Mexico Energy Update | Mexico Counter Energy Reform: An electricity sector perspective

Our Executive Advisory Board member Enrique Marroquin brings us his business perspective on the current discussion to Mexico’s proposed electrical reform.

Mexico Counter Energy Reform: An electricity sector perspective

By: Enrique Marroquín

The proposed energy (counter) reform bill (“Bill”) that President Andrés Manuel López Obrador (“AMLO”) submitted to Congress in September hit a snag earlier this week after his party (Morena) passed the FY 2022 budget without considering a single amendment proposed by the minority parties (PRI, PAN, PRD). This infuriated the PRI caucus and reaffirmed PAN’s and PRD’s opposition to the Bill. Aside from this unexpected faux pas by Morena, the powers that be in D.C. – and Brussels – finally woke up and, via their respective ambassadors, voiced their concerns about the potential impact of this ostensibly incongruous Bill. It is expected that the U.S. and Canada will remind AMLO during their D.C. summit on November 18, that the Bill as presented is not conducive to nor in the spirit of a sound trilateral partnership.

There are several scholarly and media analyses detailing the extent of the changes and effects of this Bill so it would not be productive to repeat them here. Regarding the impact on the electricity sector alone, doomsayers and conspiracy theorists predict that Armageddon will be unleashed in Mexico if the reform is passed as presented or that it is a veiled attempt to expropriate the industry, respectively. Others less pessimistic foresee a fortified CFE reducing independent power generators’ margins in favor of increasing subsidies to the less fortunate residential sectors, and still others see AMLO using CFE as a political hammer to pound the private sector into submission.

Practically speaking, however, the Mexican government does not have the stamina nor the funds to take on a full-frontal legal fight with a well-funded private sector which will most likely declare massive force majeures once the reform passes. The number of lawsuits, claims, distractions, and God forbid, power disruptions that the latter will cause is not something that AMLO needs in the last half of his term. He also would need to dedicate enormous amounts of energy to appease the international financial community. Nevertheless, AMLO, who may not understand the complexities of the electricity markets or how the grid operates, or who could care less about his image outside Mexico, is an astute politician that would not want to burden his party or his successor with an unnecessary legal, diplomatic, and political fight, so the most likely outcome of the energy reform debate would be via a compromise with the stakeholder communities. But make no mistake, he is steadfast on demonstrating to his constituents that he is serious about protecting the state-owned energy monopolies and his drive to “transform” the country.

Any proposed changes thus must contemplate the above, and if industry leaders in Mexico, the U.S. and Canada can work together to find common ground to articulate a coordinated, rational, and well-thought (counter) proposal to the Bill, there is a chance that AMLO might come to the table and accept a watered-down Bill. What could this industry-driven counter proposal address then? First, it could ask that the reform grandfathers all current generating permits. This assures there are no disruptions to power flows, no impact on current contractual agreements, and minimizes the possibility of defaults caused by an adverse regulatory environment. Second, the private sector could yield on the Bill’s proposed elimination of the wholesale electricity markets and instead request that the government maintain an independent electricity regulatory entity that would focus on protecting customers (residential and industrial alike), regulate open access to the grid on a non-discriminatory basis, and defend equitable generation dispatch rules. Third, CENACE (the independent system operator) should remain independent and in charge of managing the planning of the electric system. Because there would not be a wholesale market anymore, CENACE could focus on keeping the lights on, planning for transmission and distribution upgrades, and suggesting grid improvements based on new technology (i.e., batteries). It is likely that Manuel Bartlett, the CEO of CFE will not be happy with the system planning and dispatch functions being outside CFE’s yoke. Fortunately for the country, AMLO has the final word and Mr. Bartlett, who is turning 86 next year, must be close to or at least thinking seriously about when to ride off into the sunset. Last, but not least, the amendments should expressly address the importance of protecting any feasible project that is lingering on the queue, most of them renewable.

In conclusion and to paraphrase the great American poet, Edgar Albert Guest, if there are thousands to tell you it cannot be done, thousands to prophesy failure, to point out the dangers that wait to assail you, buckle in with a bit of a grin, take off your coat and go to it and do it. Industry and private investors were given an unexpected gift in the form of a delayed voting on the reform, but as the proverb goes, the road to hell is paved with good intentions.

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Enrique Marroquin is Executive Vice-President of Strategic Development for Zaro Transportation LLC. He has over twenty years’ experience in the energy sector.