Mexico’s Electricity Reforms: Thoughts from an expert

The Mexican government is trying to pass a constitutional reform that would limit private investors’ participation in the country’s electricity sector. If the proposal is approved by Congress, Mexico’s electricity sector would go back to being almost completely state-controlled. What implications could this have for Mexico’s investors and its business sector? Energy expert, Adrian Duhalt, shares his data and insight on the current climate in Mexico’s energy sector.

Mexico’s Electricity Reforms: Thoughts from an expert

by: Adrian Duhalt

Mexico’s energy reform in 2013/2014 paved the way for foreign investment to flow into Mexico’s energy sector, which had previously been heavily controlled by the government. Now, the administration of President López Obrador is seeking to modify the Constitution and roll back key policies instrumented by his predecessor. If passed, what would be the impact on the private industry? 

The initiative brought by López Obrador (AMLO) to Congress is dubbed as an electricity reform, but in reality, its scope is much broader as it also intends to control both the development of lithium reserves – a critical mineral whose demand is poised to grow as the electrification of transport progresses – and the pace at which the country transitions to a lower emissions economy. In short, AMLO’s proposition to reform the Constitution would send shockwaves throughout Mexico’s energy sector.

On the political side of things, the bill is yet to be discussed and negotiated as the ruling Morena party and its allies lack the votes to pass it. In the past midterm elections on June 6, AMLO’s coalition lost the qualified majority and thus the authority to sanction constitutional changes. With the goal to discuss the proposal and have more time to persuade members of the opposition to support it, Congressman Manuel Rodríguez González, who chairs the Energy Committee at the Chamber of Deputies, revealed that the reform is set to be reviewed by December 15, although the entire legislative process may end in April 2022. If uncertainty has swept the energy sector since AMLO took office, it appears that those firms allegedly affected by this initiative will have to tread even more carefully in the coming months.

It remains to be seen what shape the bill would have in the end, given that the government of López Obrador is reportedly open to making concessions, but only if the essence of the reform remains intact, and that means “maintaining the rectorship of the State over the power sector and ensuring the nationalization of lithium.”

Likewise, there is a scenario that must not be underestimated. The race to the 2024 presidential election has begun, at least on the part of Morena, and any major reform approved by Congress could be interpreted as a political victory for AMLO, further bolstering his influence as a result. With that logic in mind, it is reasonable to argue that the odds of the opposition blocking the power bill of AMLO are not slim.

AMLO’s approach to energy issues has proved controversial, to say the least, among energy pundits at home and abroad. As the objective is to strengthen the already dominant role of the state-owned electric utility CFE (Comisión Federal de Electricidad, or Federal Electricity Commission in English), companies with a stake the power industry in Mexico are vigilant and certainly wary of engaging in new projects or even compromising additional resources to existing ones. Sidelining private investment poses a very important question going forward: will CFE be able to finance capacity additions as power demands rise? It is too soon to speculate as the reform is yet to be debated, but amid tight resources, it is prudent to wonder if blackouts or higher tariffs could be on the horizon in a few years’ time.

Is Mexico’s transition to a lower emissions economy off track?

It certainly is, at least for the time being. For AMLO to fulfill his political and economic agenda, both Pemex (Mexico’s state-owned oil company) and CFE are destined to play a central role, and that means developing and implementing policies geared towards strengthening the hydrocarbon industry. Mexico’s government is following a script that in the past was relatively successful in boosting economic, social, and industrial development, but applying that same formula under current circumstances is poised to make Mexico underperform. And while the rest of the world is embracing the transition to a greener economic structure, López Obrador has decided to push the pause button. In political and electoral terms, the aforementioned arguments could be profitable for the ruling party, although at the same time it puts a dent on the country’s economic outlook.

If the power reform is passed, CFE will not only turn into an even more dominant player, but it will also be commended with setting the pace at which Mexico moves toward a greener economy. In that sense, a major concern is that the energy transition could remain deeply intertwined with politics or at the expense of the ruling elite, leaving other important stakeholders, such as the private sector and civil society, on the sidelines.

The current proposal includes giving CFE, the state’s electric company, 54% of the power market. Do you think private companies would find it attractive to operate under such conditions?

The rationale behind the proposed market share is not clear and, arguably, is the least of the concerns for private players. While private companies may find it attractive to capture 46% of the market, there are other more relevant factors at play. The power reform implies changing the rules halfway through the game, and that undoubtedly has a negative impact on those firms that made investment decisions based on a given set of conditions and is making others have second thoughts about doing business in Mexico. Red tape or an adverse economic outlook may deter companies from investing in a specific country, but when there is political will to welcome and encourage private investments, firms often find ways to navigate through uncertainty. In Mexico, it seems that type of political will concerning the energy sector is in short supply.