Mexican CEL ruling roils market

Mexican CEL ruling roils market

December 12, 2019 | By Carlos Campuzano in Mexico City , Alejandro Aguirre in Mexico City , Raquel Bierzwinsky in New York|Mexico City

More than 20 requests for injunctions have been filed by generators, industry associations and other interested parties in Mexico to challenge a government ruling that modifies who is entitled to receive clean energy certificates or “CELs” for generating renewable energy.

CELs were created as part of the 2014 energy reforms to give electricity generators an incentive to use clean energy sources to produce electricity. For each megawatt hour of clean energy generated, a generator is entitled to one CEL.

Suppliers of electricity to retail customers, including CFE Basic Supply — a subsidiary of CFE, the national utility — are legally required to supply a certain percentage of their electricity from clean energy sources. They comply by buying CELs.

The annual requirement for 2018 was 5%. For 2019, 2020, 2021 and 2022, it increases to 5.8%, 7.4%, 10.9% and 13.9%, respectively.

The administration and verification of CELs is managed by the Energy Regulatory Commission via an electronic system that records the CELs acquired or generated by each registered participant, their transfer to other participants, and the final cancellation upon use to comply with statutory obligations.

By statute, only generators producing energy from clean energy sources whose power plants started operations after August 11, 2014 are entitled to receive CELs.

However, the Ministry of Energy issued in late October a ruling that entitles all clean energy power plants owned by CFE to receive CELs for the energy produced, regardless of whether the power plants commenced operation before or after August 11, 2014.

The ruling was a gift to CFE. It will increase the supply of CELs, thereby reducing the market price for CELs.

Fissures

The ruling is concerning and deeply flawed.

It provides that any CELs granted to post-energy reform and pre-reform clean energy projects will only be accredited as of October 29, 2019, the date that the ruling came into effect. The effect is to void any CELs validly issued — and even paid for — before that date.

In response to the requests for injunctions, the Ministry of Energy amended the ruling to clarify that the October 29 accreditation date change is only relevant to pre-reform projects owned by CFE.

This change still leaves a ruling in place that violates various principles of Mexican law. They include a right to legal certainty, legitimate expectations in investments, and also possibly antitrust principles.

Several petitioners seeking injunctions were granted injunctions from a federal court in late November, provisionally suspending the application of the new ruling.

As the NewsWire went to press, courts had decided that at least two petitioners have enough merit to their cases to grant a “definitive” suspension that will last until final resolution of the request for a permanent injunction. More “definitive” suspensions are expected in December.

As long as implementation of the ruling remains suspended, the federal authorities must continue applying the rules for CELs before the October ruling.

A final resolution in the case is expected to take between six and nine months.

The main concern among renewable energy companies is that the ruling will flood the market with CELs, which will drive down their price to close to zero in the short term. This will affect any projects that sell CELs in the wholesale electricity market or through private contracts and that made pricing decisions based on earlier rules. It also creates a disincentive to build new renewable projects. That will reverse the momentum Mexico established after the 2014 energy reforms that has led to lower and more competitive energy prices.

Experts view the October ruling as a political move by the Mexican federal government to strengthen CFE. It allows pre-reform power plants owned by CFE to receive CELs, thereby not only adding to supply but also reducing the demand that CFE would otherwise have had for CELs from other generators. The Mexican government has been outspoken about the need to strengthen CFE and reduce any dependency that CFE may have on the private sector.

The CFE head has said that, given the presidential instruction to CFE to focus on energy generation, the company will promote clean energy, but “energy sovereignty will have priority” because the government considers that CFE is subsidizing private generating companies by buying energy and CELs from them.

The Mexican Business Council warned that the ruling puts more than US$9 billion in investments in new renewable energy projects at risk.