November 7, 2019

Update on Regulatory Aspects of Clean Energy in Mexico

By Antonio Riojas

Good news regarding Mexico’s electricity sector has been in short supply since late last year. Instead, the electricity industry has witnessed a series of controversial governmental decisions, which in certain cases clearly contradict the principles of Mexico’s 2013-2014 electricity reform. Such decisions included: exertion of unjustified political pressure against the former President of the Energy Regulatory Commission (“CRE” by its acronym in Spanish); the appointment of five new CRE Commissioners whose profiles and Senate confirmation hearings were criticized by both the general public and industry specialists; modifications to the strict legal unbundling of the Federal Electricity Commission (“CFE” by its acronym in Spanish); the cancellation of two proceedings to build transmission lines in Oaxaca and Baja California; and the suspension of auctions of financial transmission rights.

However, the highest profile news was the announcement by the National Center for Energy Control (“CENACE” by its acronym in Spanish), back in February 2019, of the cancellation of the fourth long-term auction. Such caused a paralysis for a large number of clean energy generation projects in the country, as well as the suspension of the most important mechanism that Mexico has for meeting clean energy goals and its resulting contribution to climate change mitigation.

At the end of September 2019, the Mexican government sent a different message when the head of the Department of Energy (“SENER” by its acronym in Spanish) made several statements that caught the sector by surprise, this time in a positive way. The Secretary of Energy noted that a fourth long-term auction was likely to be held, and that it would occur “as soon as possible”, but would be subject to two conditions. To paraphrase, the conditions are that the future auction would: (i) be held as permitted by congestion in the National Transmission Grid; and (ii) be regional, unlike the previous auction, “in order to achieve territorial balance”. Despite the conditions and the lack of a specific date for implementation, these statements were well received by the sector.

Unfortunately, the positive mood was short-lived. A few days after those statements were made, two new headlines came out and resonated quite negatively. First, on October 7, 2019, SENER sent to the National Commission for Regulatory Improvement (“CONAMER” by its acronym in Spanish) a draft of the Resolution amending the Guidelines that establish the criteria for the issuance of clean energy certificates (“CELs” by its acronym in Spanish) and the requirements for their acquisition (the “Resolution”). The Resolution was published on October 28, 2019 in the Official Journal of the Federation and became effective the next day. The second headline centered on the appearance of the CFE General Director before the Mexican federal House of Representatives on October 10.

The stated objective of the Resolution is to convert grandfathered power plants into creditors of CELs. This means that the CFE’s old clean power plants, most of which are hydroelectric, but also some geothermal and nuclear, will receive CELs from the CRE. This is in contradiction with the objective of CELs, which is to incentivize the growth of new clean generation plants, in addition to the capacity that existed prior to the electricity reform.

The Resolution, which was subject of at least 60 comments on the CONAMER website, presents several problems, among which are the following: (i) it favors the CFE, which is already the largest participant in the wholesale electricity market; (ii) it is a seemingly deceptive way to accomplish the clean energy goals that Mexico has set forth; (iii) it breaches the promise of the current administration not to modify the energy legal framework within its first three years; and (iv) it implies potential manipulation of the market owing to the oversupply of CELs and its possible depreciation, which as a practical matter could nullify the incentive for new clean energy projects.

On the other hand, the CFE General Director appeared before the House of Representatives and pointedly stated, among other things, that: (i) clean energy is too expensive because it requires backup from conventional power plants; (ii) CFE, as a State company should generate more electricity and such can be accomplished mainly with the modernization of its hydroelectric plants; and (iii) neither medium nor long-term auctions are necessary for CFE to acquire electricity and associated products.

If one can conclude anything from the above, it is that the landscape for clean energy in Mexico has become more complicated. Many hope the current administration will take into account legitimate concerns from stakeholders and, upon greater reflection, will reconsider the role of clean energy projects’ development in promoting domestic investment and employment, as well as in addressing climate change responsibly.