Mexico Embarks on Historic Energy Reform

Mexico’s much-awaited constitutional energy reform, passed on Dec. 12 by the federal congress and a week later by the required majority of state congresses, could spark increased private participation in power projects, lower electricity prices, and transform the profile of the country’s state-dominated power sector.

The Mexican Congress must still pass supporting legislation within 120 days from the date of the official publication of the Energy Reform, and the executive branch has a year to create a supporting regulatory regime. Beyond that, authorities will need to design contracts to allow expanded private sector participation in the oil, gas, and power sectors.

Discussions on the reform were initiated earlier in 2013, and for experts like Alex Choinski, a partner at the law firm of McDermott Will & Emery, the final package seems “especially broader” than expected.

Significantly, the reform allows state-owned oil and natural gas monopoly Petróleos Mexicanos (Pemex) to partner in projects and to allow private companies and new entities formed by the government to participate in exploration and production. The Ministry of Energy will now also be able to issue permits to private industry for refining and petrochemical activities.

On the power generation front, the state has historically retained exclusive control over transmission and distribution of power through the Comisión Federal de Electricidad (Federal Electricity Commission, CFE), a company created and owned by the Mexican government and which is also Mexico’s dominant generator. Mexico’s infrastructure includes 209 generating plants with a combined capacity of 52.5 GW. As a result of a 1992 law that partially opened electricity generation to the private sector, about 22.6% of that capacity consists of plants built with private capital; these 22 plants are mostly combined cycle gas-fired turbines.

Under the reform, the private sector will be allowed, on behalf of the state, to build, operate, finance, and extend infrastructure required for the “public service” of transmission and distribution. The private sector will also be allowed to generate power and possibly sell it to end-users. The Comisión Reguladora de Energía will have the authority to regulate and grant permits to private sector generators and regulate and establish transmission and distribution fees.

The CFE and Pemex, meanwhile, will be transformed into “productive state companies,” meaning they will retain control over their separate budgets and performance. It essentially “corporatizes” those entities, Choinski explained. “The intent is to make them more competitive and more productive, but not pull them out of the picture.”

Another significant change entails the creation of the Centro Nacional de Control de Energía (National Center of Energy Control, CENACE), a federal agency that will operate the national power system and power market to ensure nondiscriminatory access to the national grid. This is important because under the current regime, “CFE controls the entire process, and there is no competitive market pressure—no independent system operator in the middle of all this—creating a wholesale power market on the generation side, which would ideally bring down power rates,” Choinski said. “The current reforms intend to create that wholesale power market with the hopes that the savings derived from competitive bidding would then be transferred to consumers and end users.”

Mexico suffers prohibitive electricity rates partly because of CFE’s monopoly and because its costs for natural gas are higher, he added. “The reforms create a more competitive wholesale power market that benefits from the concurrent liberalization of oil and gas mid-stream distribution, which promises to create a market where gas supply for power generation will be cheaper.”

Finally, while an overwhelming majority of Mexico’s electricity generation is derived from fossil fuels, particularly gas, coal, and petroleum products, the reform calls for the establishment of a national program for sustainable use of energy within a year of becoming effective. It also calls for a law to regulate the survey, exploration, and exploitation of geothermal resources (Figure 1).

1. Earthly power. Mexico has the fourth-largest geothermal power reserves in the world, and proposed reforms call for a law to regulate exploration and exploitation of the energy source. Alstom in December signed a $40 million contract with the Comisión Federal de Electricidad to build the 25-MW Los Humeros III-Phase A geothermal plant in the state of Puebla, a plant that will operate in tandem with two plants recently installed in the same area: Los Humeros IIA and Los Humeros IIB (shown here). Courtesy: Alstom

The transition period during which Mexico will shape a new regulatory scheme to support the reforms is bound to be protracted, Choinski projected: “The country is essentially creating the contours of a new generation market.” As he told POWER, “There are a lot of details that have to be worked out because the guidelines are generally broad.” Certainties set down by the legislation include “a provision for turnover of resources from CFE to the new national grid operator over a certain period of time and certain provisions that allow CFE to continue transmission and distribution responsibilities for a period of time.”

Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)