López Obrador's Energy reform puts investors on edge
Mexican President Andrés Manuel López Obrador's energy agenda seeks to change the Constitution to shield an electricity reform that privileges the Federal Electricity Commission (FEC), a state-owned company, over private initiative. The plan generates great uncertainty for private companies, currently responsible for most of the country's energy production, while worrying investors.
In early March of this year, the Mexican Senate approved, by 68 votes in favor and 58 against, the modification of several articles of the Electricity Industry Law. López Obrador's new model seeks to privilege the FEC over private plants, many of which are renewable. Morena, the president's party, has insisted on multiple occasions on the need to strengthen the state-owned electricity company, while the opposition has claimed that this will hinder the development of wind and photovoltaic energy.
The clear objective of the Energy Reform is to maintain the Nation's ownership of subsoil hydrocarbons, as well as to modernize and strengthen, without privatizing, Petróleos Mexicanos (Pemex), which accumulates a debt of $100 billion, and the FEC as state-owned productive companies. The goal is to achieve greater self-sufficiency and leave behind the model of "exporting crude oil and importing fuel", for which the purchase of an oil refinery, Deer Park, for $600 million was recently announced. The plant was also carrying a debt of almost $1 billion.
The Reform aims to lower electricity rates and natural gas prices, generate economic growth in the country, as well as increase oil production; although the president has even admitted that the reasons behind it have little to do with the economy or energy efficiency and are eminently political. As he reaches the halfway point of his term, he wants to leave a mark on the Mexican productive system, articulating the program around his main slogan, "first the poor".
Numerous analysts and experts on the subject have positioned themselves against the reform. Lawyer Leopoldo Olavarría, of the Norton Rose Fulbright firm, warns that the supposed savings advocated by López Obrador are a mirage. "The ultimate effect is going to be that Mexican energy consumers are going to end up paying more for the energy supply, whether they are the industries, whether they are the residential or the tourist sector." According to this thesis, although subsidies lower the rates of small consumers, industrialists see their costs increase, which ultimately impacts the population.
The Global Wind Energy Council and the Global Solar Council said in a joint statement, "The damage has already been done to the renewable energy investment environment over the past two years, with national policy reforms such as this bill posing an unequivocal threat to local and foreign private sector investment." As a result, if the reform goes through, it is expected to have a negative impact on the country's economy, consumers' wallets, and the environment.
In the results of the last legislative elections, Morena obtained 197 seats, 20% less than in the last elections, so it made a pact with the Green Party and the Workers' Party to add 279 seats and a simple majority. For this reason, with that number of seats, they would not be able to carry out the constitutional reform, since to reach the qualified majority, they would need 65 more seats. To approve the revisions to the constitutional text, the President announced that he was willing to make a pact even with his arch enemy, the Institutional Revolutionary Party (PRI), to carry out the controversial plan which worries analysts because of its economic and environmental impact.
The two initiatives, that of the FEC and that of Pemex, were stuck in the courts due to appeals filed by the private companies affected. The plan, which de facto has not entered into force, is in limbo, but has already had repercussions by sowing uncertainty about the future and discouraging investment. Likewise, the Energy Reform has been rejected by several European and American Chambers of Commerce, since it affects the interests of Spain, Italy, France, Germany, Portugal, the Netherlands, Canada and, especially, harms the interests of the United States.
"Our country was like a land of conquest and that affected users, consumers, the people, because they increased and increased electricity prices while subsidies were given to private companies. They abused so much that a Spanish company, Iberdrola, dared to offend Mexicans by hiring former President [Felipe] Calderón as an employee," said the President. In view of these comments, the Spanish company announced at the end of 2020 its intention to look to other markets in the face of the Mexican Administration's hostility.
Joe Biden's government has expressed its concern about this energy policy in a meeting held a month ago between trade representatives. Its implementation would also violate the agreement between the two countries and Canada, the Treaty between Mexico, the United States and Canada (T-MEC). This treaty entered into force on July 1, 2020, and Chapter 8 recognizes that Mexico "reserves its sovereign right to amend its constitution and national legislation," but would still be bound to respect private sector energy investments under the T-MEC.
The initiative targets one of the fundamental pillars of the energy reform pushed by Enrique Peña Nieto in 2013, the principle of "economic dispatch". Since this reform, the FEC has lost its monopoly over power generation and has been retreating in the face of the advance of renewable energies, whose electricity is on average cheaper than that produced by the state-owned company. According to the principle of economic dispatch, the most efficient plants were the first to upload their electricity to the grid. In this way, renewable energies and privately owned combined cycle power plants were favored. Meanwhile, the FEC's hydroelectric and thermoelectric plants, with higher production costs and more pollutants, were not given preference.
López Obrador considers that this reform granted "great privileges" to private companies and that it seriously harmed the FEC, as it was sometimes prevented from emptying its load. The new energy reform erases this principle, just as it eliminates from Article 4 of the Electricity Industry Law the reference that "the generation and commercialization of electricity are services that are provided under a free competition regime". Under the new scheme, the FEC's power plants, whose facilities are more obsolete, will be the first to dispatch. In addition to the ecological impact, this reform will also have a consequent economic impact on the sector.
As installed electricity capacity exceeds demand, it is likely that private plants, paradoxically the cleanest and cheapest, will be unable to dispatch. This would complicate the sustainability of the renewable plants that currently supply the wholesale electricity market and potentially threaten to raise the price of electricity. Faced with the widespread fear that private companies, currently responsible for most of Mexico's energy, will go bankrupt, López Obrador assures that the reform "is not for these private companies to disappear. No, they will continue. But we are going to put order so that 54% of the market corresponds to the FEC and 46% to private companies".
Beyond the ecological impact, the measure could have repercussions on Mexico's energy security. Israel Solorio, an expert from the National Autonomous University of Mexico, told BBC News that "it is positive that the State is trying to recover the leadership of the energy sector", but warns that "there are many criticisms to be made of the reform and how it is carried out, lacking a broad social discussion", "Sovereignty is not the same as energy security". Energy security requires a diversification of energy sources, something that is not currently contemplated in López Obrador's policy. Diversification of energy sources could avoid situations such as the one that occurred in February of this year, where 4.7 million users were left without electricity.
