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Mexico proposes constitutional reform to give full control of power sector to state utility CFE

Highlights

CFE to be entirely responsible for the electric industry

Utility to be horizontally and vertically integrated again

CFE to lead Mexico's energy transition

Observers warn of "de facto" nationalization of the industry

The Mexican government has sent an expected proposal to Congress to modify articles of the constitution related to the energy industry that would give full control of the power sector to the state utility CFE, while putting it in charge of the country's energy transition.

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The proposed reform would make CFE entirely responsible for the electric industry, including the planning of the national grid, as CFE would take over all functions of the grid operator CENACE.

Mexico President Andres Manuel Lopez Obrador had promised he would present the reform before the end of the year, although his Morena party does not 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.

According to the proposal, CFE would be vertically and horizontally integrated again. After the liberalization of 2013, CFE was broken into six independent generation units.

The reform would cancel existing permits and set a new market where they can determine who will participate. The modified constitution would allow CFE, currently the largest producer of electricity in the country with roughly 50% of the installed capacity, to prioritize its own plants in the order of dispatch over those privately owned so their output represents 54% of the total demand. It would also allow CFE to set transmission and distribution rates.

Rodolfo Rueda, a partner at law firm Holland & Knight, told S&P Global Platts the reform could have a negative impact in the generation matrix of the country if all generation permits were cancelled.

According to CFE data, private producers, whose power output is sold to CFE at competitive prices to meet its obligations with the population already have almost 17 GW of installed capacity in the country compared to 43.8 GW from CFE.

"If they cancelled all the permits, that would compromise supply to the population," Rueda said.

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 pandemic. Mexico reached record demand of 47 GW in 2019.

The measures are practically killing the open market in electricity, Diego Campa, a partner at Campa told Platts. Campa said in his view the government is concentrating in fully controlling the sector as they are aware that the world is moving away from fossil fuels and into newer set of technologies, which will be controlled by CFE.

The reform initiative refers to the energy transition as one of the main long-term goals of the country and states that CFE will be solely responsible for it. It even expands into the mining sector nationalizing the production of lithium.

"They are probably realizing that in the last seven years since the previous reform the world has changed," Campa said. They are also trying to avoid the legal hurdles they faced last year with their first attempts to modify the sector, which are mostly based on environmental grounds, he said.

The reform presented by the president is much more aggressive than what the market was expecting, said Bernardo Cortes Araujo, a partner at law firm Cortes & Quesada in Mexico City, adding that if approved it would impact most of the contracts held by large industrial clients in the country who benefited from the liberalization.

"It is a de facto nationalization, and could be detrimental to investors' confidence," Cortes Araujo said.

Rueda agreed that the measures could be interpreted as a nationalization and said that the reform could also violate international treaties.

"We see that it could be in opposed to international standards or fair and equal treatment for investments. It would have to be analyzed," Rueda said.