| Mexico | Feb 20, 2022
New energy reforms in Mexico hope to take the sector to the next level.
Nearly eight years after the landmark energy reforms of 2013 in Mexico which were intended to transform the energy sector, President Andrés Manuel López Obrador (AMLO) has come up with another series of proposed reforms. The 2013 reforms aimed to streamline the privatization of the energy sector in Mexico, allowing foreign or private investors to enter the nation’s hydrocarbon and electricity industry.
The new reforms championed by AMLO in 2021, on the other hand, are trying to further empower the Federal Electricity Commission (CFE). Some are worried that the new initiative will undo the 2013 reforms and discourage private investors from entering the Mexican energy market. The 2013 reforms were introduced in the wake of a prolonged stagnation in oil and gas exploration activities off the coast of Mexico and a spike in the price of electricity.
It is worth remembering that the 2013 reforms were designed in such a way that their full impact would be felt only in the long run. Hydrocarbon exploration activities hardly strike oil in under a decade, neither is eight years enough for foreign and private investments in the electricity sector to bear fruit. The critics of AMLO’s 2021 energy reforms are afraid that the new initiative will nip the evolution of the energy sector in the bud, steering the Mexican energy sector in a completely different direction after eight years of relying on production-sharing contracts with private sector businesses.
Before making any judgments, let us first have a look at the changes that the proposed 2021 energy initiative will entail. The energy reforms will follow the amendment of three articles of the Mexican constitution, which will lead to the recognition of the energy sector as an example of “strategic activities.” Since “strategic activities” in Mexico must be almost exclusively controlled by government agencies, the CFE will enjoy a kind of monopoly in the sector if the energy initiative comes into effect.
The reforms will essentially return the CFE to its former position of power, giving it a kind of free rein in Mexico’s electricity sector, among other things. Other independent regulatory entities, meanwhile, will be disbanded, including bodies such as Comisión Reguladora de Energía, Centro Nacional de Control de Energía, and Comisión Nacional de Hidrocarburos will.
All this will have certain repercussions in various sub-sectors of the energy industry, but the effects will be most tangible in the electricity industry. With CFE becoming the go-to authority for the generation and dispatching of electricity, private energy companies will be only allowed to sell their electricity to the CFE at feed-in tariffs effectively determined by the government. There is no surprise, therefore, that private investors in the Mexican energy market are a little disgruntled about the proposed reforms. This may put an end to production-sharing contracts between the state and independent producers, which have kept the electricity prices within a reasonable range over the last eight years or so.
Before turning to hydrocarbons, there is one more thing that should be considered about the impact of the energy initiative on the electricity sector. By putting CFE in charge of managing Mexico’s entire electricity grid from Cuauhtemoc to Port Louis, the new reforms will effectively eliminate the possibility of competition among private local electricity companies. Since 2013, such companies have been able to adjust their prices in each part of Mexico, according to local production costs, which led to competitive prices in every local node.
This is most crucial for less privileged regions, where the income levels are low. As the costs of production in such areas are also low, the regulations brought about by the 2013 reforms ensured the access of the public to affordable electricity everywhere. Some are worried that the new reforms will have a negative impact on social equity and social mobility in Mexico by creating a vicious circle: holding back the development of underprivileged regions and making them even more destitute, while speeding up the flow of immigrants to the capital, Mexico City.
The 2021 reforms—if the initiative ever comes into effect—will also influence the hydrocarbons sector in ways which are not entirely clear at this stage. However, with the disbanding of the Comisión Nacional de Hidrocarburos, the Ministry of Energy will have the final say in the regulation of oil and gas exploration and extraction. The reforms may even have an impact on the development of clean energies in Mexico. Carla Ortiz, Director of Business Development at RER, a pioneer of renewable energies in Mexico that was born in the wake of the 2013 reforms, told TBY that “nothing is clear yet. The reform may bring about changes, though we are confident that the combination of solar energy and storage is profitable and independent. Based on what we know, this reform will undermine the country’s energy security, since it neglects renewable energy, prevents it from growing, and makes us dependent on fossil fuels.”