being approved. The Institutional Revolutionary Party (PRI) reported in a statement on Monday that: “In case this reform is approved, we will go to the Supreme Court of Justice of the Nation in action of unconstitutionality to demonstrate the violation of the principles of the right to a healthy environment, non-retroactivity of the law to the detriment of citizens and legality enshrined in our Magna Carta ”.
On the other hand, the bill opens the possibility of lawsuits against the Mexican State by North American companies, protected by the region’s free trade agreement, the T-Mec. The proposal may violate trade agreements, says Juan Carlos Baker, one of the treaty’s negotiators. If so, a North American company could sue the Mexican state and the conflict would be resolved in a specialized international court. “This does not mean that they cannot pass the initiative, if they want to, they can, but it will cost a lot of money,” says the expert, “all this can lead to lawsuits that we are clearly going to lose and that can cost us huge amount of money ”.
Furthermore, this paints López Obrador as an opponent of the plans to combat climate change that his counterpart in the United States, Joe Biden, has put at the center of his Administration. The changes that the Mexican Executive has promoted compromise the objective inscribed in the Energy Transition Law of achieving 35% of clean energy by 2024. In 2019, the Emissions Gap Report, published by the United Nations Environment Program, has already warned that the Government “had halted years of progress in the sector that threaten to reverse the progress achieved.”
Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.