Power in Mexico: A Regulatory Framework with Little Flexibility

Clotilde Bonetto and Mark Storry, Global Business Reports

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Mexico’s federal government retains almost total control over who builds and owns what electricity infrastructure. But if you know how to work within the strict constraints, it is possible to engage in profitable projects.

Article 27 of the Mexican constitution states that the electricity sector is of strategic importance for national sovereignty and that therefore the state, via the vertically integrated Comisión Federal de Electricidad (CFE), should hold a monopoly over the public service of electricity. Originally, this meant that only the CFE could generate electricity, own transmission lines, and distribute electricity to the general population. During the 1980s, when oil prices fell, Mexico looked at reforming the sector to increase the role of the private sector; however, reform didn’t arrive until the 1990s.

Reforms in the early 1990s allowed the private sector to participate in the power generation industry in four ways:

Via the independent power producer (IPP) process, whereby bids are tendered out by the CFE.
By cogeneration or self-supply, whereby a company needs to own a stake in the production company or be co-owner of the power production facility to furnish its own electricity needs.
Private producers can produce power for export, as do Sempra Energy and Intergen in Baja, California.
A rarely used exception for projects less than 20 MW.

The IPP and cogeneration approaches are by far the most important.

Beyond power generation, companies can participate in other aspects of the electricity sector via the Obras Publica Financiada (OPF), which allows private companies to become involved in public works.

Interview with Alfredo Elias Ayub, Director General of the CFE

Q. The Comisión Federal de Electricidad (CFE) is widely complimented as a world-class organization. What measures have you taken during your 10-year tenure to better the CFE?

A. We have taken a number of measures. Firstly, to modernize and improve our infrastructure. About one-third of our infrastructure is new and one-third has been recently refurbished. Thus around 70% of the infrastructure incorporates the latest technologies. Secondly, all of our operations are now under SAP [Systems, Applications and Products in Data Processing] control. Thirdly, and most importantly, we have reached agreements with our union on training. We have increased our number of training days from 6 to 11 per year, which is above the national average. We have even opened our own university, situated across 14 campuses, where we train our staff to be better engineers and better managers. The universities started some time ago; they are mainly distance courses on technical subjects. We have around 1,500 people training for engineering degrees as well as 1,000 studying for master’s courses. So better infrastructure, better management, and better people have been three key reasons for our success.

Q. Over the course of our research we have seen the difficulties of local companies participating in CFE projects via both the OPF [Obras Publica Financiada] and IPP [independent power producer] schemes. What steps is the CFE taking to promote the participation of local companies?

A. We talk a lot with Mexican companies. We certainly want them to play a role in the sector, but we see that it is difficult for them in terms of financing. We are encouraging them to go to the stock market to raise equity. For transmission lines under OPF we do have a requirement to source 40% of final output with Mexican participation.

Q. The CFE was created to provide energy to the whole population regardless of the profit motive. What steps is the CFE taking to provide service to the 6,000,000 Mexicans currently without access to electricity?

A. I don’t believe that it is 6,000,000 people; here in Mexico 97.5% of the population have access to electricity. Once you reach that number it gets very difficult to increase the percentage, as there are constantly new people starting new homesteads in very remote areas. It is very difficult in any country, even in Europe or the U.S., to reach that 100% figure. In the last 10 years we have undertaken a lot of electrification for rural and ethnic minority communities. We have gone into more than 3,000 small towns in this period.

Q. Renewables are seen as a great growth area, especially wind resources in Oaxaca; however the CFE’s mandate demands that it supply energy at the cheapest price. What have been the CFE’s main activities in renewables?

A. We are increasing our installed capacity in renewables; for example, we are working on a large hydroelectric project as we speak. Just today we will announce a 100-MW wind project in Oaxaca. We fully intend to continue on this front. We will continue looking for good projects and continue developing them. We will even support some private projects within the renewables sector.

Q. What are the main new projects the CFE are constructing and what effect will they have on the generation matrix [mix]?

A. We have several projects which could potentially be constructed, principally combined-cycle coal plants and thermoelectric projects. We are also deciding whether we should develop another nuclear plant, a decision which will be taken soon. We have noticed in the U.S. a choice has been made to develop some nuclear plants, so it is certainly something which we have to consider.

Q. The liquidation of Luz y Fuerza del Centro had a great effect on the Mexican electricity sector. What does this move imply?

A. Operations are working well within this area. We have started to rehire certain people, including ex-LyFC workers. In the central region we have connected more than 110,000 users, and we expect that to increase in the future. We will start making the investments this year to bring the central region up the level of the rest of the country. In my opinion, it is going well, and I remain optimistic about the future. We intend to introduce new concepts in the central region, which we hope will bring our service up to the next level.

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