Mexican energy industry going back to the future under Lopez Obrador

Mexico’s energy industry, long reserved exclusively for state-owned enterprises, began opening up to the private sector following a major reform under President Enrique Peña Nieto (2012 – 2018). During the current administration of President Andrés Manuel López Obrador (AMLO), however, changes are taking place that suggest a return toward government domination of the industry. AMLO has stated his desire to return state enterprises Petroleos Mexicanos (Pemex) and the Federal Electricity Commission (CFE) to their former preeminent position in the oil and electricity industries, respectively, and the trends during the first year and a half of his administration appear to be toward shifting the focus of energy production back to fossil fuels and away from solar and wind. The following are examples of some of the changes taking place.

As part of the 2014 energy reform, the previous government created Clean Energy Certificates (CELs) and an auction forum for their sale.  The CELs are issued by the Energy Regulatory Commission (CRE) on behalf of private sector generators of clean energy and are required to be purchased by certain high-volume energy consumers.  The goal was to incentivize private investment in new clean power generation capacity, and numerous such projects have been developed since the introduction of the CELs.  Last October, however, the current government changed the law to allow existing power plants operated by the state-run CFE to qualify for CELs.  The rule change cleared the way for a large number of CFE CELs to enter the market, driving down prices and undermining the revenue projections on which power companies based their decisions to build new plants.  In response, several multinationals have suspended projects in development and sued the government, putting billions of dollars of investment at risk.

The 4T, as the AMLO administration is often referred to, launched an even more eye-popping salvo against renewable energy on April 29, 2020 when the National Center for the Control of Energy (Cenace, the government agency that controls the national electricity system) issued a regulatory proposal that imposed technical stipulations that would allow the agency to prevent wind or solar plants currently in development from connecting to the grid.  The rule changes also would provide Cenace new tools to reject future requests for permits to connect new renewable generation sites.  The Cenace document cherry-picks fragments of prior laws and cites examples of instability in the flow of renewable energy to dress up the initiative as a heroic move to protect the citizenry from damage to their collective patrimony (the grid) and even to protect them from COVID-19 by thwarting the advance of wind and solar power.  This all is patent nonsense, of course, and we imagine that even the authors of the document were stifling chuckles as they came up with these justifications.  The issue here is that the prior Peña Nieto administration used its majority coalition in Congress to push through the aforementioned energy reform that eliminated state monopolies and opened up electricity generation to the private sector.  AMLO is a tireless defender of state-run industry — particularly in energy — and is now using his own majority in Congress to roll back the energy reform bit by bit.  Because AMLO is so devoted to the oil industry, this particular case takes the unusual form of a so-called “leftist” government using regulatory maneuvers to beat back the renewable energy industry in order to bolster the use of fossil fuels, all under the plodding bureaucracy of a state-owned monopoly.  So, back to the future, or whatever you want to call it, but we see this as catastrophically poor public policy that will set Mexico back years.  This regulatory change was momentarily blocked from entering into law by the Official Gazette (Diario Oficial de la Federación, or DOF), of all things, on a procedural technicality.  The Energy Ministry persevered, however, and the new rules were published in the DOF on May 15.  Wailing, gnashing of teeth and all manner of rending of garments has commenced on the part of energy companies and the private sector in general, and business organizations are vowing to challenge the move in the courts as billions of dollars in direct foreign investment are now at grave risk.

Another high profile change in energy policy came earlier this year not from the president’s office but from the Mexican Supreme Court.  In January 2020 the high court struck down a regulatory change instituted under the previous administration that increased the allowable percentage of ethanol in gasoline produced or sold in the country from 5.8% to 10%, outside the three largest metropolitan areas.  Pro-ethanol groups had lobbied hard for the increased limit in hopes of driving expansion of the market for the fuel additive in Mexico.

Mexico’s private sector has tried hard to put the best face possible on an undesirable situation once their fate was sealed and Andrés Manuel López Obrador became president in December 2018.  Since then the relationship has turned codependent and abusive, as he repeatedly beat them and then told them he loved them.  A few stragglers may still be hoping for kindly grandmother, but at this point he’s looking pretty well like the big bad wolf and they’re starting to crap their pants as the economic skies are darkening fast and we’ve still got more than four years of tough sledding ahead of us.  And that’s not even counting the COVID-19-driven recession.

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