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01 September 2014
In December 2013 Congress passed a constitutional amendment to overhaul the Mexican energy sector (for further details please see "Energy sector overhaul now in effect"). The package of secondary legislation proposed by President Peña Nieto in April 2014 (for further details please see "Next step in energy sector overhaul: new legislative package published") has now been passed by Congress and was promulgated on August 11 2014 to become effective. While amending existing statutes to comply with the new framework, the legislative package includes a number of new laws. This update covers the provisions affecting the electricity and geothermal energy sectors and highlights key preliminary considerations for existing market participants and those that will enter the market as a result of the overhaul (for details on the provisions affecting the oil and gas sector please see "Energy reform implementing legislation now in force: oil and gas provisions").
In line with the constitutional amendments, the recently promulgated Electricity Industry Law opens the generation and marketing of electric power to private parties and expressly excludes them from the following public utility services reserved for the government:
However, distribution and transmission will be subject to third-party contracts.
The Electricity Industry Law creates a new structure and legal framework for the electricity industry based on:
The Electricity Industry Law contemplates the creation and operation of new government agencies and entities that will participate in the energy sector. The law includes the following provisions:
Power generation and marketing
With respect to power generation and marketing, the Electricity Industry Law introduces a wholesale electricity market in which producers and marketers can sell power based on costs. Only suppliers and those considered 'qualified off-takers' may purchase power on the wholesale electricity market. Aside from the sale of power through this market, power suppliers (which are essentially power marketers that hold a permit to provide power supply services) may sell power to qualified off-takers under bilateral agreements, without the need to resort to the existing self-supply scheme.
Generation companies ('gencos') will be entitled to sell their power output only through either the wholesale electricity market or a marketer, but may not enter into power supply agreements directly with end users. Therefore, producers will be required to have a separate marketer. The Energy Regulatory Commission (which will issue permits and regulate the industry) will provide rules governing the relationship between producers and affiliate marketing companies. Restrictions will apply only to energy supply; therefore, the producer will be entitled to market its other energy products (eg, ancillary services and transmission rights). Gencos will be required to obtain a permit and enter into a market participant agreement in order to access the wholesale electricity market.
With respect to transmission services, the Electricity Industry Law provides as follows:
The Federal Electricity Commission will transfer its dispatch activities and related assets to CENACE. In turn, CENACE will guarantee open access to the transmission infrastructure and allow the most efficient generation projects to supply energy to customers. In contrast to the existing structure, the Electricity Industry Law contemplates both an interconnection agreement and a connection agreement which will be executed between CENACE and the producer and qualified user, respectively; however, the law does not expressly refer to transmission agreements.
As the regulatory agency for the industry, the Energy Regulatory Commission will issue the market rules that will govern in detail the operation of the wholesale electricity market and its access conditions.
Imports and exports
The Electricity Industry Law contemplates limited provisions with respect to power import and export activities, since these will be included in the regulations to be enacted by the executive branch and other administrative regulations to be issued by the Energy Regulatory Commission. However, the Electricity Industry Law does provide that market participants are entitled to import energy, related services or other products which may guarantee sufficient resources to satisfy energy demand. Likewise, the law classifies the import of power for self-use purposes – without transmitting it through the national transmission grid or the general distribution grids – as 'isolated supply' (which will be permitted once the law becomes effective, subject to authorisation by the Energy Regulatory Commission).
The Electricity Industry Law establishes that from the law's entry into force until the date on which the wholesale electricity market initiates operations, the import of power will be permitted under the terms of the provisions to be issued by the Energy Regulatory Commission to regulate imports. Once the wholesale electricity market has commenced operations, the import of energy and ancillary products may be carried out by marketers and qualified users in accordance with the market rules. The market rules will include further details about the conditions and restrictions applicable to importation activities.
Likewise, the law includes provisions applicable to self-supply schemes which will exclusively cover power plants not interconnected to the national electric system, since the energy generated or imported will satisfy only the needs of a specific user onsite. The law refers to this type of supply as 'isolated supply'. These projects may be exceptionally interconnected to the national electric system; however, in such cases, the user/producer must enter into the corresponding interconnection agreement(s) and comply with CENACE's instructions and guidelines. While isolated supply will not be considered as power supply, it will still be subject to the obligations established by the Electricity Industry Law. The law grants the producers of an isolated supply system the right to allocate all or part of their production to such isolated supply. If only part of the energy produced is allocated to isolated supply, the producer may sell the excess energy on the wholesale electricity market.
Power supply services
In connection with power supply, the Electricity Industry Law contemplates three types of power supply service:
With respect to power supply, end users are free to contract with any existing supplier for the purchase of energy; thus, in addition to the Federal Electricity Commission, other suppliers may participate in the provision of basic supply.
The existing permits and interconnection agreements will be grandfathered in under the Electricity Industry Law. Therefore, all projects operating or under development in terms of a self-supply, co-generation, small-scale, import or export permit will be entitled to maintain the conditions contemplated under the Electric Power Public Utility Law. This right, along with the right to enter into interconnection agreements with the Federal Electricity Commission pursuant to the previous regime, has been extended to parties that are in the process of obtaining a permit from the Energy Regulatory Commission and entering into the corresponding interconnection agreement, to the extent that the development of the relevant project meets certain milestones and will be operational by December 2019. Permit holders must meet certain conditions in order to maintain their permits; otherwise, they will be required to migrate to the new scheme.
Notwithstanding the foregoing, existing permit holders are also entitled to participate partially in the wholesale electricity market by reducing the energy supplied under the Electric Power Public Utility Law.
Mexico is perhaps one of the countries with the greatest potential in respect of geothermal energy, with very limited resources exploited thus far. The new framework seeks to provide a significant boost to this sector by opening its exploration and commercial exploitation to private investment.
According to the Geothermal Energy Law, private entities will be entitled to undertake scouting, exploration and production activities in the geothermal sector, subject to obtaining the corresponding registrations, permits and concessions to be granted by the Ministry of Energy.
Scouting registration is required in order to undertake geophysical, geochemical or geological analysis or to use remote sensing technologies in the search for geothermal resources in a certain area. The registrant must demonstrate the requisite technical and financial capabilities to undertake these exploration activities. The registration will be valid for eight months; two months before this term expires, the interested developer must apply for an exploration permit.
The exploration permit allows interested parties to engage in exploration drilling activities in areas of up to 150 square kilometres. To obtain an exploration permit the applicant must prove its technical and financial capabilities and the technical feasibility of the exploration programme, with scheduled milestones. In addition, the Ministry of Energy is entitled to impose minimum drilling obligations on the permit holder, which must drill and complete the relevant number of geothermal wells. The permit will be valid for three years; during this period the permit holder will have the exclusive right to explore the covered area and must submit annual reports on the activities undertaken and their achievements. The permit holder may apply for the concession for exploitation of geothermal resources at any time within the term of the exploration permit, but no later than six months after the permit expires.
Concession for exploitation of geothermal resources
Finally, exploration permit holders that have both fulfilled all obligations under the exploration permit and submitted all technical documentation and information obtained during the exploration period are eligible to obtain a concession title for the exploitation of the geothermal resources in the delimited area for a period of 30 years.
Geothermal Energy Law implementation
Following enactment of the Geothermal Energy Law, the executive branch will have 120 business days to issue the regulations for the law, which will further detail the process to obtain the aforementioned permits and authorisations. In what is now referred to as the Federal Electricity Commission's own 'Round Zero', the Geothermal Energy Law provides that the commission is entitled to request from the Ministry of Energy the geothermal areas in which it wishes to continue operations. The Ministry of Energy will assess this request and award the corresponding concessions and/or permits to the commission. All areas not specifically granted to the commission may either be developed through a public-private partnership scheme with the commission or awarded to private entities through a bidding process run by the Ministry of Energy.
For further information on this topic please contact Rogelio López-Velarde, Jorge Jiménez or Amanda Valdez at López Velarde, Heftye y Soria by telephone (+52 55 3685 3334), fax (+52 55 3685 3399) or email (email@example.com, firstname.lastname@example.org or email@example.com). The López Velarde, Heftye y Soria website can be accessed at www.lvhs.com.mx.
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