Illegal renationalisation of the Mexican energy supply

published on 10th August 2020

The Mexican government under the President Andrés Manuel Lopez Obrador, a left-wing politician, is attempting to reverse the opening up of Mexico's energy supply market to private investors that began in 2014. The government has particularly focused on renewable energies and questioned the reliability of their supply in a decree of the Ministry of Energy. The Mexico’s Supreme Court has now refused to uphold this measure and declared it unconstitutional.  

Political background

Since Mexican President Andres Manuel Lopez Obrador, referred to by his initials as AMLO, took office in July 2019, tensions between the Mexican government and private investors have increased steadily. A flagship project that currently exists only on the drawing board is the Dos Bocas oil refinery in the President's home state of Tabasco. A gradual renationalisation of the Mexican energy market, which has just been partially privatised with difficulty, is now on the agenda of the Mexican President, who follows the ideology of the Mexican left-wing parties. The President's plans are mostly influenced by the state-owned utility and former monopolist Comision Federal de Energía, CFE as electricity supplier on the one hand, and PEMEX, Petroleos Mexicanos as a state-owned oil company on the other. It was only since the opening of the market based on the energy law reform by the previous government in 2014 that Mexico became attractive to domestic and foreign investors. Especially the Spanish energy companies Endesa and Iberdrola as well as Italy's ENEL had invested considerably in renewable energies in Mexico and had achieved a pole position within a very short time. A total of 25 billion US dollars is currently invested in 169 commercial solar and wind power plants and 78,000 people are directly or indirectly employed in this sector.

Mexico offers excellent conditions for solar and wind energy, and renewable energy projects have regularly been awarded contracts at the technology-neutral auctions for power purchase agreements, which have been carried out on a regular basis since the energy reform. Alone thanks to the self-regulation of the market, renewable energies are becoming increasingly popular in Mexico, as it is six to seven times cheaper to generate energy from renewables than from the state-owned fossil fuel generators. Due to considerable inefficiency, outdated technology as well as massive corruption and overstaffing, the aforesaid state-owned energy utilities fell further and further behind very quickly, and the enormous debt of PEMEX , in particular, has become a burden on the Mexican state budget. This decline in importance does not fit AMLO's political and ideological concept. Emissions trading systems concerning Certificados de Energias Limpias, CEL, which had only just been launched and which had caused considerable additional costs for the state-owned utilities relying on fossil fuels, became unprofitable after the new government changed the regulations and was thus effectively abolished. It is, however, reassuring that regular interventions on the free energy market being taken by way of executive orders are also regularly reversed by the Mexican supreme courts.
 

Starting point: SENER decision

The specific case concerns the decree ACUERDO por el que se emite la Política de Confiabilidad, Seguridad, Continuidad y Calidad en el Sistema Eléctrico Nacional passed by the Mexican Secretariat of Energy Secretaria de Energia, SENER on 15 May 2020, which has made it very difficult for new renewable energy producers to access the national power grid. According to an observer, CFE will be „equipped with ‘superpowers’ and, together with the state-owned energy regulatory commission Comisión Reguladora de Energía, CRE and the energy control authority Centro Nacional de Control de Energía, Cenace will be able to autonomously decide on the connection of new energy producers to the grid. Wheeling charges for private energy producers have also been increased, even retroactively for the year 2019. 

The decree was justified by a sharp decline in energy demand triggered by the Covid-19 crisis, which led to grid overload due to feeding in „privately produced energy and an imbalance in the power grid with regional over- or undersupply caused by the unlimited granting of generation permits.” Even though the decree emphasizes that increasing the share of renewable energies remains the goal of the Mexican government, it does not create the necessary legal certainty for future investments.

The decree has been widely criticised in Mexico and abroad. Gabriel Quadri, a representative of the renewable energy consulting firm Sistemas Integrales de Gestión Ambiental (Sigea), used strong words describing the new rules as anachronistic, obsolete and inexplicable, whose only aim was to impose the current government's destructive vision with regard to participation of private investors in the Mexican energy market and save the state-owned utilities PEMEX and CFE. But it is Mexican citizens who will pay the ultimate price for the government’s actions: with higher tariffs, with their health and – in the worst-case scenario – even with their lives. Diplomatic representatives of the European Union and representatives of Canada announced that they would examine the possibility of launching an international investment arbitration procedure.

Government representatives, of course, present the situation somewhat differently: Mexico's Energy Minister Rocio Nahle explained that this was not a measure taken against renewable energies; on the contrary, the decree was intended solely to avoid grid overload as well as voltage fluctuations, and frequency, capacity and supply interruptions.

But also among the representatives of the executive power the decision has met with resistance. For example, the state competition regulator for the energy sector Comision Nacional de Mejora Regulatoria, Conamer had initially refused to give the required approval for the decree’s publication in the Mexican official journal Diario Federal de la Nación, DOF because this could have entailed higher market costs.

Ultimately, it was Comisión Federal de Competencia Económica, COFECE, a sort of Mexican equivalent of Germany’s Bundeskartellamt, established by the previous government, which initiated a review of the decree before the Mexican Supreme Court Suprema Corte de Justicia de la Nación in a kind of abstract judicial review proceedings called Recurso de controversia constitucional.

Court decision

At the beginning of July, the court decided in summary proceedings to make the entire decree provisional until the main issue has been clarified. The decree is in all likelihood unconstitutional since it violates the prohibition of retroactive law, does not comply with the principle of introducing restrictions permitted by the Constitution [German: Gesetzesvorbehalt] and violates the principle of free competition. 

Conclusion

The Mexican government has legitimate reasons to have new projects undergo more rigorous scrutiny in order to ensure a balanced grid load. In past auctions, foreign companies have often deliberately offered dumping prices in order to outdo Mexican suppliers and achieve a monopoly position in certain regions. However, the Mexican legislator has completely overshot the target in the measures taken. The decree, declared as a Covid-19 emergency measure, completely suppresses investments in the renewable energy sector and at the same time violates national law, Mexican constitutional law and international treaties. The fact that the relevant decree was initially repealed in its entirety by the court until the decision in the main proceedings is passed proves independence of the Mexican judiciary.

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