Mexico’s Vote on Controversial Energy Reform

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Last week President Andrés Manuel López Obrador of Mexico hosted US Energy Secretary Jennifer Granholm for talks about his government's controversial plans to tighten control over the energy sector. Since taking office in late 2018, the President has led an assault on the Mexican Reform Act of 2014, which deregulated electricity markets and encouraged foreign investment in power generation. Modifying laws to make make it more difficult for foreign investment in generation assets and changing dispatch priorities of existing renewable generation assets have already hindered growth in renewables in Mexico.

Late in 2021, President López Obrador introduced plans to reorganize how Mexico's energy markets are run by transferring much of the control over the electricity market to state-owned utility Comisión Federal de Electricidad (CFE). In the plans, CFE would be guaranteed a majority share of the electricity markets, and it would decide which customers could move from the regulated to the deregulated market. Critics note that such a shift would inhibit growth of the competitive market and lead to higher prices.

The visit from Energy Secretary Granholm is the most public demonstration of US and corporate concerns over these proposed changes. While discussions were respectful, they did highlight the significant differences in environmental policy between the Biden administration and one of its most important trade partners. Industry groups such as the automotive sector have raised concerns their corporate investments in on-site wind or solar generation may fall under the proposed changes. Large automotive manufacturers such as General Motors have raised concerns that the changes are already impacting their ability to cost-effectively source renewable energy, critical to achieving their corporate commitments to carbon reduction and climate change.

At a time when most large international manufacturers struggle to meet carbon reduction goals, there is growing uncertainty about the future availability of renewable energy in Mexico.

The Mexican President is framing his proposed changes as a "matter of national security" and is warning of higher costs and threats to CFE's existence if the changes are not made. The Energy Secretary attempted to encourage the development of more renewable power generation noting the abundance of open space, sun, wind, and experienced labor resources that could be deployed to make Mexico a leader in renewable power generation. President López Obrador says that his government is committed to reducing his country's carbon footprint through the development of hydroelectricity. However, no specific plans on how these investments would be paid for or when they would be built have been released.

In addition to industrial opposition, economists worry that likely higher costs and less choice in the market will combine to reduce the $44 billion of foreign investment in the Mexican power industry and create uncertainty which could have ripple effects throughout the entire economy. As the matter heads towards a vote in the Senate in late April, lobbying from industry groups and the government of the United States is likely to mount.

More: Research Notes, Comisión Federal de Electricidad (CFE), Renewable Energy, Sustainability

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Robert A. Heinrich