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U.S. Energy Secretary Jennifer Granholm with Mexican President Andrés Manuel López Obrador at the national palace in Mexico on January 20, 2022. (Photo: Mexican Government)
Wednesday, February 16, 2022
Perspectives

Mexico Power Reform Hurts US Investors, Renewable Energy


Mexico’s electricity reform harms US investors and will undermine renewable energy generation.

BY ENERGY ADVISOR
Inter-American Dialogue

Following meetings in January in Mexico City with President Andrés Manuel López Obrador and other top Mexican officials, U.S. Energy Secretary Jennifer Granholm expressed concerns about Mexico’s plan to tighten state control over the electricity market. Granholm later said she was encouraged by Mexico’s openness to addressing those concerns. Reforms López Obrador is seeking would guarantee state-run electrical utilities have a market share of more than 50 percent. The Mexican president is also investing heavily in fossil fuels at a time when countries around the world are moving toward more renewable energy. What does López Obrador hope to achieve with the power sector reforms? Will they deter the development of renewable energy in Mexico, as critics suggest? What will be the effects on U.S. investments in the country, and how might Mexico seek to resolve U.S. concerns?

Gerónimo Gutiérrez Fernández, senior advisor at Covington & Burling and former Mexican ambassador to the United States: If approved, the reform proposed by President Andrés Manuel López Obrador would be a strong blow to Mexico’s economy and future. Moreover, it would not even achieve its main stated objective of providing low-cost energy for Mexicans, which was one of López Obrador’s campaign promises. In his effort to avoid price increases on electric power through a state-controlled market and sector, Mr. López Obrador has all but paralyzed the rapid development of renewable energies we had seen over the past decade. This is a huge mistake, going clearly against an inescapable world trend, severely jeopardizing private investment in the sector as well as Mexico’s competitiveness. The United States and Mexican governments recently met for the high-level economic dialogue and agreed to improving the regional business environment and strengthening the resilience of U.S.-Mexico supply chains. The proposed reform runs contrary to this objective and contrary to USMCA provisions. The U.S. government has taken a careful approach because a public confrontation will not help in any way and could galvanize further nationalistic instincts, but it seems it has made clear its concerns as of part ongoing meetings. A good way for Mexico to address investors’ concerns is to work on regulatory changes as opposed to constitutional reforms and not go against its international obligations and competitiveness in the sector.

Earl Anthony Wayne, former U.S. ambassador to Mexico and co-chair of the Mexico Institute Advisory Board at the Wilson Center: The electricity reform proposal is President López Obrador’s latest attempt to reverse what he portrays as ‘neoliberal’ economic policies and to strengthen Mexico’s energy ‘sovereignty.’ As proposed, the reform will have a high economic price and will likely harm U.S.-Mexico relations. Many experts argue the reform as drafted will raise electricity costs and increase Mexico’s ‘dirty’ electricity production, reducing renewable energy where Mexico has great potential. Mexico could well become less attractive for new investment as companies are looking to nearshore from Asia and to increase their ‘green’ profile.

Mexico would also face a spate of international disputes and more domestic court cases. International companies in Mexico’s energy sector say AMLO’s government has already significantly disadvantaged them vis-à-vis Mexico’s national electric utility, CFE, and state oil company, Pemex. Critics say the legislation’s proposed concentration of monopoly power in CFE will magnify enduring ill effects. The current reform draft appears to violate key provisions of the 2020 U.S.-Mexico-Canada trade agreement (USMCA) by giving unfair advantages to state companies and undermining existing investments. It potentially contravenes commitments on the environment, regulatory transparency and trade in goods. The Biden administration is seeking to persuade Mexico to make changes so the legislation respects USMCA commitments.

It argues Mexico will garner substantial economic benefits including from green energy, with visits by Energy Secretary Granholm and more recently U.S. Special Climate Envoy John Kerry. A trade dispute case remains a likely option. Mexico’s congressional debate will be a serious test for AMLO’s energy vision with big implications for U.S.-Mexico economic relations and Mexico’s prosperity.

Pamela Starr, senior advisor at Monarch Global Strategies and professor at the University of Southern California: Mexico’s electricity reform will undermine renewable energy generation, harm the interests of U.S. investors and likely lead to shortfalls in the electricity supply. Its aim is to re-establish state dominance in the power sector, seemingly regardless of the economic costs. To achieve this, the reform allows the state-owned Federal Electricity Commission (CFE) to favor its own, carbon heavy, electricity generation over cheaper and cleaner options owned by private sector actors. The CFE claims that it will invest in additional clean energy options, but its weak financial position suggests it will be unable to do so.

Meanwhile, the government has dramatically slowed approval for new private sources of clean energy generation. The reform will also allow the renegotiation of all contracts signed by private sector operators under previous governments and make self-supply schemes illegal, including rooftop solar.

During Secretary Granholm’s visit, the United States took of the kid-gloves it had previously employed in its dealings with AMLO.

She presented significant reservations about a reform that will damage U.S. investors, prevent Mexico from meeting its clean energy commitments and contravene several provisions of the USMCA trade agreement.

AMLO’s public statements during and after the visit, however, make it unclear if he received the message. And an unfortunate ensuing statement by the U.S. ambassador created the impression that the United States does not oppose the reform after all. This issue will be a persistent irritant in bilateral relations for some time.

Larry B. Pascal, member of the Energy Advisor board and partner at Haynes and Boone: Mexico’s current administration seeks to reduce private sector involvement in the power market through a regulatory reorganization that places more emphasis on the state-owned Federal Electricity Commission (CFE). The government asserts its approach will result in a more reliable power system. If the energy reform is approved as currently proposed, the CFE will have a guaranteed market share of at least 54 percent, and private power generation will be capped at 46 percent. Additionally, the reform would cancel all or some of the previously granted private generation permits (subject to finalization of the legal text). The reform does not address what happens to the canceled operations and investments.

It would arguably reduce the development of renewable energy in Mexico because the CFE relies more on nonrenewable energy and does not have dramatic plans to change its course in this respect. Currently, 64 percent of the CFE’s power generation is nonrenewable, and only 69 of the CFE’s 192 generation plants produce clean energy, primarily via hydroelectric, geothermal and nuclear plants.

Moreover, the CFE’s 2021-2025 business plan does not provide for new investments in renewable energy projects. The reforms contribute to uncertainty for U.S. investors in the Mexican power sector. It is unclear at this time as to the process for reapplying for generation permits and whether some grace period can be invoked for private generators and their customers. Mexico could seek to resolve U.S. concerns by gradually growing and strengthening the CFE through investment in energy projects rather than the contemplated reform.

Nicolas Lloreda, president of Primus Responsum and former Colombian ambassador to Canada: In his three and a half years in power, AMLO has not missed any opportunity to miss an opportunity. With Trump punishing China, and the new USMCA secure, Mexico was the obvious place to invest for corporations seeking to diversify their supply chains away from China and access the U.S. market. But investors have not been getting any promising signs from the Mexican president. Despite Mexico’s suffering from the pandemic, a GDP loss of more than 8 percent in 2020 and 5 percent growth in 2021, AMLO remains popular. His coalition still controls Congress after last year’s midterms, and he has not deviated a bit from what Moises Naim calls his ‘ideological necrophilia’: statism and disproved ideas. With two and half long years still left in his term, it seems evident that AMLO, with every passing day listens and cares less about his critics. His actions will delay the development of renewables in Mexico, and the country will lose foreign investment. In many cases, U.S. investors will have to bring their legitimate claims to the dispute settlement mechanism in the USMCA.

 

Republished with permission from the Inter-American Dialogue's weekly Energy Advisor

 

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