Skepticism prevails in Mexico's power market ahead of Congress' vote for constitutional reform

Mexico's lower House of Congress is expected April 17 to vote against an initiative presented by the president to modify the constitution in favor of state utility CFE, but market participants and observers are skeptical that there will be a meaningful improvement in the investment environment in the power sector in the short term.

Lawmakers in Mexico will discuss and vote April 17 on a constitutional reform President Andrés Manuel López Obrador has presented that would increase CFE's dominance by securing for it at least 56% of the market and prioritizing CFE power plants in the order of dispatch over other players, including renewable plants that are cheaper. The reform would also increase the use of natural gas for power generation and likely delay the country's energy transition.

The vote, originally scheduled for April 12, was postponed by the president's Morena Party in hopes it could get some opposition members to change their minds. To do so, Morena agreed to modify some parts of the initiative to include 10 of 12 requests made by members of the opposition, one of which was to maintain the independence of the regulators in the energy sector, CRE and CNH.

Two-thirds majority required

Observers and market participants told S&P Global Commodity Insights that, based on all public information, the reform will be blocked, as two-thirds of the 500 lawmakers are required to approve it and the major opposition parties have anticipated they will vote against it. Morena and its allies have 277 votes and need another 57 from the opposition for the reform to pass.

PRI, the second-largest opposition party that holds 71 votes said April 10 it had ordered its members to vote against the proposal, observers noted. PRI was believed to be the only political force willing to negotiate with the president's Morena Party to obtain the votes it needed and, without their help, the initiative cannot pass. However, observers warned things during the vote could still go either way.

"There is no certainty in politics," said Juan Pablo Londoño Agudelo, North America's senior power market research analyst at consultancy Wood Mackenzie. "Still, we will have to wait and see," he said.

The last battlefield

The federal government decided to push for the reform to the Constitution after previous attempts to modify the law in favor of CFE had been blocked in courts. Last week, a Supreme Court decision on those cases has brought those cases one step closer to a final resolution in favor of companies, said Claudio Rodriguez Galan, a partner specializing in Mexico's power sector at law firm Thomson & Knight.

"If the reform is blocked, we will only have to live with the modifications made to the law of the power sector, which can be challenged with the result of the vote at the Supreme Court," Rodriguez said. Therefore, the vote in Congress is seen as the last legal fight the private industry as a whole will have against the government's energy policy, he added. Other lawsuits might follow, but they will be from individual companies, he said.

Skepticism prevails

Congress rejecting the reform would reduce market uncertainty, as the legal framework for all existing permits would survive, Londoño Agudelo said. But the rules in the market are still not completely clear, and the government could still try to block the participation of private players using other tools, as they have in the last three years, he said.

"In general, many in the market feel optimistic that market conditions will improve, but few believe this will happen in this administration," Londoño Agudelo said.

Rodriguez Galan agreed that there is a belief among investors that conditions will improve in Mexico in 2024 when a new president comes in and believes the change is needed for many reasons.

"Mexico needs a change in its energy strategy in order to achieve the international commitments in the fight against climate change, but it also needs clean energy to keep its competitiveness," he said.

If Mexico loses attractiveness because it is unable to offer companies clean, reliable energy at competitive prices, other countries will get those investments, Rodriguez Galan said.

The large companies in the energy business have already left Mexico and have begun focusing on Colombia, Chile, and Panama, Rodriguez Galan said, adding, "the biggest risk is that investments in other sectors leave, too."