Until 2013, the generation, transmission, distribution and marketing of electric power for public utility service purposes in Mexico was exclusively reserved to the federal government, through the Federal Electricity Commission (CFE), a public body of the federal government operating as a vertically integrated monopoly. Private participation was allowed only in the generation and transmission of power not intended to provide public utility services, under six types of permit. However, as a result of the lack of sufficient government funds to meet the significant increase in energy demand during the past decade and as part of the package of structural reforms that Mexico has enacted during the administration of President Enrique Peña Nieto, the Mexican energy sector is now subject to a completely new legal framework, enacted on 11 August 2014, following a historic Constitutional reform passed and enacted in December 2013, that opened almost all areas of the oil, gas and power industries to private participation and competition, with no foreign investment restrictions.
Over the past 20 years, the federal government fostered the participation of private companies in the electricity sector, particularly in power generation. Though its independent power production programme proved successful (private independent power producers have a generation capacity of more than 12,000MW, which currently represents 17.5 per cent of the current installed capacity, a considerable portion of the growing demand) and self-use power generation projects also gained a presence, the rapid growth in energy demand - between 2018 and 2032, the increase in electricity demand is expected to entail an additional 66,912MW of generation capacity (requiring investments of approximately US$90 billion), 50 transmission projects representing 1,196km-c, 18 transformation projects representing 3, 716.4MVA, and 39 compensation projects representing 923.2MVAr (requiring investments of approximately US$772 million)) - the limited governmental resources and high debt levels that were being reached, the need to provide clearer rules and opportunities to continue receiving private investment and increase competition in the electricity industry, the lack of scrutiny and transparency of the CFE rates and service conditions, and the lack of reliability and excessive costs of power for industrial processes (which affects the competitiveness of Mexican industries in a global economy), led the Mexican government to include the regulation of the electricity industry in a major package of legal reforms comprised of a Constitutional reform, amendments to 12 existing laws and the promulgation of nine new laws (known as the ‘Energy Reform’).
The first important change resulting from the Energy Reform is that the oil and gas industry and the electric power industry (previously vertically integrated and exclusively reserved to Pemex and the CFE under the Constitution) are no longer considered strategic activities, and accordingly, all parties are free to participate except in those activities that have been expressly reserved to the state under the new article 27 of the Constitution (namely, nuclear power, power transmission and distribution as a utility service, and the dispatch and operation of Mexico’s National Electric System to be controlled by an independent system operator). Pemex and the CFE are no longer considered public instrumentalities of the federal government and were transformed into ‘state productive enterprises’, a new form of state-owned commercially oriented companies, each managed by a board of directors and subject to corporate governance principles.
Moreover, for the electric power sector, the Energy Reform contemplated the creation of a completely new industry model based on a competitive wholesale electricity market operated by the new independent system operator (ISO), while keeping the state’s control and ownership of the National Grid and its exclusivity with respect to power transmission and distribution activities, but with the express possibility of entering into contracts with private parties assisting the Mexican state in the development of such activities (including public-private partnership (PPP) arrangements). The Energy Reform opened the market to merchant power plants that sell their power in bulk, where the ISO dispatches the system on the basis of cost efficiencies, providing market participants with non-discriminatory access to the grid, which is expected to affect the cost of power to the end user, thereby reducing the price differentials that the industrial and residential sectors currently have with respect to other economies. The wholesale electricity market commenced operations back in January 2016, with a short term market, which includes a day ahead market, and a real time market.
The Energy Regulatory Commission (CRE) became the regulator of the midstream and downstream oil and gas industry, and all areas of the electricity industry, which turned the CRE into a powerful and critical part of the Mexican government.
The main legal framework for the electric power industry resulting from the Energy Reform included the following four federal statutes:
- the Law of Coordinated Regulatory Agencies, governing the organisation and authority of both the National Hydrocarbons Commission as upstream regulator, and the CRE for midstream and downstream activities, including Mexico’s electricity industry;
- the Electricity Industry Law, which liberalises and provides the new organisation of the electricity industry, from generation to distribution and marketing, including the creation of a wholesale electricity market;
- the Law of the Federal Electricity Commission, which reorganises the existing power utility, the CFE, and defines its new role in the market, as well as its contracting methods; and
- the Geothermal Energy Law providing for the terms of exploitation of geothermal resources.
In parallel, various federal statutes were amended, including the Foreign Investment Law, the PPP Law and government procurement laws, among others.
Initially, no new statutes were enacted to regulate specifically renewable energy sources; however, in December 2015, the Energy Transition Law was enacted (and the previous Law for the Use of Renewable Energies and the Financing of the Energy Transition was repealed). This statute is aimed at promoting the diversification of the energy sources used to generate electricity through the use of renewable energies, and promoting the sustainable utilisation of energy and the reduction of polluting emissions from Mexico’s electric power industry.
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