Market awaiting constitutional reform to Mexican power market

Market participants and observers in Mexico are awaiting the presentation of a constitutional reform that could curb the participation of private companies in the country's power market and increase the dominance of state utility CFE.

Mexico President Andres Manuel Lopez Obrador has said he will present the reform before the end of the year, but his Morena party does not appear to have enough votes in Congress to pass the reform on its own and will likely need to negotiate with opposition parties.

The reform is expected to be the first of three major constitutional amendments planned by the president before the end of his term in 2024.

Reaching dominance in power generation

The first step is expected to be modifying the fourth article of the constitution, which concerns the fundamental rights of citizens, to include the right of access to energy, according to two energy executives familiar with the process. Article Four already guarantees the right to such things as housing, clean water, and health.

"This will be the pillar for the reform," the executives said, requesting anonymity.

The government also is expected to push for changes it attempted last year to benefit CFE, including giving CFE power plants preference over privately owned facilities, the executives said. The attempt was shot down in Mexico's courts in 2020.

"The government will likely try to find a way to materialize a constant desire expressed by the president that CFE control 56% of the market, although it is not clear how exactly that can be achieved," said Bernardo Cortes Araujo, a partner at law firm Cortes & Quesada, who specializes in the Mexican energy sector. Cortes Araujo added the reform will likely focus on power generation and the order of dispatch.

After the liberalization of the power market began in 2014, private companies were allowed to produce electricity with newer, cleaner plants. According to CFE data, the total installed generation capacity in the country is 85.9 GW, 42 GW of which is owned by private companies. CFE claims this is excessive given the country's consumption.

Mexico's power demand in 2021 is expected to remain around 44 GW, in line with 2020 levels, data from the Energy Secretariat showed, as the economy slowly recovers from the COVID-19 pandemic. Mexico reached record demand of 47 GW in 2019.

Nevertheless, other industry sources say there is no excess capacity, as private plants were meant to gradually replace many of the old plants from CFE, which use coal, diesel or fuel oil, with newer plants that either run on natural gas or use renewable technologies, including solar and wind.

Under the current law, the National Center for Energy Control (CENACE) dispatches energy from the cheapest available source at that moment. Privately owned plants, which are more modern and more efficient, get dispatched first. CFE has called this treatment unfair. The current administration agrees and is pushing to get CFE plants dispatched first.

According to data from the Energy Secretariat, SENER, the CFE controls 55% of the market, but roughly 10% of that is obtained by CFE through long-term supply contracts signed with large private generators, such as Iberdrola, Acciona, EDF, and others.

Some sources expect the government to make offers to purchase some of those private generators and place them under CFE control.

Others pointed out that the limited financial resources of CFE and the administration will make that option difficult.

Scope of reform

It is unclear how far the government will go in its attempt to restore the CFE monopoly. Some sources said the reform could end up being fairly minor so that it can more easily be agreed upon by opposition parties.

For instance, the administration could limit generation from renewable power companies, which would simplify CFE operations, because CFE has to give renewables priority in the order of dispatch.

Claudio Rodriguez Galan, a partner at law firm Holland & Knight, who specializes in the Mexican energy industry, said there might not be a 180-degree change on liberalization.

"Otherwise, it will face fierce opposition in the houses of Congress," Rodriguez Galan said.

Others say the government could be more ambitious. Paul Alejandro Sanchez, a partner at consultancy Perceptia in Mexico City, said the government could be much more aggressive and go for a comprehensive cleansing of the private sector, imposing restrictions on wholesalers and retail distributors, or even companies that generate their own electricity.

"The incentive is there for them to do it right now," Sanchez said.

According to SENER data, self-generators account for roughly 14% of the market.

Market participants are concerned, and speculation regarding the scope of the reform is high. Some said the government is also considering restricting private access to the national grid in order to curb their operation.

"They don't like to have private companies connecting to their grid," according to a top executive from a private generation company. The executive added that his company has found it very hard to get interconnection permits.

Regardless of how ambitious the reform is, it will have to comply with other articles of the constitution, such as respect for international treaties and the fact that the laws cannot be retroactive, Rodriguez Galan said.

Fierce political opposition

Most sources believe the chances of the government passing its reform have increased as the president recently has publicly attacked the opposition parties with accusations of corruption.

In 2020, the former CEO of state oil company Pemex Emilio Lozoya was arrested by international police in Spain on charges of bribery and corruption and extradited to Mexico. Lozoya has since revealed financial ties with members of Lopez Obrador's political opponents.

Most sources agree that passing the reform will not be easy, as the government will have to negotiate with opposition parties to obtain the two-third majority needed for a constitutional reform. The president's party and its allies have 278 votes in congress or 55.6% of the total, which means they need all their members to vote in favor and get 56 additional votes from the other parties.

"Getting the opposition to vote in favor will have a high political cost, and the president has to use whatever capital he has carefully if he wants to get all three reforms passed," said a Mexican politician from an opposition party who is familiar with the process. "It won't be easy."