We explain the impact it will have on clean electricity generation over the next few years.
The Energy Reform bill sent by the Executive Branch will cause more problems than benefits, according to experts.
Specialists warn that it represents a serious step backwards for the environment – in the midst of the climate crisis – reducing the competitiveness of companies and violating multiple trade agreements.
One section of the reform says that the government, through its company the Federal Electricity Commission (CFE for its initials in Spanish), will completely regain control of the generation, distribution, and commercialization of electricity in Mexico by guaranteeing 54% of electricity generation to the CFE at the expense of private investment.
Enrique de la Madrid, Director of the Center for the Future of Cities at Tecnológico de Monterrey, in an interview with Tec Review, explains another worrying aspect: the government will be in charge of the energy transition in Mexico despite the fact that the CFE does not have its own photovoltaic or wind power plants.
“Our world is making greater use of electricity, but from renewable energy sources. The trend is for vehicles to be electric and households to use more reliable and accessible electrical power, but the government’s big proposal is a state monopoly to meet demand,” he says.
For his part, Oscar Ocampo, Energy Coordinator at the Mexican Institute for Competitiveness (IMCO for its initials in Spanish), adds that “the CFE is a stakeholder with no renewable energies. It doesn’t have an energy transition strategy, but it’ll be in charge of managing this area. It’s absurd.”
Mexico made a voluntary commitment in the Paris Agreement that 35% of its electricity will be clean energy by 2024.
However, the Department of Energy has already acknowledged that –in the best-case scenario– it will produce 31% and perhaps less if the reform bill is approved.
This is because the Executive Branch introduced changes that would overturn the current power supply scheme to favor its thermoelectric plants (technologies that have not been modernized since the 1960s and are very polluting).
Since the Energy Reform of 2013, the CFE’s power supply model has worked as follows: in the mornings, it buys the cheapest and cleanest energies (solar and wind from private companies); during the day, it changes to hydroelectric plants; and only at night does it turn on its thermoelectric plants.
Enrique de la Madrid explains that the core of the reform bill is aimed at the CFE buying surplus fuel oil from the refineries of Petróleos Mexicanos (Pemex) for use in its thermoelectric plants.
“The rest of the world doesn’t want that material anymore because it’s very inefficient for generating electricity, and it’s very dirty, but since Pemex doesn’t know what to do with the surplus, it wants the CFE to buy it to produce electricity.”
While the world is going through an unprecedented environmental crisis due to the excessive use of hydrocarbons, the government’s proposal is to use more fossil fuels.
The CFE will absorb the National Energy Control Center, the body that decides when the plants pump their energy into the power grid based on the criterion of economic merit.
“The CFE would have the power to decide to turn on all its plants first and send renewables to the back of the line. This cancels out the possibility of more private investment in renewables in Mexico,” adds Ocampo.
Paradoxically, this reform would increase the CFE’s expenditure to supply itself with energy.
In 2020, private generation from renewable energies had an average cost of 401 pesos per megawatt-hour, while the average cost of that produced by CFE was 1,413 pesos, according to IMCO.
The Federal Expenditure Budget for 2022 contemplates 73 billion pesos for CFE subsidies to offset losses in electricity rates, while this was 70 billion in 2020 and 2021, says Ocampo, who holds a master’s degree from the London School of Economics and Political Science.
It doesn’t make sense for the CFE to spend so many resources on subsidies and not on the construction of renewable energy plants.
“There are six combined cycle power plants, but there is no investment in clean energy, except for a 1,000-megawatt solar plant announced by the governor of Sonora, Alfonso Durazo. And that remains to be seen,” says Ocampo.
A UN campaign shows a dinosaur at the front of the General Assembly calling for no investment in fossil fuels (Photo: UNDP video screenshot)
Companies would be less competitive because the government would subsidize the residential use of electricity but charge the cost to the private sector.
Furthermore, at the international level, countries that have invested in an energy transition based on renewable sources would impose tariffs on Mexican products because they were manufactured using dirty energy.
“You can’t have more lax environmental criteria and pretend that you’re going to trade with countries with strict criteria,” Ocampo observes.
Commitments set out in the Free Trade Agreement between Mexico and the European Union and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership would be breached with significant trade repercussions.
The Mexican government reassured foreign investors by respecting the rule of law for the first time with the North American Free Trade Agreement and its modern version, the United States-Mexico-Canada Agreement (USMCA), a document that consolidates the opening up of the energy sector.
“This reform is an attack on legal certainty, investment certainty, and the rule of law in the Mexican economy,” observes Oscar Ocampo.
“The possibility that Mexico will have to appear in international arbitrations to defend its energy policy is very real.”
The USMCA recognizes the right of the Mexican State to change its constitution, but a section in Chapter 8 says that the modifications should not be to the detriment of U.S. and Canadian investors.
Article 32, paragraph 11, states that Mexico commits to grant the same level of openness to the United States and Canada in energy, cross-border trade in services, and in state-owned enterprises.
Similarly, U.S. Ambassador to Mexico Ken Salazar expressed concern about the proposal on Twitter:
“I had important meetings with the Mexican government to discuss the reform to the power sector. I want to learn more about the impetus for the proposed constitutional reform. I also expressed serious concerns for the United States. We committed to continuing our dialogue on these critical issues.”
I had important meetings with the 🇲🇽 government to discuss the reform of the power sector. I want to learn more about the impetus for the proposed constitutional reform. I also expressed serious concerns for the 🇺🇸. We committed to continuing our dialogue on these critical issues
— Embajador Ken Salazar (@USAmbMex) November 3, 2021