The principal laws that govern the ownership and structure of the power industry are:
Power Industry Ownership
Under the CPEUM, the power generation industry is a combination of state-owned and private investor-owned entities. The state has a monopoly on the public service of transmission and distribution of energy through the National Transmission Network (RNT) and the General Distribution Network (RGD).
The supply of power to end users is also a public monopoly, being considered a public service in charge of Federal Electricity Commission (CFE). Private Energy Receiving Facilities with qualified demands – 5 MW and up – can buy energy in the Wholesale Energy Market (MEM) to qualified Energy Generation Facilities, where they purchase energy through a qualified supplier with a market price, commercial CFE or by contracting directly with a private supplier.
Vertically Integration and Disaggregation
The generation segment has both types of organisation: (i) vertical when the CFE acts through subsidiary production companies, subsidiary companies or any partnership model allowed by the CFE; and (ii) horizontal separation when the CFE or the subsidiary productive companies can directly or indirectly participate in the social capital of more than one subsidiary company that carries out generation activities. The industry has a vertical organisation for the transmission and distribution of energy; this is due to the fact that the RNT is a state monopoly.
The CFE acts through its nine subsidiary companies and four affiliated companies, as established in the Terms for the Strict Legal Separation of the CFE (https://bit.ly/2LIsjmf).The subsidiaries are composed of six generation companies, a transmission company, a basic supply company and a distribution company.
The industry is configured as an unbundled system of companies. Until April 2019, there were a total of 79 generating companies and 45 trading companies by the private sector.
According to the National Electric Development Program issued by the Ministry of Energy, CFE's generating plants generated 52% of electric energy in 2017. Independent producers contributed 26.7%, and the remaining 21.3% corresponded to private companies under self-supply, co-generation and export schemes. Among the generators reported by the National Energy Control Center (CENACE) are Frontera México Generación, GPG Energía México and Iberdrola Generación.
In 2017, in the long-term auction market for clean energies, the private company with the largest contribution in clean electricity generation was Enel Green Power, with 38% of the total contribution, followed by Consorcio Engie Solar 1 with 14%.
CFE also has four affiliated companies: CFEnergía, CFE international, CFE Calificados and CFE intermediación de Contratos Legados.
CENACE oversees, regulates and administers the RNT and also plans and proposes the modernisation and coverage of the networks to the Ministry of Energy, which issues the National Program for Modernization or Coverage (PRODESEN). The LIE also allows for the construction and operation of private transmission lines exclusively for interconnection porpoises. The construction of the RNT its the responsibility of CFE, through is subsidiary CFE Transmission.
The Energy Regulatory Commission (CRE) issues provisions on the quality, reliability, continuity and safety obligations of the public transmission service and issues its opinion on the RNT and RGD modernisation and expansion programmes, to be considered by the Ministry.
Selling electricity to end users is a public service. CFE has a public monopoly, and is in charge of the CFE subsidiary company, CFE Suministro Básico and oversees the CFE affiliated company, CFE Calificados.
Foreign investment is not subject to review under Mexican regulation, nevertheless the investor or the investment recipient are bound to give notice to the Ministry of Economy regarding the investment; such notice constitutes the registration on the National Registry for Foreign Investment. If investment overall surpasses MXN20 million, the investor must file a quarterly report regarding the investments; when the investment surpasses MXN110 million, the investor must file an annual economic report.
There are no specific protections for the industry or sector, however it is worth noting that Amparo suspensions – measures similar to the writs of injunction and of certiorari – have become harder to obtain given the public benefit that the industry is considered to provide. The general protection for investors derives from the Foreign Investment Promotion and Protection Agreement between Mexico and other countries, which grants extra protection to investors against measures tantamount to expropriation, as well as access to the ICSID or UNCITRAL arbitration.
Currently, Mexico has signed 32 Agreements on the Reciprocal Promotion and Protection on Investment with 33 countries, which are designed to promote and protect the capital cycles that stimulate foreign investment. The countries listed are: Germany, Argentina, Australia, Bahrain, Belarus, Korea, China, Cuba, Denmark, Spain, Slovakia, France, Finland, Greece, Haiti (still in process), India, Italy, Iceland, Kuwait, Netherlands, Panama, Portugal, United Kingdom, Czech Republic, Singapore, Sweden, Switzerland, Trinidad and Tobago, Turkey, Belgium-Luxembourg Economic Union and Uruguay. These agreements represent an advantage and an incentive to encourage foreign investment from the listed countries.
The principal laws governing the sale of power industry assets or businesses are:
The LGSM and the LFCE regulate mergers and acquisitions of private companies; the terms of such operations are subject to the will of the parties under the principle of contractual freedom. Public assets must pass through a disincorporation process, under the LGBN.
There is no special requirement for mergers of companies in the industry as established in the LGSM.
Regarding market distortions, there is a process contained in the LFCE, through which the Federal Economic Competition Commission (COFECE), guarantees free market access and economic competition, regulates the behaviours or practices that are presumed as barriers to economic competition and sanctions market substantial power to determine prices, quantity produced or offered, displacements or pressure on economic agents or direct influence to obtain contracts, agreements, procedures or combinations that bring a direct benefit.
The process of disincorporation of real estate property owned by the state contemplates obtaining an administrative agreement from the Public Function Ministry, which issues such agreement through an Appraisal Commission of Public Property and the registration of the property in the Public Property Registry.
The following authorities do not regulate the purchase/sale or mergers, but their authorisation is required to transfer the authorisations/permits rights to continue operation of the generation facilities: SEMARNAT for the EIA; the CRE for the generation permit; and SENER for the social impact. The procedures generally only require the filing of the merger/acquisition agreement and a commitment letter to the authority stating the commitment comply with all regulations, among others.
The only restriction is the one mentioned above, regarding market concentration or distortion. In this case, COFECE could commence an investigation that could result in sanctions that suppress monopolistic practices, order partial or total breakdowns or impose fines.
The central planning authority that oversees and administers the RNT and the RGD is the CENACE.
CENACE operates the MEM and oversees and administers the RNT and RGT. Likewise, CENACE has operational control over the SEN under its faculties. CENACE must guarantee that the transportation and distribution services and networks, as well as the MEM, comply with the principles of efficiency, quality, reliability, continuity, safety and sustainability, therefore it must guarantee the satisfaction of energy demand under balance of lower costs to give stability to the SEN.
CENACE must assure that the MEM and RNT, as well as the RGD are operated under conditions of efficiency, quality, reliability, continuity, safety and sustainability with respect to the operation of the SEN.
In imports and exports, CENACE may use all the interconnection links necessary for isolated supply, supply to achieve reliability, standard or emergency supplies of generation facilities exclusively connected to the SEN and to meet the required level of reliability. Even though the CENACE has no direct control over emergencies, in the event of national electric system emergencies the permit holder shall make available to the CFE, at the interconnection point, the measurements, signals, communication channels and other necessary infrastructure so that the Commission may implement, if applicable, an automatic emergency upload.
In the past 12 months, the sector authorities have issued different regulations related to the control of tariffs of the services offered, tasks for different authorities, operational administrative plans and regulations on permits and applications.
One of the main regulations issued was concerning the bases and guidelines for acquisitions, leases and services of CENACE.
At the end of 2018, CENACE officially notified the different entities participating in the electricity industry of the suspension of the fourth auction for the acquisition of energy and clean energy certificates for the long term. This decision caused a leakage of investment in the Mexican electricity industry as it represented uncertainty for the market.
However, in recent days there have been announcements by authorities which clarify that the government's objective is to reopen auctions. The decision to suspend the auctions was to validate the transparency and effectiveness of the contracts previously obtained and to assess the economic benefits that the Mexican electricity industry has obtained with the opening of the industry to private investment. With this decision, the Mexican electric industry will be able to resume the assignment of contracts of electric coverage for the purchase and sale of power, and the obtaining of clean energy certificates.
CENACE also issued CENACE/DOPS/128/2019, an official letter in which it declared the Yucatan Peninsula region an electrical emergency area due to the scarcity of natural gas needed for combined cycle power generation, which would mean having a deficit of 44% of the energy that will be demanded in this region between April and October. The following day, CENACE issued a clarification of the official statement in which it stated that the information contemplated for the declaration of the emergency was not current information so there were not sufficient conditions to declare an operational state of emergency.
On 29 July 2019, the CENACE declared an Emergency Operating Status on the Baja California Sur region, given the low reserve margin and the impossibility to withstand a severe contingency. To attend this issues, the CFE announced the construction of the first stage of the Mérida IV combined cycle power plant, which will begin operating in 2020. This project will cost approximately USD250 million and, in its first stage, will aim to generate at least 300 MW, with the final goal of generating up to 1000 MW. This new plant will have a great impact on the determination of energy prices for the region.
Currently, in the South-east zone there is not enough supply of natural gas or power plants to supply the total demand, so investment in this area would bring significant growth and industrial development. In addition, the country's proximity to the USA represents an interesting opportunity for the establishment of interconnection networks and the development of industry on the countries' border. Mexico has various international commitments that oblige it to promote the development of clean energies; in addition, geographically, Mexico has a great potential for the development of renewable energies because within the country there are all types of clean energies. For these reasons, the electricity market in Mexico is interesting for investors around the world, because there is a growing demand that is not yet supplied and could determine a profitable selling price.
The price of electricity is determined by supply and demand on a competitive basis within the MEM; however, supply offers prices must be based on the generation marginal costs, start-up and operational costs. MEM is structured in five broad operations:
Given the power that the LIE grants to issue Administrative Regulation to the Ministry and Regulatory Acts to the CENACE, the following should also be considered:
Structure and Function of Markets
MEM covers power or capacity operations. The MEM structure is organised as follows.
There are three types of users operating in the electricity market: basic users, qualified users, and qualified market participant users; regarding the seller, there are qualified suppliers, basic service suppliers, and suppliers of last resort. All users and sellers must operate through a non-supplier trader registered before CRE, which allows them to trade on the MEM and import and export electricity, ancillary services and capacity.
International commerce of electricity is allowed by Mexican regulation. The CRE oversees the authorisation for importing and exporting electricity, whether derived from a power plant connected to the National Electric System or from the modality of isolated supply. The CENACE also manages the imports and exports programmes, in order to satisfy the power demand of the SEN.
Mexico has many interconnected systems with USA, Belize and Guatemala, which are composed of the following:
The interconnections for import and export links located in the Mexican territory are within the jurisdiction of the Mexican Government, specifically the CENACE. However, generation facilities located abroad must not only comply with the rules of the country they are based in but must also comply with the Mexican industry’s regulation if they are going to be interconnected to the SEN.
The LIE establishes that an authorisation by the CRE is required to import electric energy generated in a facility abroad that is exclusively connected to the SEN. The market rules regulate the procedures for imports and exports of capacity, as with any other energy products that ensure the satisfaction of the national demand. Assigned prices for imports and export in the short-term market will be derived from the prices of the network hub located on the foreign electrical system based on the marginal offer that gets assigned.
According to the Development Program of the National Electric System the energy mix is:
There are no specific concentration limits on the MEM – the general limits that apply are contained in the LFCE. The COFECE has the faculty to investigate and punish the concentrations whose purpose or effect is market distortion.
The principal laws that govern market concentration limits are:
There is no concentration fixed limit; the applicable criteria is market relevance. The COFECE is the authority that guarantee free market access and economic competition. The criteria are:
COFECE has faculties to prevent, investigate, combat, prosecute, sanction and eliminate monopolies, monopolistic practices, unlawful concentrations and barriers to entry into the market.
Principal Laws Prohibiting Anti-competitive Behaviour
In Mexican regulation, the principal laws that prohibit anti-competitive behaviour are:
Regulator/authority Responsible for Market Surveillance and Enforcement
The COFECE has the following faculties:
Enforcement Procedures and Potential Penalties
The investigation is initiated ex-officio or per request of the Federal Executive, directly or through the Ministry, the President’s Legal Counsel, or upon a private request; such must be analysed and will issue a decision, either: ordering the initiation of the investigation; dismissing the complaint, partially or totally; or, informing the complaint, for a single instance that the written motion of complaint fails to meet the requirements established in the law.
The Authority shall issue an investigative opinion to initiate the procedure, which can result in the following sanctions: correction or suppression of the monopolistic practice or unlawful concentration in question; partial or total restructuring of an unlawful concentration, determination of control or suppression of the acts thereof. The law contemplates special procedures such as:
Article 4 of the CPEUM recognises the human environmental right and grants the government faculties to regulate GHG emissions mitigation and adaptation. The General Law of Climate Change (LGCC) – and its regulation, cover the mitigation goals committed to by Mexico before the international community.
Regarding climate change regulation, Mexico has a series of administrative regulations that apply:
These programmes must be updated by the current administration, given they are limited to the six-year term for the presidency:
Regarding specifically the energy industry, the LIE establishes the CELs that are granted for the production of energy without fossil fuels usage, and can be traded to meet the cap that generation facilities must meet as determined on a yearly basis.
Also, indirectly the LTE – establishes a cap for renewable energies in the national energy mix, aimed at the promotion of the development of such energies; this process, even though it can affect climate change, does not contemplate GHG emissions directly.
Limiting Carbon Emissions from Generators
The LIEPS establishes a federal tax on fossil fuels that increase in relation to each gas magnitude of greenhouse effect – this acts as a deterrent more than a fixed limit. In the same way, the establishment of local taxes on carbon may apply depending on the location of the infrastructure or plant; these taxes were recently confirmed as valid by Mexico's Supreme Court in relation to the state of Zacatecas, this being the only state as of the redaction of this report, but it opens the door for other states to do so.
As previously stated, the LIE establishes a minimum energy generation mix quota for clean energies of 25% by 2018, 30% by 2021 and 35% by 2024, which in turn is used to determine the CEL requirement for the yearly period. CELs must be acquired by fossil fuel generation and receiving Facilities, incrementing the production cost of said energy which will impact on the new fossil fuel infrastructure, consequently giving market advantages to renewable energies, that will have a surplus generated for the sale of said CELs.
The LGCC has established as an aspirational goal to reduce emissions to 30% of by 2020, as well as achieving a 50% reduction in emissions by 2050 in relation to those issued in 2000. Furthermore, Mexico is committed to unconditionally reducing 22% of GHG emissions. These goals have not been transferred to the general public as an emission cap – only the generation facilities and charge centres are required to obtain CEL.
Emission Limits and Mechanisms to Limit Carbon Emissions
Mexico has a general cap for GHG emissions contained in our binding and not binding mitigating commitments. Indirectly the LIE establishes an energy mix cap that is correlated in its goals to the country's international commitments on mitigation applicable exclusively to the industry.
The only mechanisms, outside of taxes in the CEL market, are determined by the energy output without fossil fuels usage; the cap to the generation facilities and charge centres is determined by the energy mix goals applicable to the estimated fossil-fuelled power generation and total consumption, in order to achieve such mix quota in megawatts per hour.
There are no provisions, policies or instruments that establish an obligation or goals for early retirement of generation facilities. The current regulation only applies to the shutdown of a facility at the end of its life cycle. There is a policy to update certain generation facilities to combined cycle, geothermal electric and efficient co-generation power plants; these provisions are covered in the PRODESEN.
The following laws and policies relate to alternative energy sources:
Capacity Targets for Alternative Energy
The LTE establishes a minimum energy mix quota for clean energies on generation of 25% by 2018, 30% by 2021 and 35% by 2024.
Financial Incentives, etc
The Income Tax Law establishes full deduction for income tax purposes on the price of machinery and equipment for generation of energy by renewable sources or co-generation; machinery or equipment must be active and operating for a minimum of five years post-deduction. This deduction benefit is available for anyone that has all permits to construct and operate a generation facility, there is no cap or limit to such.
The CELs are issued by the CRE for the production of electricity from clean energies sources; the expenditure of CELs is not limited, there is no cap. CELs can be offered in a specific competitive market. Generation and Distribution Facilities are bound to acquire CELs in the amount established by the Ministry of energy in the Agreement by which the requirement for the acquisition of CELs is disclosed to meet the clean energy mix quota.
The CELs appeared together with Mexico's energy reform in 2013; a CEL covers the generation of 1 MWh of clean electric power. The main objective of these instruments is to comply with the country's goals in terms of clean energy and to promote new investments in clean energy.
Mechanisms for Providing Incentives or Subsidies
In Mexico there are funds to encourage the development of alternative sources of energy, among which are the following.
The objective of the Fund for Energy Transition and Sustainable Energy Use (Fondo para la Transición Energética y el Aprovechamiento Sustentable de la Energia) is to contribute to the fulfilment of the National Strategy for the Energy Transition and the Sustainable Use of Energy, promoting the use, development and investment of renewable energies, efficiency and energy saving as well as its diversification of sources. It also proposes the necessary measures so that the population has access to reliable, timely and easy-to-consult information related to the energy consumption of the equipment, appliances and vehicles. Its target population are individuals or corporations, both public and private sector or any national non-governmental organisation. FOTEASE funds can be refundable or non-refundable, and include assurances to finance or credit, or any other financial support to an applicable project for the efficient use of energy.
Fund for Climate Change
The fund's objective is promoting the implementation of projects and actions that have an impact on the reduction of GHG emissions and the increase of resilience capacity and adaptation to climate change that contribute to the connectivity of forest ecosystems, natural areas, areas voluntarily destined for conservation and Ramsar sites (wetlands of international importance). Its target population is all Mexican or Latin American legal persons that demonstrate (and can document) their experience in the implementation of measures for mitigation and adaptation to the adverse effects of climate change. In 2019, based on the authorised budget, each project or action may be financed up to a maximum amount of MXN10,124,567.90.
CONACYT-SENER Energy Sustainability Sector Fund
This is a trust created to address the main problems and opportunities in terms of energy sustainability. Its objective is promote applied scientific and technological research, as well as adoption, innovation, assimilation and technological development in renewable sources, energy efficiency, use of clean technologies and their diversification. Its target population are at the research and higher education institutes of the country; in this new administration, the publication of the call to participate in the fund is pending.
Construction and development of any energy infrastructure requires a series of environmental permissions regulated by the General Law of Ecological Balance and Environmental Protection (LGEEPA) and its regulations. The LGEEPA regulates the protection of human environmental rights and establishes a series of public policy instruments to achieve its goals; among these instruments are that:
The LIE requires all infrastructure projects in the industry to obtain the social impact evaluation (EVIS) that aims at complying with the progressive interpretation of the human rights of the indigenous communities to the previous, free and informed consultation, previous consent and shared benefits.
The previous authorisations apply to any development or modernisation of infrastructure of the industry, including generation and receiving facilities, as well as the RNT and the RND.
Specifically for generation facilities, the LIE and the generation permit by the CRE require the facility to disclose its technical information to integrate such to the SEN and account for its power charge in the MEM; this permit is mandatory as long as the capacity of the generation facilities is greater than or equal to 0.5 MW.
General Environmental Authorisations
The AIA is the main instrument to reduce environmental impacts that could be generated by any activity or project, through the establishment of mitigation and compensation measures. The CUSTF is the instrument required to remove any wild vegetation, fungi, moss or even the soil of forestry terrains, technically justifying such deforestation and a donation the Forestry Fund as environmental compensation. The LAU regulates and registers pollutant air emissions, hazardous waste management and water discharges to federal water bodies. Risk analysis is required if the project involves dangerous activities, and necessitates the identification and quantification of the risks, as well as including appropriate measures in the internal accident prevention plan.
Generation facilities with a capacity less than or equal to 0.5 MW are exempted from obtaining the AIA. Self-supply plants do not require submission when their capacity is less than 3 MW, but to be approved must include an environmental baseline, identification, description and evaluation of the environmental impact that will be generated and the corresponding measures that reduce, mitigate or compensate the impacts. When the activity that is intended to be carried out is highly risky, it will be necessary to submit a plan drawing attention to risks and accidents, and to notify the SEMARNAT.
General Social Authorisations
The EVIS (social impact study) is the corresponding instrument to comply on international conventions and criteria issued by international courts and by the Supreme Court, and to attend the litigations and suspension against infrastructure projects from indigenous communities. Although there are legal reforms or administrative provisions in the works as of the time of writing, there is no regulatory framework in Mexico specifically regarding social consultation. The instrument must include characterisation of the peoples and communities, as well as of indigenous individuals. This characterisation must be made under the principal of auto-determination, which implies that each indigenous individual must determine personally if he/she considers himself/herself as part of the indigenous population. It must identify the social impacts that the project will generate and establish a social management system. The Ministry will issue an approval of the EVIS to perform the previous, free and informed consultation under the terms of the OIT international agreement No 169; proof of such will be approved by the Ministry once the previous consent has been reached with a majority of the community.
All permits for the generation of electric power through a generating facility are issued by the CRE. The permit will last for 30 years, and it is required to prove the technical feasibility for the interconnection of the facility to the RNT, considering the installed capacity, other facilities that could use the same line as well as the installed capacity of the RNT.
Public participation and input is permitted or required, whether public hearings are required, whether projects are subjected to a detailed environmental review or assessment process, and whether the regulator itself has the authority to grant the required authorisations or only make recommendations to a governmental ministry.
In the EVIS, public participation is necessary to obtain the previous consent of the indigenous communities, when such are present at the site; at least, it requires the consent of the majority of the population of the indigenous group, which is required by all permits and authorisations for the development of the generation facility.
In the AIA, SEMARNAT can impose to the proponent or developer the obligation to carry out and cover a public meeting. The meeting has to be publicised in local newspapers and in such the proponent covers the cost of the reunion and has the obligation to make a presentation of the project, the impacts that it may produce and the mitigation and compensations measures that will be put into practice, as well as to receive any comments or questions which must be addressed by the SEMARNAT in the AIA. Said questions or comments could prompt a requirement of additional information or the adjustment of mitigation actions. This process does not require acceptance or consent from the community, the obligation is to inform and receive comments from the community and give a proper and legally justified response.
Typical Approval Timelines
In the AIA procedure the interested party shall submit a preventive report to SEMARNAT, which shall inform if it is necessary to submit MIA within 20 days of the submission of the preventive report. If necessary, the interested party shall submit MIA to SEMARNAT, which may be requested to conduct a public consultation within ten days of the publication of the MIA. SEMARNAT shall then decide on MIA within 60 days of its submission. This term may be suspended for up to 60 days when clarifications, corrections or expansions are required.
For the LAU, ERA and EVIS procedures the timeline cannot exceed three months; the authority has 30 days thereafter to issue its final resolution, otherwise the response will be inferred as negative by expiration. A risk study is a notice, so it does not require an authorisation by the SEMARNAT.
Regarding the generation permit, when the interested party files a request with the CRE, the authority will resolve its admission within 15 working days. Once the request is accepted, the authority will have a period of 60 days to analyse the request, during which time additional information may be requested or other authorities may be consulted. After a period of 60 days, it will decide whether to issue the permit or not.
The typical terms and conditions imposed in the AIA by SEMARNAT in the EIA are to obtain all other permits, establishing additional prevention and mitigation measures in matters of water, soil, noise and air, biodiversity rescue programmes; insurance or bonds are also set to guarantee compliance with the conditions and the filing of an Environmental Management System (EMS) to encompass the previous. In case of deforestation, the CUSTF is conditioned to donate a certain amount to the forestry fund as environmental compensation.
In the case of the EVIS the most common terms and conditions are: to obtain all other permits; to ensure that the suppliers of goods and services required for construction and operation are from the area in order to have a positive impact on the region's economy; to guarantee at all times access to the roads and pedestrian streets surrounding the core area. If a workforce is required, applicants should be informed of the working conditions and duration of the project to properly manage expectations; training programmes should also be included to help with safety and health; the labour needs of the inhabitants of the area should also be factored in.
Although the permit granted by the CRE for the generation of energy must follow the NOMs in terms of safety, these permits are not conditioned to obligations or requirement.
Amendment of Terms and Conditions
It is impossible for authorities to modify their own acts given that such create legal security and rights, once the authorisation has been issued. The only way to change it is through litigation or administrative appeal to the hierarchical superior authority.
For the acquisition or possession of real estate intended for the provision of public service of electricity, the Ministry of Energy has diverse mechanisms: the temporary, total or partial occupation or limitation of proprietor rights – ease of way – or expropriation after the declaration of public utility. The government can also acquire surface land through private agreements, the cost must be determined considering the damages to non-land-based goods and rights, as well as damages and prejudice that arise due to the transmission activity, and the lease or occupation fee or compensation considering the commercial value and the official values issued by the National Goods Valuation and Administration Institute.
The price that will be set as compensation will be equivalent to the commercial value. The amount will be set by the Institute of Administration and Appraisals of National Assets or authorised credit institutions or experts. If the experts of the parties do not agree, a third party will be appointed by common agreement. In the case of temporary occupation and limitation of ownership, the compensation shall also include the damages and losses, if any, that may be caused by the execution of said measures.
The decommissioning of installed power plants is mainly regulated by two legal systems, specifically: the LIE and the LGEEPA and its regulations on environmental impact.
Under the LIE, the agreements between the owners or holders of the land and those interested in developing the generation facility must provide the necessary financial vehicles, warranties, insurances, etc, to cover any damages due to the decommissioning of the facility.
On the other hand, regarding the decommissioning, LGEEPA requires that the AIA considered all stages of the project including the closure and decommissioning. Under such, the dismantling procedure has to be met with mitigation and compensation measures to prevent, minimise or repair the environmental damages that may be caused. Within these measures of prevention and mitigation is the granting of guarantees or insurance, which will be required by SEMARNAT
Any proprietor or holder of any land is liable to restore or remediate soil pollution with hazardous wastes and must perform such actions for the closure of the site. Also any land transaction must contain a declaration regarding the pollution of the land subject to sale to the public notary or such transaction could be declared null.
Under the EIA, proponents must file a guarantee or insurance upon commencement of each stage of the development – site preparation, construction, operation, maintenance and closure and dismantling of the facility – to ensure compliance with the terms and conditions contained in the EIA. For such stage of development, the guaranteed amount is derived from the cost of damages that could be caused by the breach of the conditions. In case of failure to grant the guarantee or insurance required or to stop granting, SEMARNAT may order temporary, partial or total suspension of the work or activity (in this case the dismantling or closure) until the requirement is met.
As established in the previous chapters, under the CPEUM the State has a monopoly on the rendering of the public transmission and distribution services through the RNT and RGD.
The LIE constitutes the RNT and RGD by unifying all transmission and distribution networks and associated facilities and assigning the construction and development of the RNT and the RGD to CFE, and the rendering of the services through its subsidiary CFE Transmission. The Federal Electricity Commission Law (http://www.diputados.gob.mx/LeyesBiblio/pdf/LCFE_110814.pdf) sets out the faculties and activities to provide the transmission and distribution services. On the other hand, the CENACE oversees, regulates and administers the RNT and the RGD, and also plans and proposes the modernisation and coverage of the networks to the Ministry of Energy, which issues the PRODESEN. The LIE also allows for the construction and operation of private transmission lines exclusively for interconnection porpoises. The Ministry of Energy conducts and co-ordinates the National Energy Policy and the SEN, authorises the RNT and RGD expansion and modernisation programmes and instructs the carriers and distributors to execute the projects contained in the programmes. It is also the authority in charge of carrying out consultation procedures and social impact evaluations.
The general approvals required to construct and operate a transmission line and distribution lines are the environmental and social authorisations applicable to all development projects in the industry; see above, 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities.
To expand the coverage of the RNT, private parties and public entities have to propose to CENACE the inclusion of their expansion projects in the PRODESEN. Private transmission lines for interconnection purposes are required to execute an interconnection agreement with CFE, prior to approval of the technical feasibility of the interconnection by CENACE.
The CRE issues provisions on the quality, reliability, continuity and safety obligations of the public transmission service; additionally, it issues its opinion on the RNT and RGD modernisation and expansion programmes, to be considered by the ministry. Also, through the general administrative provisions:
Private parties propose projects for the expansion of the RNT whenever a demand must be met. The criteria taken into account to admit a project is that it preserves and improves the reliability of the SEN, reduces the costs of electricity supply, contributes to the fulfillment of clean energy goals, is proven to operate with energy efficiency, minimising transmission network congestion and electricity losses or if it incorporates intelligent power network technologies. The private proponent must perform and pay for all required studies.
Transfer lines for interconnection purposes approvals are conditioned to the execution of the interconnection agreements with CFE, and technical feasibility on the RNT capacity.
The general environmental and social permits required for any infrastructure project in the energy sector have already been listed and explained in 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities, above.
All infrastructure projects on the energy sector are subject to the AIA and the EVIS procedures, which require the implementation of the previous, free and informed consultation and the public information reunion, as explained above in 4.2Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities.
Typical Timelines to Obtain Approvals
For incorporation to the PRODESEN, projects must be filed prior to the expansion proposal presented in February to the CRE, that must issue its opinion to the Ministry within 30 days, which then has 30 days from the reception of the opinion to issue its authorisation. After the publication of PRODESEN, the Ministry has 30 days to determine the carrier who will execute the project; this in turn has 30 days to make a proposal.
The timelines for AIA, LAU, ERA, EVIS and risk analysis are applicable to all infrastructure project in the energy sector; see above, 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities.
The typical terms and conditions imposed in the AIA and the EvIS applicable to all infrastructure project on the energy sector have been listed in 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities, above.
It’s impossible for authorities to modify their own acts given that such create legal security and rights; once the authorisation has been issued, the only way to change it is through litigation or administrative appeal to the hierarchical superior authority. The authority may provide clarification of the terms and conditions of the authorisations or permits, but cannot alter the content or the resolutions.
For the acquisition or expropriation of real estate intended for the provision of public service of electricity, the diverse mechanisms and the quantum for the compensation of such measures as described in 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights are applicable to the RNT and RGD.
The ease of way includes: the right to transit; the right to carry out construction, installation or maintenance of infrastructure; the right to carry out necessary constructions for the proper development of the transmission service. Legal easements may be decreed by jurisdictional or administrative means.
The government can also acquire land or surface through private agreements. The compensation must be determined considering the damages to non-land-based goods and rights, as well as damages and detriments that arise due to the transmission activity, and the lease or occupation fee or compensation considering the commercial value and the official values issued by the National Goods Valuation and Administration Institute.
Building and operation of the infrastructure and installations of the RNT is the responsibility of CFE. There are no regional entities for the management of the transmission network.
The exclusive rights of CFE and CENACE to control and operate the RNT are granted in the constitution. To modify such, a constitutional reform is required – this requires a majority of the local congress, approved by a qualified majority of votes.
In addition to the information given above in 5.1.1 Principal Laws Governing the Construction and Operation of Transmission Facilities, the main regulation is the LIE that establishes the faculty of the CRE to issue tariffs and the objectives to be considered in the methodology and in applying the tariffs.
The major regulators are the Power Ministry, whose scope is mentioned in 5.1.1 Principal Laws Governing the Construction and Operation of Transmission Facilities, and CRE which:
The CRE issues the methodologies to determine tariffs for the transmission and distribution service, such as are approved within the CRE governmental body through a simple majority of its commissioners. CENACE must apply the methodology given by the CRE with the SEN data and determine the amount that will be paid by generating and receiving facilities for the transmission service through the RNT. CFE charges generation and receiving facilities said amount upon the upload or download of power.
The principles governing the methodology for determining tariffs are to promote the efficient development of the power industry, guarantee continuity of services, avoid discrimination, promote open access to the RNT and protect the interests of market participants and final users.
Tariffs are calculated based on CFE information of cost, consisting of exploitation and assets costs and the required investments. Such costs are distributed between generation and consumption. Efficiency gains targets can be established, and if met such savings will be transferred to users in the form of lower tariffs. Transmission tariffs and electric tension levels are quantified by KW/h.
Typical Capital Structure
CFE has no capital structure, since it is a productive enterprise of the State exclusively owned by the Federal Government, and its patrimony will be constituted by the goods, rights and obligations, budgetary ministrations or donations, as well as by the income from its operations or from any other appropriate means.
Right of Appeal and Complaint Process
CRE resolutions may be appealed only by an Amparo trial. Although the law establishes that the suspension – right of injunction and certiorari – of those acts does not proceed, such disposition has been declared null and unconstitutional by the Supreme Court.
There is a reconsideration procedure that can be filed by any party; the CRE has full discretion on the resolution of such.
Transmission Entities' Obligations
Carriers are obliged to allow non-discriminatory interconnection to their networks upon request by the power generation facilities, conditional only on the technical feasibility of the part of the network that will support the interconnection.
Open Access on the RNT is regulated in the LIE on non-discriminatory terms and is considered as a universal and public service obligation. It also grants the faculty to the Ministry of Energy to order the strict legal separation in case of any discrimination in interconnection and connection requests. CENACE’s guidelines also regulate open access and the technical specifications and infrastructure required to make the interconnections and connections. The provisions issued by the CRE establish the agreement models to carry out the interconnection and connection between CFE and the requester.
Open access shall be limited to the available capacity of the SEN; however, when CENACE, the carrier or the distributor deny an interested party access to the services, having available capacity, the affected party may request the intervention of the Commission in the event of an unjustified refusal. Those who subscribe to interconnection contracts have the rights to carry out the interconnection within 72 hours following the notification of CENACE's order.
The laws, URL, scope, major approvals and the regulators' analysis detailed above in 5.1.1 Principal Laws Governing the Construction and Operation of Transmission Facilities are applicable to the distribution services and infrastructure;
The typical terms and conditions imposed in the AIA and the EVIS, applicable to all infrastructure projects in the energy sector, are as listed above in 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities.
The general administrative provisions regulate both services, but make some distinctions between transmission and distribution services, such as the agreement to create the subsidiary of the CFE which will be responsible for carrying out the necessary activities to meet the objective of providing the distribution service (http://www.dof.gob.mx/nota_detalle.php?codigo=5431301&fecha=29/03/2016) and the disposition in which the CRE issues the tariffs to be applied by the CFE for distribution (https://bit.ly/2VoUyMz).
The construction of the RGD is the responsibility of CFE; its subsidiary CFE Distribution is responsible for carrying out the activities necessary to meet the objective of providing the distribution service. The legal approvals required to construct and operate a transmission line are the environmental and social authorisations applicable to all development projects in the industry, as fully covered in 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities, above.
The regulatory process and the factors that are considered in the decision to approve or not approve a transmission line project are applicable to the distribution network; please refer to 5.1.2 Regulatory Process for Obtaining Approvals to Construct and Operate Transmission Facilities, above. The general environmental and social permits required for any infrastructure project in the energy sector are as listed and explained in 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities
Public Participation, etc
All infrastructure projects in the energy sector are subject to the AIA and the EVIS procedures, which require the implementation of the previous, free and informed consultation and the public information reunion, as explained in 4.2Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities.
Typical Timelines to Obtain Approvals
The typical timeline for the project inclusion on the PRODESEN, as described in 5.1.2 Regulatory Process for Obtaining Approvals to Construct and Operate Transmission Facilities, are applicable to the RGD. The timelines for AIA, LAU, ERA, EVIS and risk analysis are applicable to all infrastructure projects in the energy sector, as listed in 4.2Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities, above.
The typical terms and conditions imposed in the AIA and the EvIS are applicable to all infrastructure projects in the energy sector; see above, 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities.
It is impossible for authorities to modify their own acts, given that such create legal security and rights; once the authorisation has been issued, the only way to change it is through litigation or administrative appeal to the hierarchical superior authority. However, the authority may provide clarification of the terms and conditions.
For the acquisition or expropriation of real estate intended for the provision of a public service of electricity, the diverse mechanisms and the quantum for the compensation of such measures, see above 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Right; the ease of way and private acquisition mechanisms described in 5.1.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights are applicable to the RNT and RGD.
Building and operation of the infrastructure and installations of the RGD are the responsibility of CFE; there are no regional entities.
The exclusive rights to CFE and CENACE to control and operate the RGD are granted in the Constitution; to modify such, a constitutional reform would be required.
The laws, scope and major regulator referred to above in 5.1.1 Principal Laws Governing the Construction and Operation of Transmission Facilities are also applicable to the distribution services.
The CRE shall issue, through general administrative dispositions, the methodologies to determine the calculation and adjustment of the maximum regulated tariffs for the distribution and distribution service; such are approved within the CRE governmental body through a simple majority of its commissioners. CENACE must apply the metrology given by the CRE with the NES data and establish the amount that will be paid by generating and receiving facilities for the distribution service through the RGD. CFE charges generation and receiving facilities said amount upon the upload or download of power.
The principles governing the methodology for determining tariffs are to:
Tariffs are calculated based on the cost of each segment of the value chain of the electric industry, while incorporating temporary variations in the cost of the service (depending on the time of year) and seeking to ensure that the CFE recovers efficient costs. The cost is shared equally among the different categories of electricity users and the determination of these charges is made based on the consumption patterns of the users and the level of voltage at which the network is used.
Right of Appeal and Complaint Process
CRE resolutions may be appealed only by an Amparo trial. Although the law establishes that the suspension – right of injunction and certiorari – of those acts does not proceed, such disposition has been declared null and unconstitutional by the Supreme Court.
There is a reconsideration procedure that can be filed by any party, however the CRE has full discretion on the resolution of such.
Outlook under the New Government
After the general elections held on 1 July 2018, there was a major shift in Mexico’s political landscape. The most left-leaning candidate won by an ample margin and his political party achieved majorities in the Senate and the Chamber of Deputies. The new president took office on 1 December 2018. This entailed a profound change in the government’s priorities and objectives, causing considerable uncertainty in the energy sector during the first months of the presidency.
Even though there has been a clear change in the administration’s political ideology, and important modifications in energy policy are taking place, it is anticipated that the electricity reform will not be reversed as government officials have stated that they do not intend to derogate this reform. Additionally, pending regulations in line with said reform have continued to be issued, and many of this administration’s objectives in this regard depend on, and indeed, are most likely to be achieved by, following the model created by these reforms (eg, renewable energy goals, construction of CFE’s new infrastructure, and lowering electricity prices).
In light of the above, it is expected that: (i) development of the liberalised Wholesale Electricity Market (Mercado Electrico Mayorista, MEM) will continue; (ii) the rules pertaining to the participation of private entities in generation and commercialisation will not be modified; (iii) participation of private entities in activities related to distribution and transmission – where the state preserves the monopoly but can still execute contracts with private parties – will also still be permitted; and (iv) renewables and alternative generation mechanisms will remain as an important part of the agenda.
Recently, the Energy Regulatory Commission (Comision Reguladora de Energia, CRE) published a draft of collective distributed generation regulations for consultation and has published rules to extend the deadline for the commencement of operations for generators who obtained permits before the reforms. The new administration has also announced that new programmes for the promotion of distributed generation and off-grid generation will soon be outlined, and some have already been published, including the Ciudad Solar initiative in Mexico City, which will involve an investment of MXN13.659 million to install solar panels and reduce emissions in the capital.
Nonetheless, it is important to note that there are significant elements of the previous administration’s energy policy which this administration does not endorse, and important changes are either already being implemented, or probably will be: (i) the State Electricity Company, the Federal Commission of Electricity (Comision Federal de Electricidad, CFE), will be reorganised to strengthen their generation divisions; (ii) secondary regulation will be amended so that the CFE basic supplier is not bound to buy energy only through long and medium-term bids; (iii) the CRE has almost completely renewed its governing body and its new members will support changes to strengthen CFE in the market, including modifying the mechanisms to determine regulated fees (which is one of the main concerns of market experts); and (iv) various flagship projects and initiatives have been put on hold for review or suspended, including the mid and long-term public energy auctions.
Notwithstanding the above, it is expected that the electricity sector will maintain steady growth throughout the country. Continuity in the flow of foreign investment is also expected since achieving the administration’s goals requires extensive private participation and international expertise. Additionally, private initiative has continued to boost the sector by investing in both regular and alternative generation, and commercialisation schemes: solar generation alone grew by 32% during the first six months of 2019, distributed generation grew by 22% over the same period, and specialised organisations are putting together a system of private energy auctions (short, mid and long-term) to offer an alternative to the public auctions that were suspended. Therefore, we consider that the momentum of what has been lauded as one of the most successful power market liberalisations in the world has not been lost, and this momentum – as well as some of the government’s policies – will keep pushing the industry forward.
The new administration has set as one of its main priorities the strengthening of the CFE to make it more competitive and efficient. One of the steps that will be followed to achieve this is reorganising the company. After the reform, CFE was divided into 14 different, independent entities, each in charge of various parts of the value chain (generation, transmission, distribution, basic supply, qualified supply, etc). These divisions were made to balance CFE’s market power and to encourage the participation of new players in these newly liberalised markets. The generation assets of the CFE were then divided between six of these entities. The new administration considers that this division was inappropriate and improperly weakened the CFE as it had resulted in increased costs, hampered administrative specialisation, and created inefficiencies.
On 25 March 2019, the Ministry of Energy (Secretaria de Energia, SENER) issued an amendment to the regulations which initially ordered this separation, allowing the generation subsidiaries to reorganise and reunify if required. The main objective behind this modification was to improve the CFE’s competitiveness in generation activities, and to allow the CFE to: increase co-operation and co-ordination between its various entities; share employees under certain conditions; regard all of the CFE’s divisions as a whole when defining investments and objectives, except in projects benefiting transmission and distribution activities; and to allow the use of scale economies to improve operational efficiency and cost reduction in commercial activities.
The amendment provided 60 days for the submission of proposals for the reallocation of assets and generation contracts. As of this date, said proposal has not been submitted, but it is expected that the reallocation will be implemented in accordance with the geographical location of the assets. This reorganisation will not affect the CFE divisions, other than those in charge of generation activities, and the main principles behind the original separation of CFE should continue to be respected. The Federal Economic Competition Commission (Comision Federal de Competencia Economica, COFECE) has issued recommendations as to how this allocation should be made, to guarantee that no competition barriers are raised as a result of it. Further action by COFECE is expected in the event of these not being followed.
New CFE Power Generation Projects
In addition to the CFE’s reorganisation, there are plans for an extensive overhaul and renewal of its generation facilities, as well as the building of several new power plants. The CFE will contract specialised private entities to develop these projects. CFE has its own contracting regulations which require the awarding of contracts through public tender, but it also includes certain exceptions to allow direct awards or restricted tenders (which are commonly used in practice despite its 'exceptional' nature). The government has indicated that the main mechanisms that will be used for this are 'Productive Infrastructure Investment Projects with Deferred Registration in Public Expenditure' (Proyectos de Infraestructura Productiva con Registro Diferido en el Gasto Publico, PIDIREGAS). This allows a project to be developed with a contractor who provides the necessary investment in addition to optional financing; once completed, the project is transferred to the CFE and, on commencement of the operation, the contractor begins to receive payments from the generated cash-flow. Nonetheless, the CFE is allowed by law to use other mechanisms including public-private partnerships and regular public works or services contracts.
The Program for the Development of the National Electricity System 2019-2033 (Programa de Desarrollo del Sistema Electrico Nacional, PRODESEN) includes the development of new combined cycle (CC), geothermal (CG) and efficient co-generation projects (CO), as well as the modernisation and renewal of hydroelectric power plants owned by the CFE. Between 2019 and 2020, the schedule suggests an increase in the CFE’s installed capacity by 3,945 MW through the expected completion of nine CC and CG projects, which are either about to be finished or are currently at the test stage.
Projects which are in the process of being tendered and are scheduled to commence construction in 2020 amount to 12,621 MW and are comprised of: (i) five hydroelectric projects with a combined capacity of 471 MW; (ii) CC Salamanca with 757 MW; (iii) CC San Luis Potosí with 740MW; (iv) CG Humeros III Stage B with 25 MW; (v) CC San Luis Rio Colorado with 450 MX; (vi) CI [Internal Combustion] Baja California Sur VI with 42 MW; (vii) CC Lerdo with 911 MW; and (viii) CC Tuxpan with 964 MW.
Additional co-generation projects are planned to be developed in tandem with the rehabilitation of PEMEX refineries which is part of an ambitious endeavour to increase the country's oil refining capacity: (i) CO Tula with 320 MW, (ii) CO Minatitlan with 870 MW, and (iii) CO Salina Cruz with 812 MW.
Renewable projects which are still subject to technical and economic studies, and financing possibilities, scheduled to commence in 2023-24, are: (i) Sureste I Fase I with 105 MW; (ii) Sureste II and III with 600 MW; (iii) Sureste IV and V with 600 MW; (iv) Photovoltaic plant (PV) Cerro Prieto II with 150; (v) PV Villita with 62 MW; (vi) PV Central with 450 MW; (vii) PV Costa Jalisco Nayarit with 340 MW; and (viii) PV Guadalajara with 250 MW.
Studies are currently being conducted for eight more geothermal projects with a total capacity of 117 MW, as well as the reactivation of a hydroelectric plant with a capacity of 240 MW named Chicoasen II (scheduled to commence development between 2023 and 2024).
Alternative Generation Schemes
As a general rule, the new market regulations dictate that generators may not sell energy directly to end users, but only sell their energy through suppliers, to a qualified market-participating user, or directly to the wholesale electricity market. However, there are alternative generation schemes that offer the generators the possibility of selling their energy directly to the end user, under certain conditions. These schemes are distributed generation, isolated supply and local generation.
Distributed generation allows the generator to install a power plant and storage equipment to produce up to 0.5 MW for self-consumption, sale, or a combination of both self-consumption and sale. The generator must be interconnected to a distribution circuit containing a high concentration of load centres. Under this scheme, it is not necessary to obtain a generation permit, thereby simplifying the administrative process when initiating operations. The generator is able to sell the energy produced directly to an end user located in the same premises where the power plant is located without the participation of a supplier. The price for said energy can be freely agreed between the generator and the end user and, in the event of the end user not consuming all of the energy produced, any surplus may be delivered to the National Electricity System (Sistema Electrico Nacional, SEN) for which the generator shall be paid at market rates. Regulations for collective distributed generation are currently under consultation and are expected to be published later this year, which will allow power plants to be associated with more than one load centre – thus, more users will be able to benefit from the energy produced, being able to freely agree with the owner of the plant the price conditions governing the supply.
This scheme is adequate for residential use, and for businesses with an electricity consumption of approximately 0.5 MW, such as medium to large stores, retailers, bars and restaurants, and small manufactures. Collective distributed generation will be particularly useful for medium-sized real estate developments, office buildings, and shopping centres.
Isolated supply allows the generation or import of electricity to be supplied directly to the consumer, provided that such consumers and the generator belong to the same economic interest group. Generation through isolated supply supposes the existence of a private network transmitting the electricity generated between the power plant and the end user. The facilities of isolated supply may or may not be interconnected or connected, either permanently or temporarily, to the grid for the sale of surpluses or purchase in case of shortages.
There is no limit to the generation capacity of a power plant incorporated under the isolated supply scheme. This scheme is adequate for industries with medium or high consumption, which have sufficient space to install a power plant on their premises, including industrial parks, stadiums, airports, large real estate developments, large office buildings, and industries such as textiles, cement, wood, food-processing, pulp and paper, steel, automotive, sugar, chemical and manufacturing.
Finally, the option known as local generation allows the generation or importation of electricity for consumption by one or more end users, that may or may not belong to the same economic interest group, without transmitting the said energy through the national grid. As with the isolated supply scheme, local generation facilities may or may not be interconnected or connected to the grid for the sale of surpluses or purchase in case of shortages. Since the generator and the final consumer do not belong to the same economic interest group, the participation of a qualified services supplier is mandatory; they will act as an intermediary between the generation and supply to the final user. Even when the local generation scheme is quite similar to the regular generation scheme provided by the new market regulation, the implementation of a local generation scheme benefits both the generator and the consumer, as no transmission or distribution costs will be accrued, since the energy will not be transmitted through the grid, allowing end users to benefit from more competitive prices.
We consider that these alternative generation and commercialisation schemes will continue to grow in the short term and will be of great relevance to the industry, as their flexibility allows them to satisfy the electricity supply needs of large and medium consumers, and entail significant savings in electricity charges.
Transmission and Distribution Projects
SENER has instructed the distributor (one of CFE’s subsidiaries) to execute 42 projects for the expansion and modernisation of the transmission and distribution grids. These 42 projects include 23 new substations, 14 extensions and five substitutions to existing distribution substations, with a total investment of MXN2,918 million, to be executed over the following two years.
Other projects to expand and modernise the transmission and distribution capacity include: (i) increasing the transmission capacity to deal with increased demand in Cancun and Riviera Maya; (ii) implementing a project for the compensation of reactive power in Bajio; (iii) increasing transmission capacity from the North-east region to the centre; (iv) developing the South-east-Peninsular Interconnection; (v) solving capacity restrictions in underground lines in the North-east; (vi) the acquisition and installation of electricity meters and connections, as well as the replacement of damaged and obsolete equipment in order to comply with the necessity of covering the increase in demand and load centres for residential, commercial, industrial, public lighting and service users, with an investment of MXN20,387 million; (vii) the interconnection of Holbox Island, located in Quintana Roo, which involves the construction of a 60 km aerial circuit and a 10.5 km underwater circuit; (viii) the replacement of 112 transformers in distribution substations for high and medium voltages, 1,021 medium voltage switchgear in substations and 4,491 distribution transformers from medium to low voltage; (ix) the substitution of submarine cable for the electricity supply to the Municipality of Isla Mujeres with an estimated investment of MXN252 million; and (x) replacement of 5.4 million obsolete electricity meters, which represents an investment of approximately MXN7,000 million between 2019 and 2023.
Private Energy Auctions
The new administration has put on hold the public mid and long-term energy auctions, which have been successfully implemented since 2015, arguing that it will review the process, as well as the progress made by the winners, before continuing with further auctions. Nonetheless, specialised private organisations are looking to implement private auctions as an alternative for generators and consumers.
These auctions will seek to promote investment in power plants which (i) use clean energies, (ii) have steady capacity technologies, and (iii) offer the lowest possible costs, looking to increase the development of additional physical resources and financial mechanisms to add flexibility and liquidity to the SEN and to the MEM.
The first auction will include energy, 'power' (potencia), clean energy certificates (CELs), and a new product called 'electricity balancing'. Electricity balancing will be provided by power plants with firm generation capacity, with the purpose of buying or selling energy when there is intermittency in other plants to answer the fluctuations in the SEN. Any conventional generator will be able to participate in the auction, including the CFE. The bids will be for five, ten and 15-year contracts. The first informative session took place at the end of June 2019 and it is expected that the winners of the auction will start operations on 1 January 2022.
Dispute Resolution and Investment Protection
Contracts in the power sector in Mexico, even between private and public entities, regularly include arbitration clauses, which provide a neutral and specialised forum for the resolution of disputes. CFE is a regular user of arbitration, resolving most of the disputes arising from its contracts through such mechanism. Its arbitration clauses normally specify Mexico City as the seat of arbitration and Mexican federal law as the applicable law. Contractors are usually comfortable with this, since Mexico is an arbitration-friendly jurisdiction – it has enacted a text almost identical to the UNCITRAL Model Law as national arbitration law; national courts do not normally intervene in arbitration procedures; they have a reputation for consistently favouring the execution of awards; and the country is a party to the New York Convention on the Enforcement of Foreign Arbitral Awards.
Additionally, Mexico has 30 Bilateral Investment Treaties in force and it has ratified the ICSID Convention on the Settlement of Investment Disputes between States and Nationals of Other States, as well as other bilateral and multilateral free trade and investment protection agreements (although some are pending ratification by other members of the Trans-Pacific Partnership and the United States-Mexico-Canada Agreement). This provides additional protection to foreign investment in the country, by giving an opportunity for investors to bring claims against Mexico in the event of violations to any of the investment protection provisions contained in said treaties.
Despite the positive expectations of the industry, we believe that the changes being implemented will inevitably cause an increase in disputes in the sector during the coming years. This will derive mainly from contracts executed before the commencement of this presidential term, which will suffer an impact due to the new objectives of the government. We are also seeing new claims being brought against the government for the cancellation of infrastructure projects and the commencement of new ones without required authorisations and formalities. There is also the possibility of seeing an increase in investment claims during the following years, although the government has shown a positive attitude of negotiation and settlement to avoid such disputes – which was shown by the process that followed the cancellation of an airport at the beginning of 2019, where the government agreed to compensate investors and contractors to avoid further conflicts, as well as the recent gas pipelines negotiations .
Even though the change of government has presented new challenges to the electricity industry in Mexico, the momentum gained from these energy reforms has not been lost and this should keep pushing the sector forward. The administration is not expected to reverse these reforms, although some important modifications will be made. In short, there are more new opportunities than threats. Many of this administration’s goals are in line with the model implemented by the reforms and maintaining them will facilitate their achievement. It is expected that the sector will continue to grow, and investors will keep finding attractive business opportunities in the country. There are diverse new schemes that are still on an early implementation but will be commonly used in the near future. Particularly, isolated supply and distributed generation are expected to become increasingly relevant in the short term.