Headwinds From Mexico's Energy Reform

At A Glance

Mexico has announced a proposed series of reforms to its energy sector. The reforms include eight new laws and three amendments to existing laws, significantly reshaping the country's energy sector. Our analysis of the proposed series of reforms has confirmed that certain risks we previously identified—(i) Priority for the State Utility, (ii) the Lack of an Independent Energy Regulator, (iii) Judicial Reform, and (iv) New Regulatory Framework—will materialize. In this Legal Update, we identify the measures that investors should be taking to effectively navigate the evolving regulatory landscape and manage associated risks.

THE CHANGES

The following changes represent a substantial departure of the current system:

Mexico has announced a proposed series of reforms to its energy sector (the "Reform"). This proposed Reform includes eight new laws and three amendments to existing laws, significantly reshaping the country's energy sector. Last year, our Mayer Brown team hosted a webinar examining the challenges and risks for investors and electricity generators derived from the new energy framework in Mexico. We anticipated that the most critical risks would be (i) Priority for the State Utility; (ii) the Lack of an Independent Energy Regulator; (iii) Judicial Reform; and (iv) New Regulatory Framework.

Our analysis of the Reform has confirmed that these risks will materialize. We've also identified the measures that investors should be taking to effectively navigate the evolving regulatory landscape and manage associated risks.

PRIORITY FOR THE STATE UTILITY WITH AN IMPACT TO PRIVATE GENERATORS

Mexico implemented constitutional changes to establish that the State Utility—the Federal Electricity Commission ("CFE")—shall have priority (prevalence) over private generators, likely impacting existing dispatch rules with potentially material financial consequences to projects. Key legislative changes in the Reform include:

54% of total generation for CFE: The State will have priority over private entities in power generation and commercialization activities, as it is responsible for ensuring the reliability, security, continuity, and accessibility of the public electricity service. CFE must maintain at least 54% of the average energy injected into the grid over a calendar year. This must be achieved within the framework of the Wholesale Electricity Market, which will limit the dispatch from private generators to a maximum of 46% of the yearly energy demand.
Legacy Permits and Contracts will Remain Valid: All permits and contracts granted under the Electricity Industry Law and the Public Electricity Service Law will remain valid until their termination date. However, dispatch rules in the Wholesale Electricity Market will change to ensure CFE's priority and compliance with new system reliability requirements. These changes may impact local marginal prices, regulatory requirements for renewable projects, and the dispatch by private power plants.

These changes will ensure that CFE controls at least 54% of total electricity generation, limiting competition and replacing economic merit-order dispatch—which prioritizes the lowest-cost generation—with a system that favors CFE's power plants over private generators, regardless of efficiency or cost-effectiveness.
Financial Impacts: Under the new regime, older and less-efficient thermal plants owned by CFE will be dispatched before cheaper, cleaner alternatives owned by private investors. Thus, private power plants may be subject to curtailments, which may reduce private investors' market share and profits. In addition, renewable projects may be required to install batteries to comply with new reliability requirements, which may carry a further financial impact.

Finally, clean-energy certificates—which had previously been granted only to clean-energy projects developed after 2014—will now be granted to all clean energy-power plants, including nuclear and hydro power plants owned by CFE and constructed before 1990. This will devalue the clean-energy certificates, which were a source of income for clean-energy projects.

LACK OF AN INDEPENDENT ENERGY REGULATOR

Mexico will no longer have an independent energy regulator, as the Energy Regulatory Commission (CRE) will be absorbed by the Ministry of Energy. Key legislative changes in the Reform include:

Transfer of CRE´s Regulatory Powers: The powers of the CRE will be transferred to the newly established National Energy Commission (CNE).
CNE as a Ministry-Controlled Regulator: The CNE will operate as an entity within the Ministry of Energy, responsible for regulating, supervising, and enforcing sanctions in the energy sector. Its functions will include setting transmission tariffs and compensation rates within the industry.
Presidential Power to Appoint and Remove CNE Director: The CNE will be led and managed by a Director General, appointed by the President, and confirmed by the Senate. The President has the authority to remove the Director General at will.

The CNE, which will be under direct control of the President, will wield broad regulatory powers with direct implications for private energy generators. These powers include: (i) issuing regulations related to energy activities and ensuring its compliance; (ii) imposing and executing sanctions for non-compliance with energy laws; (iii) granting, modifying, revoking, and supervising permits in the energy sector; and (iv) requesting information from power generators—and their business partners—to provide relevant data on permits and agreements.

JUDGES ELECTED BY VOTE

Beginning in the second half of 2025, judges hearing energy-sector disputes will be elected by popular vote. As a result, they may lack subject-matter expertise. Therefore, investors should consider other dispute resolution mechanisms, such as international arbitration.

NEW REGULATORY FRAMEWORK

Following publication of the Reform, additional secondary regulations will be published by the new CNE regarding (i) social impact assessments to be performed by power generators; (ii) amendments to the Electricity Market Rules (Wholesale Electricity Market´s dispatch and operative rules); and (iii) new methodologies to calculate tariffs

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.