The new Mexican government is moving rapidly to put its imprint on the renewable energy sector.

A constitutional reform published in late October deals with the role and participation of public utilities and private companies in the energy sector in Mexico. The Mexican Congress has 180 days after publication in the Federal Gazette to make conforming changes to the existing statutes.

Constitutional Reform

Both Petróleos Mexicanos (PEMEX), the national oil and gas company, and the Comisión Federal de Electricidad (CFE), the national electric utility, were converted from state-owned companies to fully competitive “productive state enterprises” after the last major energy reforms in 2013.

The new reform reverts these entities to public companies under the full supervision and budget of the Mexican government, tasked with complying with public policies, including guaranteeing energy sovereignty and national security.

Any activities performed by state public companies pursuant to laws enacted by the Mexican Congress will not be considered monopolistic activities.

For power generation, the key takeaway from the reform is that state public policies will have priority over everything else.

The reform does not eliminate the ability of private parties to participate in the power industry. However, it clarifies that CFE and its activities will always have priority over private parties.

While not expressly mentioned in the reform, the government has indicated its intention to maintain aggregate private generation below CFE’s aggregate generation and, more specifically, that at least 54% of all power generation will come from CFE and up to 46% from private parties. This restriction is expected to be used as the cornerstone for implementing laws and regulations.

Given the underlying intention of the reform, we would not be surprised if the implementing legislation allows CFE to participate in the power market under a different set of rules, with certain exceptions and advantages for, among others, the interconnection and dispatch of its power plants, as CFE must comply with a social and constitutional mandate that arguably is intended to avoid limitations arising from free competition rules.

The reform also eliminates from the constitutional text the possibility for the Mexican government to enter into contracts with private entities for the provision of public electricity transmission and distribution services. Since 2018, public tenders that would have granted this type of contract were canceled by the prior administration.

The language in the constitutional reform is so broad that, in our view, with adequate public policies and political willingness, it could still allow the private sector to participate in the construction of power plants to be owned by CFE through build, transfer, operate (BTO) agreements or public-private partnerships, so long as CFE maintains an overall higher percentage of energy generated. It will also continue to allow private parties to build, own and operate power plants that sell power to the wholesale electricity market or to private companies, with certain restrictions.

Electric Sector Strategy

Private participation will be permitted with a cap of 46% overall power generation.

The government’s national strategy estimates that private parties can add between 6,400 MW and 9,550 MW of renewable energy between 2025 and 2030, with an expected investment ranging between US$6 and US$9 billion.

The Ministry of Energy said private renewable projects must comply with a “30% backup” requirement. While no additional details were shared, this could imply a mandatory implementation of power storage solutions equal to a certain percentage of the installed generating capacity.

Projects operating under the self-supply legacy scheme will be required to migrate to the wholesale electricity market.

Isolated supply projects not interconnected to the grid and with generating capacities between 0.7 MW and 20 MW are expected to be used to supply power to new industrial developments.

Distributed generation projects will be able to generate up to 0.7 MW, an increase from the previous limit of 0.5 MW.

Private parties will also be allowed to enter into long-term agreements with CFE for the sale of power and capacity.

A new type of “mixed generators” will be created, where the Mexican state will participate with at least 54% of the investment, and the balance may come from private investment.

All other generators will be allowed to participate in the Mexican market, provided they comply with the requirements of safety and reliability of the national grid that will be spelled out in regulations. Among other things, the Mexican President indicated that renewable generating facilities will be required to implement energy storage solutions to improve reliability.

Administrative simplification is also part of the government’s strategy. A one-stop shop will be implemented by the energy authorities, regulators and local governments to facilitate filings for permits and authorizations in the energy sector, aimed at reducing the number of filings, costs and time.

Other Sectors

Notwithstanding that it is identified as a reform to the energy sector, the reform does not introduce substantial changes for oil and gas, other than the repositioning of PEMEX as a public company. Thus, the constitutional ability of private parties to participate in contracts with PEMEX for the exploration and extraction of oil and other hydrocarbons remains in place.

The reform also provides that all lithium is owned by the Mexican nation and that no concessions will be granted for its exploitation.

Activities performed by the Mexican government relating to lithium exploitation and provision of internet services will not be considered monopolies.