Counter-reform: latest developments in battle that has become war

Introduction
First attacks
Counterattack
Upcoming war and imminent counter-reform
Silver lining

Introduction

The Policy of Reliability, Security, Continuity and Quality of the National Electric System (Reliability and Security Policy),(1) which was issued by the Ministry of Energy on 15 May 2020, is just one of the many actions taken by the new federal government in an effort to prioritise the Federal Commission of Electricity (CFE), Mexico's state-owned power company, over other participants in the open electricity market implemented by the 2013 to 2014 energy reform. This effort is based on the government's conviction that it should control the majority of power generation activities and that decentralisation and private participation in the market would weaken and endanger Mexico's capacity to ensure energy security for its citizens (as well as its potential political desire to tear down the flagship achievement of the previous government – the energy reform).

The government has shown its determination to substantially limit private entities' participation in the power supply chain while simultaneously increasing the CFE's role therein.(2) Consequently, since a significant portion of the CFE's assets consists of conventional power generation plants that are less efficient and more expensive than privately owned new plants which rely on renewable sources, the government has also taken an aggressive stance towards renewable energy, arguing that its natural intermittence is too harmful for the grid and that its development should be immediately limited.(3)

First attacks

Between December 2018 (when the new president took office) and August 2020, the federal government took numerous actions against private market participants and renewables, including:

• cancelling power auctions and the construction of new power transmission lines;
• renegotiating the terms of various gas supply contracts with the CFE;
• blocking pending Energy Regulatory Commission (CRE) regulations;
• favouring the substitution of most CRE board members and appointing new members with less experience but a closer alignment with the government's policies, while also undertaking massive lay-offs of CRE personnel;
• reintegrating CFE's generation assets, which were previously separated following the energy reform to promote competition in the market;
• blocking and slowing down the granting of permits by the CRE;
• modifying the rules for issuing clean energy certificates (CELs);
• increasing the power transmission fees applicable to grandfathered projects of self-supply by up to 811%;(4)
• issuing a regulation to stop pre-operative tests of intermittent power-generation projects (allegedly only during the COVID-19 pandemic), preventing them from achieving their commercial operation date;
• issuing the Reliability and Security Policy, which imposes improper competition barriers on private and renewable energy power plants and inefficiently modifies basic market rules (including the so-called 'economic dispatch rule');
• issuing an energy sector programme which expressly indicates the objective of strengthening the CFE over other market participants and modifying the rules of the market; and
• publishing a memorandum from the president to energy regulators and the market operator (ie, the CRE, the National Hydrocarbons Commission and the National Energy Control Centre) which indicates diverse public policy priorities focused on strengthening the CFE and Pemex and directly asked the regulators if they had considered whether this could be achieved without a new energy reform.

Counterattack

To date, numerous market participants have challenged the last five points above before the Mexican courts, with many having obtained preliminary injunctions suspending the effects of these actions while the corresponding judicial procedures unfold.

These challenges have been exerted by not only private entities, but also governmental entities. The Federal Commission of Economic Competence (COFECE) and the governments of various states, including Jalisco, Tamaulipas and Colima, have submitted constitutional claims before the Supreme Court challenging the Reliability and Security Policy. COFECE and these three states have each obtained preliminary injunctions which render the policy ineffective until the disputes are finally resolved. Organisations such as Greenpeace Mexico and the Mexican Centre of Environmental Law have also obtained similar injunctions.

Numerous experts consider that the federal government's actions have violated several laws and regulations, so many of the abovementioned challenges will likely succeed. However, recent developments in the sector show that the battle will not end there; on the contrary, it is likely to continue to escalate.

Upcoming war and imminent counter-reform

On 12 August 2020 the CRE vetoed five regulations which had previously been approved. One of these contained specific provisions regarding collective distributed generation – a scheme which would have allowed small generators to sell energy produced on-site to users inside their facilities or location (which could have promoted off-the-grid generation at cheap prices, making it accessible for low-resource users, which would have been beneficial considering Mexico's transmission and distribution problems). Another vetoed regulation included provisions for the installation of batteries for storage (which would have helped to solve the intermittency problems that the government cites as being the main issue with renewables).

The decision to veto these regulations has generated significant concern as it clearly contradicts the federal authorities' recent claims that they are interested in promoting competition and the energy transition. Conversely, the decision seems to have:

• deliberately halted the development of cleaner and cheaper energy sources while a solution to the CFE's economic dispatch problem is implemented (the government is looking to prioritise the CFE's power dispatch so that its electricity is injected into the grid and sold to users ahead of cheaper options, which contravenes the economic dispatch rule – a basic principle of energy markets worldwide); and
• avoided a reduction of CFE sales to basic users.

At the end of August 2020 the CRE also published a regulatory schedule in which it indicated its plans to issue and modify 35 regulations, including those relating to:

• distributed energy;
• basic supply;
• market participants' information obligations;
• the functional, operative and accounting separation of market participants;
• updating the grid code;
• requirements for obtaining, modifying and transferring generation permits;
• the regulation of CELs; and
• connection and interconnection regulation.

All of these scheduled modifications are expected to follow the objectives mentioned above.

At the beginning of September 2020, despite multiple promises from the president that Mexico's energy legislation would not be reformed, his party – which holds the majority in Congress – announced a legislative plan to embark on a new energy reform. Although this outcome was expected, this was the first direct confirmation of the new government's intention to legislatively reverse the energy reform.

On 22 September 2020 the energy regulators' directors and the market operator held a meeting with the president to confirm that they would implement the measures contained in the memorandum previously sent to them (which includes, among other things, stopping issuing permits and modifying the rules of power dispatch). Although they stated that the objectives of said memorandum could be achieved without a constitutional reform, there is a high chance that courts will also reverse such measures if they are implemented, so it is likely that they will change their minds to align with the president's party and promote an energy counter-reform.

Silver lining

However, the industry should not consider this battle to be lost. The counter-reform is still in the early stages and neither its full scope nor completion are definitive (eg, it could be prevented if the president's party loses the mid-term election in June 2021). As such, civil organisations, experts, companies and other industry players should voice their objections to influence discussions in the media and Congress. All of these stakeholders can play an essential role in this paradigm shift by sharing informative material to reduce misinformation and counter the unsubstantiated ideological statements made during public discussions, as well as by continuing to defend their interests through collective and independent efforts (both judicial and extra-judicial). In this regard, stakeholders must keep up to date with progress and any parallel new actions taken by the administration in order to exert adequate defence mechanisms and adapt their operations accordingly.

Similarly, even before this imminent reform, industry players will likely be presented with new opportunities. In addition to a new privately funded energy infrastructure programme – which is expected to be announced in mid-September 2020 and will contain multiple projects – new opportunities will include:

• more association and contracting opportunities with the CFE (which is seeking to refurbish and increase its generation facilities and urgently needs to expand its transmission and distribution capacities);
• off-the-grid generation projects (isolated supply and local generation); and
• distributed generation projects (which are still allowed and profitable despite being affected by the recent regulatory vetoes).

The upcoming court decisions are also expected to help curb the government's actions and its intentions for the reform.

Finally, although the government's actions are based more on ideology than technical grounds, they are a democratic exercise that reflects what the new administration promised to its voters. Although more changes are expected, as long as the government abides by the law, they should still benefit future democratic transitions and contribute to the growth and development of the power industry. However, in order to secure these benefits, stakeholders must not give up. The time has come to unite efforts, raise voices and take action on all fronts.

For further information on this topic please contact Guadalupe Esparza Sánchez or Diego Álvarez Ampudia at Ramos, Ripoll & Schuster ​by telephone (+52 55 1518 0445) or email (lesparza@rrs.com.mx or dalvarez@rrs.com.mx). The Ramos, Ripoll & Schuster website can be accessed at www.rrs.com.mx.

Endnotes

(1) For further information on the policy and the various defence mechanisms that public and private entities have wielded against it, please see "Implications of Policy of Reliability, Security, Continuity and Quality of the National Electric System".

(2) The limit of power generation by private entities is 46% of Mexico's total power generation.

(3) This article deals exclusively with government actions relating to the power industry and the CFE. It does not discuss Pemex and the oil and gas industry, which is also being severely affected by the new government's policies.

(4) These are projects permitted by legislation prior to the 2013 to 2014 energy reform, which allow certain users to generate and sell power to their own shareholders.