Contributed By Ramos, Ripoll & Schuster
Since 2013, the structure of the power industry system ceased to be a vertically integrated monopoly and migrated to an open market where only the planning and control of the National Electricity System (SEN), nuclear power, and the provision of transmission and distribution utility services are exclusively reserved for the state, and the industry entities have been disaggregated (unbundled).
All other activities in the industry are now open to either direct or indirect private participation. The commercialisation and generation of electric power are services which may be provided directly by private entities under a free competition regime and, even when the Mexican state has exclusivity over transmission and distribution services, it can associate or contract with private entities for the indirect implementation of activities in said areas.
The Ministry of Energy (SENER) is responsible for conducting public policy on energy matters and planning the development of the SEN.
The National Centre for the Control of Energy (CENACE) is the independent market operator, and the Energy Regulatory Commission (CRE) is the regulatory body in charge of issuing the necessary permits to operate in the industry, regulating applicable fees, determining administrative provisions, guidelines, regulations and conditions applicable to market participants; as it also supervises and enforces compliance with said provisions.
The principal laws that govern the ownership and structure of the power industry are:
For many years, up until the energy reform which took place at the end of 2013, the entire value chain of the power industry – including generation, transmission, distribution and supply – was considered to be a public service which could be provided exclusively by the state through the Federal Electricity Commission (CFE). The CFE was a vertically integrated government monopoly, responsible for all activities in the industry.
However, due to the opening up of the industry which allowed the participation of private entities, and which disaggregated the sector into different activities, the CFE was transformed from a "decentralised public entity" to a "productive state enterprise" – an autonomous state-owned entity governed mostly by private law whose objective is to create economic value. The CFE was then divided into nine subsidiary companies and four affiliated companies responsible for different areas of the value chain.
Naturally, due to its recent transformation and disaggregation, CFE's subsidiaries and affiliates continue to be pre-eminent in the sector. The CFE’s six generation subsidiaries generate most of the electricity consumed in Mexico (around 60%), with private generators accounting for approximately 40% of the total power generation.
The CFE’s transmission and distribution subsidiaries have full control over said activities, and CFE Basic Supply is the sole provider for basic users (ie, all final users who consume less than 1 MW), although three private companies have already begun the process to become basic suppliers. Around 50 private entities are actively operating as "qualified suppliers", who can sell power to qualified users (ie, all final users consuming more than 1 MW). The CFE also has a subsidiary for these activities.
Only nuclear power generation is exclusively reserved for the Mexican state.
There are no other restrictions imposed by the Foreign Investment Law on foreign investors wishing to invest in the power industry. This law only requires foreign investors (in any area, not only in the power industry) to be registered with the National Registry of Foreign Investment, and to present quarterly and annual reports if their operations exceed MXN20 million and MXN110 million respectively. This registration and these reports are for statistical purposes only; however, not complying with them may result in economic penalties.
Investment protection in Mexico is in line with international standards and, in addition to the usual protections included in domestic law, extends the protection of foreign investment through international investment agreements (IIAs), both bilateral (BITs) and multilateral (MITs). Mexico has many IIAs executed and effective to this date, including 29 BITs in force.
Additionally, Mexico is party to numerous free trade agreements which also include investment protection provisions. The new USMCA or T-MEC, which has replaced NAFTA by entering into force on 1 July 2020, also contains such provisions. Similarly, in 2018 Mexico ratified the ICSID convention. All of these treaties oblige the state to submit to investment arbitration in dispute resolution, allowing foreign investors to pursue claims against the Mexican state in a confidential and impartial forum. These treaties comply with the regular standards of protection which include "national treatment", "most favoured-nation", "fair and equitable treatment", and compensation for expropriation.
The sale of power industry assets is regulated under the ordinary laws applicable to mergers and acquisitions in Mexico, including civil, commercial, tax, labour, antitrust and environmental laws. Particular laws and regulations must be considered when the sale involves the transfer of permits, public concessions, CFE real estate assets, or real estate under the agrarian property regime.
The principal laws to be considered for the sale of power industry assets are:
Assets which are associated with activities that require permits in accordance with the LIE, require the approval of the CRE to conclude the transfer of the permits. The procedure to require this approval is made online. The CRE will review the capacity of the buyer to comply with the conditions of the permits, its financial and technical capacity to participate in the market, and its ability to provide the necessary guarantees. CRE will have 60 working days to issue a resolution.
A merger, acquisition of control, or any other act by means of which companies, associations, stock, partnership interests, trusts or assets in general are consolidated, require prior authorisation of the Federal Commission on Economic Competence (COFECE) if the operation reaches certain limits of value or constitutes "accumulation" in economic agents with more than a specific amount of sales.
Although SENER is the federal public administration department in charge of directing the state’s energy policies and political guidelines, the operational control and the central authority that oversees the SEN is CENACE. CENACE is a decentralised public entity responsible for the operational control of the SEN, the operation of the wholesale electricity market (MEM), the National Transmission Network (RNT) and the general distribution networks (RGD).
As the independent operator, CENACE is responsible for evaluating and instructing the dispatch of power plants, defining the specific characteristics of the infrastructure and requirements necessary to interconnect new power plants and new load centres to the national networks, to maintain a registry of market participants and further execute all necessary guarantees to ensure compliance with their obligations.
Although there have not been any recent material changes in the principal laws that govern the power industry, there have been several de facto measures taken by the federal administration which have changed the power industry landscape of the country, mainly concerning intermittent renewable energy sources. These measures have had as their main objective strengthening the CFE and giving it priority over other industry participants.
At the beginning of the current administration, in 2018, long-term and mid-term public power auctions (which had been very successful, resulting in some of the lowest prices the market has seen in recent years) were indefinitely suspended, and large transmission and distribution projects were cancelled.
At the end of 2019, the CRE modified the regulation applicable to the issuance of clean energy certificates (CEL) in order to grant the CFE said certificates for plants that were operating prior to the issuance of the regulations, thus going against the purpose of the CEL in favour of the transition to renewables through new plants, and affecting CEL prices by flooding the market with those CEL.
In early May 2020, CENACE issued provisions to indefinitely suspend all pre-operative tests for all future renewable power plants, including those which were about to start operations, arguing instability on the SEN due to lower demand during the COVID-19 pandemic, and arguing that the intermittency of renewable plants risked the proper functioning of the system. However, many public and private entities considered these provisions were not properly justified on technical grounds and were in fact an attempt to increase the CFE’s sales of energy (which is more expensive and comes mainly from non-renewable sources).
On 15 May 2020, the Ministry of Energy published the Policy of Reliability, Security, Continuity and Quality in the National Electricity System. This document contained even more aggressive measures against new power generation plants, attempting to secure more control and dominance for the CFE. This includes several additional studies, authorisations and requirements for the interconnection of both renewable and non-renewable generation plants, affecting distributed generation as well.
On 8 June 2020, the CRE announced an increase in transmission fees for grandfathered self-supply projects; this is a scheme which allows entities to produce energy and sell it to its shareholders and which is no longer possible for new consumers, but remained valid for those who implemented it before the energy reform. Many of the largest companies in the country had some participation in these schemes. The increase was between 400% and 800%, so many have suffered severely adverse economic impact from this increase.
Many industry players have taken legal measures against these actions and most of them have succeeded before national courts in the early stages of constitutional review procedures (known as amparos), having obtained temporary and permanent suspensions (injunctive relief), which means the government actions challenged will not come into effect while the trial is in progress. Injunctive relief in amparo proceedings usually only protect the entity which invoked and succeeded in the amparo. However, there are certain exceptions, particularly in environmental matters, when collective organisation may achieve injunctive relief with general effects. Entities such as Greenpeace and other energy associations have obtained injunctive relief which will last until the trials are over. These trials are expected to last between six months and two years. Foreign companies have also stated that they are willing to resort to investment arbitration in case it becomes necessary, and experts agree that these measures can be considered violations to IIAs.
By the end of June 2020, a number of state governments, including Jalisco, Tamaulipas, Nuevo León, Coahuila, Durango, Michoacán, Colima and Guanajuato, as well as the Federal Commission of Economic Competence, have also instituted procedures known as “constitutional controversy” against the Ministry of Energy’s reliability policy. A constitutional controversy, contrary to the general rule of amparos, has generalised effects. If any of these procedures is successful, a declaration of unconstitutionality will be issued by the Supreme Court, nullifying the effects of said policy.
On 30 June 2020, the Supreme Court admitted the constitutional controversy submitted by the COFECE and ordered the suspension of all effects of the Ministry of Energy’s reliability policy while the merits of the matter are resolved (which is expected to take between six and 12 months).
On 8 July 2020, the Ministry of Energy published the Energy Sector Programme 2020-2024, derived from the National Development Plan 2019-2024, setting out the goals and strategies of said ministry for the rest of the current government’s term. This programme follows the same path as the recent changes, explained above, and emphasises the government’s priority of strengthening the CFE and its market dominance. Additionally, although it states that clean energy should be promoted, it is contradictory by indicating that oil extraction and the use of derived hydrocarbons will be used more in electricity generation, particularly, fuel oil.
The government has announced delays, on several occasions, to an energy infrastructure plan which would identify projects in the energy industry, for development, with private funding and government support. By mid-July 2020, this plan had not yet been announced.
Although there have not been any more announcements regarding policies affecting renewable energy, we can expect that the tendency to strengthen CFE and limit intermittent generation will continue, and that off-the-grid generation will be the less affected alternative for private generation and consumption.
Mexico has unique, diverse geographic conditions which give an important edge to its power industry. Its proximity to the USA gives it access to very low-price gas and facilitates hydrocarbons and electricity trade. Mexico also has a great variety of natural resources and land which could be used for power generation. The country has above-average solar irradiation, with 70% of the country having levels greater than 4.5 kWh/m²/day. It also has above-average geothermal capacity (approximately 13.4 GW, with only 6.04 GW currently installed).
The country also has a large number of high-consumption users eager to obtain lower costs in energy supply, which offer a great opportunity for new generators. Off-the-grid generation (local generation, isolated supply and distributed energy) still represents a very attractive option for these users, as have been less affected by the measures recently taken by the government as outlined in 1.6 Recent Material Changes in Law or Regulation and 1.7Announcements Regarding New Policies.
The country also has an urgent need to develop its transmission and distribution networks, and renovate CFE’s generation capabilities, which provides many possibilities for private parties to collaborate with CFE
At the onset of the contingency measures against the pandemic, general construction activities were stopped as they were not considered essential, which halted development of diverse projects. However, they were restarted before other activities.
The contingency measures also caused a reduction in energy demand, which was used as a reason by government authorities to establish measures against intermittent generation sources as explained in 1.6Recent Material Changes in Law or Regulation. This reduction on demand started recovering sooner than expected.
Finally, although the global reduction on oil sales and prices have not caused substantial variations on electricity prices in Mexico (due to, among other causes, how the price is calculated and controlled), it has affected PEMEX (Mexico's national oil company) in terms of its sales. This has also been caused due to new environmental international rules. SENER then has taken steps which show an evident support to PEMEX, by instructing CFE to change its use of coal for fuel oil in some of its power plants, and in general consume more fuel from PEMEX.
The wholesale electricity market (WEM) is divided into the following sectors and market participants.
Electricity can be produced by private companies or subsidiaries of the CFE (both known as GenCos) using different types of technology. GenCos may sell electricity to:
GenCos compete with each other in the market and are able to set their price for electricity without restrictions. Nevertheless, when selling to basic services suppliers (which currently is only the CFE), they must do so through auctions which provide a regulated and transparent mechanism for selecting the most cost-efficient projects. GenCos can freely agree on the terms of coverage contracts entered into with qualified services suppliers and market participant qualified users. Finally, GenCos may also sell electricity directly to the market through CENACE, who will pay the spot market price in the corresponding node.
Other available generation and commercialisation schemes include isolated supply, distributed generation and local supply (these three being off-the-grid generation), which have additional applicable rules for the way generators can place their energy.
Commercialisation of electricity may be executed by two types of entities: suppliers and non-supplier marketers.
Suppliers purchase products from GenCos, then supply them to the end users. Qualified services suppliers may only supply qualified users (users consuming 1 MW or more) on a non-regulated supply basis, while basic services suppliers provide regulated supply to basic users (all small users consuming less than 1 MW).
Qualified services suppliers may enter into electricity coverage contracts with GenCos at freely negotiated prices. They may also purchase products directly in the market.
Non-supplier marketers, on the other hand, are entities who may participate in the WEM but do not represent physical assets (generation assets or load centres). They can buy and sell (bilaterally or in the market) capacity, CEL, financial transmission rights, energy and ancillary services, import and export energy without representing physical assets. However, they cannot enter into supply agreements with end users.
Consumption is divided into two types of users: qualified users, who consume 1 MW or more; and basic users, who are all other small-scale users who consume less than 1 MW. Qualified users can buy electricity from qualified services suppliers or they can become market participants, which would enable them to buy directly from GenCos or from the market, circumventing the qualified services supplier intermediary.
In the WEM there are different types of markets:
The Mexican wholesale electricity market allows imports and exports of electricity to and from other jurisdictions through interconnection links – transmission lines that interconnect the SEN with neighbouring electric systems, or transmission lines which interconnect the SEN with isolated power plants and load centres located abroad. The three neighbouring jurisdictions with access to the SEN are the USA, Belize and Guatemala. Despite the USA’s market size, cross-border operations are still limited due to circumstances such as the lack of transmission infrastructure, and low population density near the borders.
Depending on the purposes for which the import/export will take place, (ie, commercial purposes, to supply isolated load centres or import from isolated power plants, to ensure reliability of the system, or due to emergencies) the authority has enabled different interconnection links for each purpose, as well as different rules.
All market participants may import and/or export electricity for commercial purposes, although only CENACE may perform such activities for the purposes of reliability of the system and in the case of emergencies.
The Imports and Exports Manualindicates the conditions that should be complied with in order to perform these transactions. This manual also details how the prices for imports and exports will be determined depending on the import or export programme, if the operation is for commercial or emergency needs, spot market or day-ahead market, nodal prices, transference capacity and the corresponding offers.
According to CENACE, at the end of 2019 this was the supply mix:
COFECE is responsible for investigating and sanctioning unlawful concentrations whose purpose or effect is to hinder, harm or impede competition and free market access. The Economic Competence Law regulates COFECE’s powers, and grants it the authority to order the partial or total divestiture of an unlawful concentration, as well as to apply fines and penalties to those market participants that breach antitrust regulations. Any entity considering that there are no conditions of effective competition in the market may request COFECE to act in accordance with its powers.
The LIE considers monopolistic practices to be any arrangement between market participants with the intention or effect of restricting the efficient operation of the MEM. When SENER, CRE, CENACE or any other person detects such practices, they must inform COFECE in order to proceed with the investigation and sanction process.
In case a purchase or sale operation reaches certain limits of value or constitutes "accumulation" in economic agents with more than a specific amount of sales, it will require an approval by COFECE. To determine if an operation constitutes an unlawful concentration COFECE will consider different parameters including substantial market power, impact on free access to the market, competition barriers in relevant or related markets, displacement of economic agents and monopolistic practices.
COFECE has a 60-day period from receipt of the authorisation request or from receipt of any additional documents requested. Upon conclusion of such a period without the issuance of a resolution, it is understood that the COFECE has no objection to the notified concentration.
Since the unbundling of the market, COFECE has also participated in the CFE's activities and asset separation process, issuing opinions to prevent actions against free trade and competition, including one issued in May 2019, recommending to maintain a horizontal separation between the CFE GenCo's, and one in May 2020 warning that SENER’s new policies (explained in 1.6 Recent Material Changes in Law or Regulation) could be harmful for economic competence.
As explained above, COFECE is an autonomous entity, the purpose of which is to guarantee free participation and economic competence, as well as to prevent, investigate and fight monopolies, monopolistic practices, concentrations and other restrictions to the efficient functioning of the markets.
COFECE has powers to order measures to eliminate barriers to competition including instructions to: de-incorporate assets, rights, or shares – equity of economic agents; perform verification visits; issue subpoenas including requests to submit evidence; present criminal complaints; conduct trial-like procedures; and issue pressure measures and administrative sanctions.
COFECE is also empowered to impose “pressure measures” including warnings, fines, using public force, and 36-hour arrest. It also may impose administrative sanctions including very high fines (which can be 8% or 10% if the total income of the sanctioned economic agent, or 5,000 to 180,000 times the minimum wage).
Currently, the main laws in Mexico governing climate change are: (i) the Climate Change General Law, and (ii) the General Law for the Ecological Balance and Environmental Protection.
In energy matters, however, the Power Industry Law itself has devoted an entire chapter to the obligations of industry participants regarding generation and consumption of clean energy, which include the obligation of users to acquire clean energy certificates (as explained below).
Additionally, the Energy Transition Law and the Transition Strategy to Promote the Use of Cleaner Technologies and Fuels, the latter of which was recently updated in February 2020, provide rules specifically applicable to the power industry. These instruments define the goals and objectives of the country regarding clean energy use, define the obligations for the SENER, the CRE, CENACE and the National Commission for the Efficient Use of Energy (CONUEE) to issue regulations regarding the sustainable use of energy and energy efficiency, and establish mechanisms to promote sustainable exploitation of energy for final consumption and the procedures of energy transformation, including funds and special benefits.
At a federal level, there is a special carbon tax (Impuesto Especial Sobre Producción y Servicios) applicable to fuels depending on their carbon content, which aims to reduce the consumption of it. At a local level, states have started enacting regulations to promote energy transition and limiting greenhouse emissions. Examples of these are recent declarations by the governors of states such as Tamaulipas and Jalisco, regarding the imposition of special taxes to companies producing high levels of pollution. In 2017, after challenges made by certain companies and the federal administration, the Supreme Court ruled in favour of the state of Zacatecas that these local taxes were valid (and not an incursion on federal competences), so these new taxes are expected to persist. These taxes may be applicable to CFE generation subsidiaries which do not use clean technologies.
LIE includes clean-energy consumption obligations for consumers, which require the acquisition of clean energy certificates (CELs). CELs are documents issued by the CRE in which the production of an amount of clean energy is certified. Generators are entitled to one CEL for each MW/h generated through clean sources, while the end users are required to consume a proportion of clean energy in relation to the total electric power consumed in their load centres. In this sense, CELs are similar to a green tax. As of 2020, load centres are obliged to consume 7.4% of clean energy, which will increase to 10.9% in 2021, 13.9% in 2022, and will continue to increase gradually thereafter.
The Programme for the Development of the National Electricity System (PRODESEN) has an indicative programme for the installation and retirement of power plants, however, in its current version it does not foresee the retirement of any plant.
Additionally, the Energy Transition Law indicates that power generators which use fossil fuel must gradually substitute any of their facilities which exceed the limits established by SEMARNAT. These limits are provided in Official Mexican Norms (NOMS), but currently do not impose any significant limits on fossil fuel use in power generation, and power plants are still allowed to function with high-carbon fuels.
Finally, although the aforementioned instruments have set goals for Mexico to improve its energy mix towards a cleaner balance – 30% of total generation for 2021, 35% for 2024, 39.9% for 2033, and 50% for 2050 – the current government has in fact publicly promoted carbon-based generation, and has not made any additional efforts for its early retirement which, in addition to the efforts to limit the increase of clean energy in the supply mix, casts in doubt upon the possibility of reaching these goals.
Despite the current federal government having shown disregard for alternative energy sources, Mexico still has various instruments and mechanisms to encourage them and has also given continuity to many instruments aimed at supporting the energy transition.
The Energy Transition Law (ETL) is the main legal instrument encouraging the development of alternative energy sources. From this was derived the Special Programme for the Energy Transition, the Strategy for the Transition to Promote the use of Cleaner Technologies and Fuels, and the National Programme for the Sustainable Use of Energy (PRONASE).
The ETL contains provisions for the creation of various funds and financing schemes to provide financial support transition initiatives, including the Fund for the Energy Transition and the Sustainable Exploitation of Energy (FOTEASE), the Fund for Climate Change, and the CONACYT-SENER Energy Sustainability Sector Fund.
Development banks and ECAs such as Banobras, Bancomext and NAFIN offer various low-cost financing schemes to develop clean energy projects.
A particular benefit for alternative energy sources is that the Income Tax Law allows companies to deduct the total amount of investment in machinery and equipment for renewable energy or efficient co-generation during the year of its purchase. This benefit can be applied jointly with a mechanism known as "green CUFIN". This allows deferral of corporate income tax and to anticipate tax-free dividends (distribution of the green CUFIN). To apply for this, at least 90% of the revenues of the company must come from renewable energy generation or efficient co-generation.
The principal laws that govern the construction and operation of generation facilities are as follows.
Power Industry Law and its Regulation
The Power Industry Law is the main law governing all activities in the power industry, including generation, transmission, distribution and commercialisation of electricity. It provides the general rights and obligations of all market participants, including the rules applicable to generators and generation facilities.
The Market Rules are a series of administrative provisions and rules which govern the wholesale electricity market. The Market Rules establish the minimum requirements to be a market participant, determine their rights and obligations, define the way in which the activities of transporters and distributors must be co-ordinated for the operation of the wholesale electricity market, and define mechanisms for dispute resolution. Market rules include the electricity market bases and a series of Regulations for Market Operations.
Electricity market bases
Electricity market bases establish detailed regulation of the rules and principles of the design and operation of the wholesale electricity market.
Market practice manuals
Currently, the CENACE has published 28 market practice manuals which are part of the Regulations for Market Operations. These manuals establish, in a very detailed manner, the calculation principles, instructions, rules, guidelines, examples and procedures to be followed for the accreditation and registration of market participants, interconnection of power plants and load centres, and the administration, operation and planning of the WEM in general.
In order to construct and operate a generation facility, a generator must obtain the following approvals.
Social Impact Assessment (SIA)
Prior to obtaining any other regulatory authorisation, the GenCo must perform a SIA in order to identify any risks and anticipate any conflicts that may arise from the communities surrounding the area where the generation project is to be carried out. The SIA must comply with the General Administrative Provisions for SIAs in the energy sector, and is submitted to SENER, who will be in charge of evaluating the information and issuing the final resolution. In its resolution, SENER may issue recommendations and actions to be implemented by the GenCo in this regard.
If, in the resolution, SENER indicates that indigenous communities will be affected by the project, it will be necessary to carry out a consultation procedure in order to obtain the consent of the majority of the affected group. This consultation should follow internationally accepted standards of freedom, information, good faith, and adequacy (appropriate language and using proper communication channels through the communities’ institutions).
Established by the General Law of Ecological Balance and Environmental Protection, the main environmental authorisation is the Environmental Impact Assessment which includes technical studies made by developers analysing and describing the environmental conditions and expected impact of a project, proposing compensation measure to prevent, mitigate or compensate them, which are submitted to the Ministry of Environment and Natural Resources (SEMARNAT) for their evaluation and corresponding authorisation. Depending on the scope of the project, it may also be necessary to obtain a Change of Forest Land Use from SEMARNAT, authorisations from the National Waters Commission, and a Unified Environmental Licence for emissions, residues and discharges.
All power plants with a capacity equal to or greater than 0.5 MW must obtain a generation permit issued by the CRE. The requirements for obtaining this permit are, in general, to disclose technical information pertaining to the power plant in order to assess the impact it will have on the grid, and demonstrate sufficient technical and financial capacity to comply with the obligations stipulated by the permit.
When the generation facilities are to be interconnected permanently or temporarily to the RNT and the RGD for the sale of the electricity, an interconnection agreement must be executed. For these purposes, three impact studies in the corresponding system must be carried out with the CENACE.
Accreditation as Market Participant in the Capacity of Generator
In order to sell the electricity generated by the power plant in the wholesale electricity market, the company holding the generation permit must be accredited as or represented by a market participant in its capacity as generator by CENACE.
In determined areas it will be necessary to obtain the approval of the National Institute of Archaeology and History regarding archaeological remains. All projects will also require the appropriate municipal construction and “use of land” licences. Certain projects may also require special permits from the Ministry of Communications and Transportation if they might affect airspace.
Generation permits are normally granted for an initial term of 30 years and will include the GenCo’s obligation to comply with the works programme specifying the date for the completion of construction and the expected commercial operation date of the generation facilities.
Typical obligations will include the GenCo’s agreement to comply with applicable regulations and best practices regarding infrastructure and equipment, and to operate the power plant in compliance with CENACE's instructions, as well as not interrupting the service without proper cause, not engaging in improper discriminatory conduct which impacts upon users, not exceeding approved fees, respecting NOMs, and not undertaking activities other than those allowed by the permit, among others. Failure to comply with these obligations may lead to the revocation of the permit.
As a general rule, a proponent for the construction and operation of a generation facility may freely negotiate the terms and conditions for the use of the land with the landowner; the GenCo is entitled to decide whether to purchase, lease, or combine any other legal mechanism to access and use the required surface, as well as to negotiate the applicable compensation.
As an exception to this general rule, when the generation premises require a specific location due to their characteristics – that is, generation premises which will produce energy by taking advantage of a geothermal reservoir or a hydraulic resource and therefore require a specific location for its viability – the project will have "preference” over any other use of land. Therefore, the law provides for a “superficial occupation” procedure that must be followed in order to ensure the obtainment of the surface access and use, either through an agreement or through a mandatory “legal easement”. This is also the procedure that is required to be followed for transmission and distribution infrastructure works, so it is addressed in detail in 5.1.2 Regulatory Process for Obtaining Approvals to Construct and Operate Transmission Facilities.
The Power Industry Law does not provide specific obligations or requirements to be met for the decommissioning of power plants; rather it establishes that the owner of the land and the GenCos must include in their land-use agreements the financial mechanisms and guarantees they will adopt in order to ensure that the decommissioning of the facilities is executed in accordance with the best practices of the industry. Therefore, obligations regarding plans, scope, requirements and securities for decommissioning activities will be mostly agreed upon and included in the land-use agreement.
Additionally, both the authorisations of the Environmental Impact Assessment and the SIA must include specific rules and requirements to be met when decommissioning power plant facilities in consideration of the locations and characteristics of the power plant. These can also include the granting of guarantees or insurance.
The planning of the SEN, and the public utility transmission services are reserved exclusively for the Mexican State. CFE’s subsidiary responsible for transmission, CFE Transmision, has full control over transmission activities. However, the state can contract with private entities for the financing, installation, maintenance, operation and expansion of the infrastructure required to provide such public services, either through the Ministry of Energy or through CFE Transmision.
CFE Transmision is responsible for the National Transmission Network (RGT) and operates the RGT in co-ordination with, and subject to, CENACE’s instructions. CENACE must plan and propose to SENER the modernisation and extension of the RGT, in order for such to be included in the Development Programme of the National Electric System (PRODESEN), after considering the opinion of CRE. As part of this programme, SENER identifies those expansion projects to be developed and promoted by the transporters, distributors or by the federal government, as well as the general guidelines and specifications that such projects have to consider.
Finally, the CRE has the authority to issue general administrative provisions for the rendering of the public transmission service, which determine the rights and obligations of the service provider and the user, including the applicable tariffs and the rules to guarantee non-discriminatory access to the grid to all market participants, and to issue general administrative provisions to ensure quality, reliability, continuity, security and sustainability of the transmission service.
Hence, the principal laws and provisions that govern the construction and operation of transmission lines and associated facilities are:
If the construction of transmission facilities is to be performed directly by CFE Transmision, it will not require any specific permit for that purpose if the project was already included in PRODESEN and assigned to it; otherwise, additional authorisation would be required. However, like all infrastructure projects on the energy sector, it will be subject to the environmental authorisations, SIA, superficial occupation procedure, and municipal authorisations as explained in 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities. Special authorisations for crossing bodies of water (before CONAGUA), highways, or other communications channels (before SCT) will be more common in these projects.
If the Mexican State decides to contract with private entities for the financing, installation, maintenance, operation and/or expansion of the infrastructure required to provide public transmission services, the state will retain the responsibility to provide the services, but the private party will be solidary responsible with regard to its scope of work. Such contracts must be awarded through competitive bidding processes, and they can be either launched directly by SENER or through CFE.
Private entities may request that CENACE include specific projects in the expansion programmes of the RGT in the PRODESEN. When such projects are not included therein, the private entity (normally a generator or a consumer) may choose to perform such works at its own expense to benefit from them, and having right to either obtaining financial transmission rights (FTRs) or receiving income for the sale of such FTRs.
Finally, private entities may construct and operate private transmission and/or distribution lines when intended for isolated supply, import and export of power, or simply to deliver the power of their generation plants to the National Transmission Network. In such cases, the generation permit obtained for the construction and operation of the generation facilities will also comprise the authorisation for the private entity to finance, install, maintain, manage, and operate the private networks deemed necessary for the operation and delivery of the power.
Regarding construction of transmission facilities, the environmental, social, and municipal authorisations will include the terms and obligations to be met by the constructing entity. Typical conditions include mitigation measures and biodiversity rescue programmes. Insurances or bonds are also normally required to guarantee compliance with the conditions set forth in the environmental authorisations.
Regarding operation of the transmission facilities, CFE’s transmission subsidiary is obliged to allow the interconnection of all generation facilities that request such interconnection on a non-discriminatory basis, whenever the interconnection is technically feasible.
Transmission lines constructed and owned by private entities for isolated supply, import and export of power, or simply to deliver the power of their generation plants to the National Transmission Network, may be exclusively used to transmit the power generated, exported or imported only by such permit-holder, who is not allowed to provide transmission services to third parties.
Finally, if the private entity requests CENACE to include the required infrastructure in the expansion and modernisation programmes of PRODESEN, the generator may be required to grant guarantees to ensure the construction of the proposed generation facility.
The transmission power utility service is considered to be of social interest and public order, and therefore has priority over any other activity on the land to be affected by it. Therefore, the rights over land required for the construction of the National Transmission Network (RGT) may be obtained through compulsory procedures of “superficial occupation”.
This exceptional procedure includes a notice to the owner or titleholder of the land providing a description of the project and its potential consequences and impact. A social witness may be appointed to follow the procedure and the Ministry of Agrarian, Territorial and Urban Development (SEDATU) will be provided notice of the commencement of these negotiations.
The compensation must be proportional to the requirements and characteristics of the project and may be covered in cash or through other methods such as commitments to execute projects which benefit the affected community. It must include the commercial values of the land and any damage that could be suffered by the landowner due to the project. The compensation and terms agreed to by the parties must always be executed in writing and abide by the guidelines and contract models issued by SEDATU.
Furthermore, when the required surface is defined as agrarian land, and is therefore subject to the Agrarian Law, additional procedures and formalities must be concluded, and the beneficiaries of such land may request the advice and representation of the Agrarian Procurator’s Office. Any authorisation in these cases must comply with the requirement of Agrarian Law regarding the representation and decision-making procedures of the beneficiaries, which will include the performance of a special assembly with specific requirements.
In all these cases, the agreement entered into by the parties must be filed before a District Judge in Civil Matters or a competent Agrarian Court in order for such authorities to validate the agreement, giving it the character of res judicata and therefore providing the constructor with the legal security in that it will have the rights over the surface for construction and operation.
In both cases (agrarian and non-agrarian lands), if the parties do not reach an agreement within six months after the negotiations have been initiated, the interested party may request the District Judge in Civil Matters or a competent Agrarian Court to constitute a legal easement (mandatory occupation ordered by the court or executive authority). Alternately, the interested party may initiate a mediation procedure before SEDATU. If this mediation is unsuccessful, SEDATU may request the constitution of a legal easement through an administrative mechanism. However, if the parties reach an agreement, they may terminate these proceedings at any time, even after these procedures have been initiated
As previously explained, the public utility transmission services are reserved exclusively to the Mexican state. As of this date, the CFE’s subsidiary for transmission (a state-owned entity) has full control over transmission activities through the national transmission grid.
Transmission lines constructed and owned by private entities for isolated supply, import and export of power, or simply to deliver power from their generation plants to the National Transmission Network, may be exclusively used to transmit the power generated, exported or imported only by such permit-holders, who are not allowed to provide transmission services to third parties.
Transporters are obligated to guarantee open access and non-discriminatory transmission service to power plants and load centres. For such purposes, the Energy Regulatory Commission (CRE) has issued administrative provisions which specifically regulate:
The CRE is also responsible for establishing and issuing the tariffs and charges applicable to transmission services. Current applicable tariffs are available here.
CENACE, as the independent market regulator, oversees that open access and terms of service obligations are met by the transporters. CENACE is also responsible for issuing the general technical requirements to allow the interconnection of generation facilities to the SEN, proposing to the CRE the charges payable for the studies to be performed in order to determine the specific infrastructure required to allow each interconnection. SENER has published the specific Manual Applicable for the Interconnection of Power Plants and Load Centres, which establishes the requirements, procedures, rights and obligations that must be observed in regard to an interconnection request.
The Energy Regulatory Commission (CRE) is responsible of issuing, through general administrative provisions, the methodologies to determine and further adjust the transmission rates.
The methodologies issued by the CRE to determine the transmission rates, must consider the estimated income necessary for the transporter to recover adequate operational costs, maintenance, financing and depreciation of the facilities, technical and non-technical losses, applicable taxes and a reasonable profit.
At present, the methodology issued by the CRE is based on a post-stamp concept, establishing a rate applicable to generators and a rate applicable to consumers per kWh, considering the level of tension in which the generator or load centre is interconnected with. Such rates are subject to adjustments based on inflation, exchange rate variations and the implementation of new transmission infrastructure.
As mentioned above, the Energy Regulatory Commission (CRE) is responsible for issuing the administrative provisions which regulate the general terms applicable to transmission service and the guidelines and model contracts to be used by CENACE, transporters and market participants, to ensure the quality and continuity of the service.
The Interconnection Agreement to be executed with the generators and load centres, either to transmit electricity from a generator or receive electricity supply, includes all the specific rights and obligations of the transporter when rendering the service, including the ones related to the construction and completion dates, reinforcement works and studies necessary, and the metering equipment (installed by the transporter but paid by the party requesting the interconnection).
Transporters are required by law to provide the transmission utility service on an open-access and non-discriminatory basis. Transporters are obliged by law to allow the interconnection of power plants and load centres to the National Transmission Network, whenever requested to do so, provided that it is technically feasible.
The CRE has issued general administrative provisions to guarantee compliance with open-access obligations, while CENACE has issued the technical and infrastructure requirements to be met for the interconnection to take place. In order to guarantee compliance, CENACE, as the independent operator, is in charge of receiving the interconnection requests from the interested parties, and will perform the interconnection studies, request any required infrastructure and further instruct the transporter to execute the interconnection agreement with the party who requested the transmission.
Should the transporter deny access to a user having available capacity and existing technical feasibility under the criteria approved and issued by the CRE and CENACE, or should the transporter offer the service in unjustifiably discriminatory conditions, the affected party may request the intervention of the Ministry of Energy and the CRE within the scope of their respective powers.
As mentioned above, distribution activities are reserved exclusively to the Mexican state, which is done through one of the CFE subsidiaries: CFE Distribucion, whose purpose includes performing all necessary activities to provide the public service of distribution, as well as undertaking the financing, installation, maintenance, management, operation and expansion of the infrastructure required for this.
It is also important to mention that CENACE, the independent market operator, is the entity in charge of the operation of the general dstribution network. CFE Distribucion is responsible for the distribution network but must operate them in accordance with the instructions of CENACE.
Even though distribution activities are still an exclusive monopoly, it is allowed for CFE Distribution to contract private parties to provide their auxiliary services for the operation of MEM including the financing, installation, maintenance, management, operation and expansion of the infrastructure required. However, private parties may construct, own and operate private distribution networks which are not interconnected to the RGD nor the RNT.
The main laws applicable to the construction and operation of distribution facilities are LIE, RLIE, the General Administrative Provisions on open access and rendering of services in the RNT and RDG (which specifies the obligations of the providers and the users), and the Manual of Coverage Contracts of Transmission and Distribution, which establish the conditions to be included in the contract between the transporters, distributors and market participants.
The approvals required for the operation and construction of electric distribution facilities are also those listed in 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities and 5.1.3 Terms and Conditions Imposed in Approvals to Construct and Operate Transmission Facilities.
When the execution of works of distribution infrastructure need to temporarily halt the public use of streets, gardens, plazas and other public spaces, the distributor must require authorisation of the corresponding authority to execute said works. This will not be required in case of emergencies, where the distributor will only require the ratification of the measures taken after having commenced the works. Public lighting services are not considered part of the SEN so only the corresponding municipality will be responsible for their construction, operation, maintenance and reparation.
The planning and control of SEN depends on SENER, and the construction of expansion of the RGD requires to be included in PRODESEN and in annual plans with a 15-year projection. These projects are proposed by CENACE and Distributors and approved by SENER after hearing CRE in case it issues an opinion in this regard.
This has to be developed under the following principles: (i) to procure the operation of SEN in conditions of efficiency, quality, reliability, continuity, security and sustainability; (ii) to include elements from electric intelligent networks to reduce costs or increase the conditions mentioned in (i) above; (iii) to be co-ordinated with the funds to increase electrification of rural and marginalised zones; and (iv) to incorporate mechanisms to consider the opinion of market participants and interested parties in developing electricity infrastructure projects.
When determined works are required to be interconnected, and these had not been included in the corresponding plans and programmes, the entity requiring connection may perform said works itself or make contributions to the transporters and distributors to make them and benefit from the works.
The planning of the RGD should also consider that distributed generation must count with open and not improperly discriminatory access to the grid, as well as access to markets to sell its production. So PRODESEN will consider the expansion and modernisation of RGD to allow this.
The projects will be subject to the same terms and conditions imposed to other projects on the industry in the authorisations listed in 6.1.2Regulatory Process for Obtaining Approvals to Construct and Operate Distribution Facilities.
When private parties are contracted to carry out specific activities in distribution and transmission, the state will preserve the responsibility to provide the transmission and distribution services, but the private party becomes solidary responsible for the service, regarding its scope of work. The contracts are subject to fee regulations and general provisions issued by CRE. The contracts must be awarded through competitive procedures guaranteeing free competition.
National minimum content will be determined by SENER when such is not provided by international treaties or commercial agreements subscribed by Mexico. Additionally, the contract must provide for technology and knowledge transfer to transporters and distributors. Under no circumstance may the public domain goods object of the contract be given as a guarantee.
The LIE states that distribution services are considered of social interest and public order, so they will have preference over any other activity which implies the use of the area of the lands required for them.
In this regard, mining concessionaires and titleholders are not entitled to oppose the construction of ducts, cables or installation of any infrastructure for transmission or distribution as long as such is technically feasible.
Due to this exceptional condition, the procedure to acquire the rights of use over lands for distribution projects is the exceptional procedure of “superficial occupation” mentioned in 4.4Proponent's Eminent Domain, Condemnation or Expropriation Rights, and detailed in 5.1.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights, which may culminate in the imposition of a compulsory legal easement over the required lands for the projects.
CFE Distribution preserves the distribution monopoly in the country. There are no regional distribution operators. However, when determined works are required to be interconnected, and these had not been included in the corresponding plans and programmes, the entity requiring connection may perform said works itself or make contributions to the distributors to make them and benefit from said works.
Therefore, distribution networks can be built directly by the interested party of a connection within residential subdivisions, residential units and condominiums, commercial centres and buildings including office or mixed developments; industrial parks, touristic development and agricultural developments. As these works would not have additional impact on the RGD, they do not require any additional authorisation apart from the corresponding interconnection authorisation.
The CRE determines, through general administrative provisions, the regulation of considerations, prices, regulated tariffs and regulatory accountability for the rendering of the distribution services. The LIE mandates that this regulation will be predictable, stable and transparent, establishing principles of proportionality and equity, in order to avoid that transporters, distributors and suppliers improperly use its market power in detriment of the users.
CRE must take into consideration principles which allow the efficient development of the industry and competitive markets, reflecting best practices in investment and operation decisions, and protecting the interests of users. The regulations must also consider the current degree of openness of the market, concentration of participants, and other aspects related to the competence conditions in the distribution segment.
The charges are defined in general administrative conditions issued by the CRE. For each activity, the CRE should establish the corresponding fees under principles which allow the efficient development of the industry and of competitive markets, reflecting best practices in investment and operation decisions, and protecting the interests of users. The CRE must not recognise any consideration, prices or fees which deviate from said principles.
These considerations, prices or regulated fees constitute mechanisms which promote a rational demand and use of the distribution goods and services. CRE will use the evaluation tool it deems necessary and may perform comparative studies applying adjustments it considers opportune, as well as the use of performance indicators. These determinations will allow users to have access to the services in conditions of efficiency, reliability, security, quality and sustainability. The CRE may also require information on costs, operational conditions and other information which allow evaluation of the risk of the activities, and the performance and quality of the distribution services, for the purpose of the fee structure and any applicable adjustment.
Open access obligations indicated in 5.2.3 Open-Access Transmission Service also apply for CFE Distribución regarding the RGD.
Bases on CRE’s provisions, CFE Distribución issues periodically the applicable distribution fees which take into consideration geographical location and level of consumption. The determinations of rates can be challenged through an amparo indirecto.
Users can challenge acts of transporters and distributors through a claim procedure established in RLIE. The challenge is submitted to the transporter or distributor and such will have ten days to provide a properly reasoned answer. If an answer is not forthcoming, the interested party may request the involvement of the CRE to resolve the challenge.