Mexican Renewables Face Uncertain Future

May 27, 2021

In 2013 Mexico’s previous president Enrique Peña Nieto made history when he passed an energy reform that opened up the sector to private investors. Now the current president Andrés Manuel López Obrador, or Amlo, is doing his best to rewrite history by dismantling the reform. Yet in undermining his predecessor, he is also threatening Mexico’s embryonic renewable sector.

Amlo wants to reform the Electricity Industry Law and in March passed a law to change the dispatch rules under which electricity will be fed to the power system. “According to the bill, the hydroelectric power plants owned by the Mexican Federal Electricity Commission (CFE) will now have priority”, explains Victor Ramírez, Perceptia 21 Energia partner and spokesperson at Plataforma Mexico Clima y Energía. “Electricity produced by the CFE’s nuclear, geothermal, combined cycle and thermoelectric plants would come second. In the third place are the private solar and wind power stations; and the last players would be the private combined cycle plants.”

But changing the rules of the game like this will cause severe damage to Mexico’s finances and international image, says Gonzalo Monroy, Managing Director of local energy consultant, GMEC. Power companies are already fighting the new law in the courts. Shortly after it was passed, more than 100 companies and organisations immediately filed ‘amparo’ law suits which persuaded a federal court to suspend the reform until these cases have been decided. Monroy estimates compensation and fines could be “more than three times than the $16.5billion the Mexican government had to pay after cancelling the Mexico City Texcoco Airport two years ago.”

No more renewables

Renewable power project auctions have been halted since the new government took office on December 2018. “This new law would stop the Mexican government from holding further auctions for private power, ensuring no new renewable power projects will be developed in the coming years”, says Fernanda Ballesteros from think tank, Mexico Evalua. That’s bad news for an administration that has already overseen an 80% reduction in foreign direct investment.

The law sends a worrying message to the private power sector.  Local and foreign players have invested billions in developing energy projects under the Mexican Energy Reform and this bill changes the rules by which such investments were made. Oscar Ocampo from Mexico City-based think tank, IMCO, estimates that cancelling power auctions will cut private investment by $8billion from 2020 to 2022. While Ballesteros believes compensation for individual renewable energy companies with standing contracts could reach $200m.

With these political changes, Mexico would fall behind countries like Colombia, Chile and Peru that have made significant advances in clean energy…

The value of compensations and legal awards for the entire Mexican power sector could represent about 11% of Mexico’s GDP. According to Ramirez, compensation from projected auctions that were halted and contracts in progress could reach $61bn. “Mexico was becoming a poster child for Latin American renewable energy during the past administration. With these political changes, Mexico would fall behind countries like Colombia, Chile and Peru that have made significant advances in clean energy”, says Ramirez.

The new law won’t just hamper power generation, Mexico, explains Ramirez. Companies like General Motors are committed to reducing their carbon footprints by producing electric vehicles and using clean energy for its production plants. If the Mexican government reduces the renewable energy access to these companies, they are going to look for alternative sites, threatening thousands of jobs.

International impact

With these changes in the law, Mexico will fail on its commitments under the Paris Agreements and other international free trade agreements signed by Mexico with different economic regions or countries, including the recently signed USMCA, with the US. 

Existing power projects will face new restrictions that could jeopardize their financial feasibility. Likewise, power generation and power trading services will not be provided under free market conditions, since the Independent System Operator would give priority to CFE’s generation, points out Ballesteros.

Investors are already spooked, with Spanish renewable giant Iberdrola recently suspending Mexican investment until the regulatory outlook clears….

“International investors may also consider international arbitration under the bilateral or multilateral investment treaties Mexico has executed, including the USMCA. Indeed, signatory countries to the Paris Agreement could impose new tariffs to the country for violating the agreement”, says Ocampo. While it’s impossible to know the full potential consequences it’s clear that some damage has already been done. The Amlo administration has shown that it doesn’t want private-sector power investment and that the Mexican government is prepared to disregard international agreements. The goal, says Ocampo, is not lower consumer prices or higher energy quality but an ideological belief that only the state should control the power sector – even if that damages the environment. 

Investors are already spooked, with Spanish renewable giant Iberdrola recently suspending Mexican investment until the regulatory outlook clears. Iberdrola was subject of direct attacks from Mexican president in 2020, including non-specific accusations of corruption. Iberdrola, said the company has invested about $7bn in Mexico over the past 20 years and had plans to invest $3bn in the following years on the construction of five plants.  According to Ramirez, Iberdrola cancelled new investments but continue working on plants that were under construction.

One way Amlo could circumvent the courts is through a constitutional amendment of the the energy sector. To do that, he would need to perform well in June’s mid-term elections to gain a supermajority of two-thirds of Congress. Investors will be keeping a close eye on Mexico’s legislative elections on the 6th of June.