Mexico’s government has been chipping away at the country’s electricity market reforms ever since Andrés Manuel López Obrador assumed the presidency in December 2018.

A planned 2019 auction of renewable energy contracts, dominated by foreign private investment, was cancelled. Natural gas contracts with private developers were renegotiated. Attempts were made to grant clean energy certificates, awarded to clean energy generators that began operations after August 2014, for legacy state-run hydro plants.

Last month, the government suspended synchronization trials for 28 wind and solar projects and placed indefinite limits on the amount of electricity renewable resources can provide to the grid, measures that affected 4.5 GW of capacity.

The final blow may have come on May 15, when the government announced new regulations that give priority to electricity generated by Mexico’s state-run electricity monopoly, Comisión Federal de Electricidad (CFE). Relying on gas and heavy fuel oil, CFE’s energy costs are as high as $141/MWh. In comparison, renewable energy, without marginal costs, goes for about $20/MWh and has generally been dispatched first.

No wonder, then, that as renewable developer Mannti Cummins put it, a WhatsApp war erupted that afternoon and into the evening. (Because Mexican phone companies charge for texts, many phone users resort to the WhatsApp Messenger tool.)

“I read through [the rules], and it hurt. ‘I can’t believe they’re doing this. I can’t believe they’re doing this,’” Energía Veleta’s Cummins told RTO Insider. “It’s just the weirdest thing I’ve ever seen.

“I’ve been in kind of a daze since then,” he said. “This flips the whole market on its head. It kills renewables. They’ve taken some body blows and punches, but it’s a knockout for renewables.”

The new policy also limits new power generation permits and places additional restrictions on new renewable resources. That places at risk 44 renewable projects, worth about $6.4 billion, scheduled to begin commercial operation this year and next.

Mexico’s energy ministry, Secretaría de Energía (SENER), said the rules were necessary because of a drop in demand caused by coronavirus lockdowns and to preserve the grid’s reliability, safety and continuity. Market participants and observers aren’t buying that and note the rules will allow CFE to burn fuel oil the country’s state-run petroleum company, PEMEX, can’t sell in a world awash with oil.

A May 18 report produced by global law firm Norton Rose Fulbright said, “SENER has eliminated any doubt that power sector policy in Mexico is being driven by the state-owned utility and dominant market player [CFE], rather than by sound and competitive policy principles enshrined in Mexican law.”

That would make a seer of José María Lujambio, former legal counsel at Mexico’s regulatory commission (Comisión Reguladora de Energía, or CRE) and the Austin, Texas-based energy practice leader for Mexican law firm Cacheaux Cavazos & Newton. A couple of years ago, he predicted CFE would enjoy a “privileged position” under AMLO, as López Obrador is more commonly known. (See Changes Add Uncertainty to Mexico’s Power Market.)

“It’s another chapter, perhaps the most shocking, among several specific measures that have put obstacles in place for private participation,” Lujambio said last week.

Duncan Wood, director of the Wilson Center’s Mexico Institute and an internationally respected specialist on North American politics, said no one should have been surprised by the recent announcements. AMLO came into power promising greater state control of the country’s natural resources and cracking down on what he said was private corruption.

“Still, it came as a bit of a shock because it’s such an obvious, blatant aggression against the energy reform of 2013,” Wood said in a WhatsApp message. “What we’re seeing here is an attempt to centralize control of the electric system, to promote CFE as the dominant actor within the electric sector.

“Ultimately, this is all about increasing political power and centralizing control over the economy,” he said. “This is one way of attempting to eliminate competition for CFE, not just in terms of competition for generating electrons but about competition for the supply of electricity to the market. If CFE becomes the only actor that can supply electricity, that gives it an enormous amount of political power.”

“[AMLO’s] actions prove he wants to stick it to private companies,” said Cummins.

‘Huge’ Potential

Ambassadors from the European Union and Canada were quick to respond to the latest measures, sending letters to SENER Minister Norma Rocío Nahle on May 15 that were almost immediately leaked to the Mexican media. European companies Engie, Enel, Iberdrola and Vestas and several Canadian firms dominate Mexico’s renewable market.

“This agreement establishes various actions and strategies [for] operational control, which put at risk the operation and continuity of renewable energy projects of Canadian companies in Mexico,” wrote Graeme Clark, Canada’s ambassador to Mexico.

“Potential investors will be completely freaked out by this move,” Wood said.

Some market participants expect legal injunctions to stop the rules before they are in place. That’s what happened following April’s suspension of market tests for renewable resources. The country’s grid manager backpedaled and began pre-operational testing again.

Wood pointed out that during AMLO’s May 18 mañanera — as his daily morning two-hour press conferences are called — Mexico’s president said he respects the decision of the courts.

“I don’t think this is the end of the story, however,” Wood said.

SENER’s proposal was published in Mexico’s version of the Federal Register on May 15, but not before pushback from the national commission of regulatory improvement (CONAMER), which determines whether new laws have an economic impact. CONAMER called for regulatory impact studies and a 20-day public comment period, saying the new measures would pose compliance costs on companies.

Those requests were to no avail. The commission’s chief resigned the afternoon of May 15. An hour later, Cummins said, the decree was published.

“It’s clearly illegal,” he said. “Not only did they not follow the procedures in making changes to regulations, they pushed it through on this fast track.”

“The planning and reliability of the National Electric System requires rational economic regulation for the accelerated and progressive incorporation of all energies,” SENER said in a statement May 16. “In the case of intermittent energies, they must be incorporated through the intervention and necessary support of plants that have full availability and provide planning and operational reserves.”

As if to rub salt in the wounds, CFE Director Manuel Bartlett said last week private renewable companies should pay for part of the market’s baseload power. “Do you think it’s fair for the CFE to subsidize these companies that don’t produce power all day?” he asked Reuters.

So where does Mexico’s electricity market go now? Wood said that barring an electoral loss in 2022’s “mid-terms” and an ensuing AMLO resignation, private developers will have to wait until the next administration takes over in 2024 for a change in fortunes.

“Mexico has incredible natural endowments for renewable energy,” he said. “It has shown that if you create the right legal framework and regulatory framework, then companies from around the world are willing to invest in renewable energy and produce electricity at an incredible low cost.

“There are huge opportunities for renewable energy long-term,” Wood said. “But short-term, not a lot.”