Following Mexico's energy regulatory reforms that began at the end of 2013 and were championed by the prior administration of former President Enrique Peña Nieto, foreign investment in the energy sector in Mexico flourished, in particular through three successful rounds of energy auctions that attracted considerable development of new wind and solar power generation plants. As with other countries in Latin America, the pendulum has swung back with populist candidates replacing "free market" leaning administrations, and current president Andrés Manuel López Obrador was elected to the presidency in part by his message that he would always put the Mexican people first. Since his election, his administration has used this line of argument to justify several changes that have disrupted foreign and private investment in critical infrastructure projects, such as the cancellation of the Mexico City airport project,1 the cancellation of the fourth renewable energy auction,2 the cancellation of auctions for the exploration of oil and gas fields3 and efforts to renegotiate certain long-term gas pipeline contracts.4
A number of recent changes in the Mexican regulatory regime applicable to the power sector are consistent with the approach taken by the current administration in other parts of the Mexican economy. The administration's actions targeting wind and solar power plants, undertaken by the National Center for Energy Control of Mexico (Centro Nacional de Control de Energía-CENACE) and the Ministry of Energy (Secretaría de Energía-SENER), and further cemented by statements made by the administration, including by the President himself, have led to growing concern in the market regarding such investments.5
On April 29, 2020, CENACE issued a Resolution to Guarantee the Efficiency, Quality, Reliability, Continuity and Stability of the National Electrical Grid of Mexico during the SARS-CoV2 Virus (COVID-19) Epidemic (sic)6 (the "CENACE Resolution"). Through the CENACE Resolution, CENACE implemented temporary technical and operational measures purportedly to mitigate the effects of the COVID-19 pandemic on the National Electrical Grid of Mexico (Sistema Eléctrico Nacional-SEN), including reduced energy demand and interruptions to the power supply at certain nodes of the national electricity grid. Without providing conclusive technical analysis following a comprehensive investigation into the underlying causes of such interruptions, CENACE attributed such effects to the intermittent nature of wind and solar power plants. The proposed measures include, among others, the temporary suspension of pre-operative commissioning tests for wind and solar power plants and oversight over, and potential curtailment of, operations of such power plants while pandemic-related contingent measures remain in effect in Mexico. Approximately 44 wind and solar power plants in various stages of construction, commissioning and operation with an aggregate expected installed capacity of about 5.34 GW, representing approximately $6.4 billion in investments, stand to be adversely impacted.7 The CENACE Resolution does not specify an end date for such restrictions, although one may infer, given the rationale provided for these new measures, that they are temporary and should end when the effects of the underlying cause are no longer continuing, ostensibly, at the conclusion of the pandemic in Mexico.
As a result of the CENACE Resolution, renewable energy power plants across Mexico will, for an undefined period, be unable to achieve commercial operation and, if already operating, may be subject to discretionary curtailment risk, directly affecting the ability of generators to perform under their respective power purchase agreements. Further, where such generators have debt financed these power plants, inability to commence commercial operations despite completing construction as scheduled and/or curtailed operations may affect their ability to make debt service payments to their lenders. The uncertainty introduced by the CENACE Resolution has led generators to evaluate change in law, extraordinary event and force majeure claims under their power purchase agreements, and may also cause, for those plants still in construction, contractors to review potential force majeure claims under the related construction arrangements. Judicial amparo claims (a form of constitutional challenge under Mexican law) challenging the CENACE Resolution have also been filed by numerous impacted parties. As of the date of this note, in no fewer than 23 such amparo proceedings, a provisional suspension order in respect of the CENACE Resolution has been granted in favor of the complainants,8 paving the way for the reconnection of generating assets and completion of the testing needed to achieve commercial operations pursuant to the power purchase agreements.
On May 5, 2020, in response to the CENACE Resolution, the leading conservative political party in Mexico, the Partido Revolucionario Institucional, issued a statement calling on SENER and CENACE to modify the CENACE Resolution to protect the rights of private generation companies and guarantee free economic competition, and further urged the Energy Regulatory Commission (Comisión Reguladora de Energía-CRE) to instruct CENACE to comply with applicable Mexican energy laws.9 Two days later, the Mexican anti-trust regulator, the Federal Economic Competition Commission (Comisión Federal de Competencia Económica-COFECE), published an opinion (the "COFECE Opinion")10 identifying potential restrictions on economic competition and the free market for electricity in Mexico in the CENACE Resolution, including measures that would allow CENACE to favor conventional power plants, which are mostly owned by the state-controlled Federal Energy Commission (Comisión Federal de Electricidad-CFE), over wind and solar power plants. Presumably, COFECE is one of the authorities with jurisdiction over interpreting the principles requiring no undue discrimination within the electricity market, as such principle is enshrined throughout the relevant Mexican legislation and rules. The COFECE Opinion makes a series of recommendations to address such concerns, including: (1) that the measures adopted in the CENACE Resolution be based strictly on technical criteria directly linked to the reliability, continuity and stability of the SEN, and that those criteria be made public; (2) not to grant unduly discriminatory treatment to certain power plants and to guarantee, in accordance with the applicable legal framework, the dispatch of power plants according to price, without compromising the stability of the SEN; (3) to define and make public clear, transparent and objectively measurable criteria establishing when and how the measures established in the CENACE Resolution will be lifted; and (4) to apply the measures contemplated in the CENACE Resolution only to the extent strictly necessary to ensure the stability of the SEN in relation to the COVID-19 epidemic, and only when alternatives that are less restrictive to competition are not available. The COFECE Opinion is not binding on CENACE;11 however, it does lay the groundwork, in part, for challenging the CENACE Resolution or creating a framework for such resolution to be reformulated. The European Union and Canada have both also issued written statements to SENER regarding their concerns with the CENACE Resolution.12
Just as debt and equity investors in wind and solar projects in Mexico were beginning to analyze the potential adverse impacts of the CENACE Resolution, and seemingly consistent with the contents of the "pliego petitorio" (also known as the "wish list")13 attributed to CFE that leaked to the public in late 2019, in the beginning of the week of May 11, 2020, another document was disclosed to the public: a draft resolution setting forth a proposed policy to be adopted by SENER relating to the general reliability, stability, continuity and quality in the SEN. This created additional confusion in the market given the timing and contents of the document. On May 15, 2020, SENER published in the Official Gazette of Mexico (Diario Oficial-the "Gazette") the Resolution for issuance of the Policy on Reliability, Stability, Continuity and Quality in the National Electric Grid14 (the "SENER Resolution"). SENER had reportedly submitted a request to the National Regulatory Improvement Commission (Comisión Nacional para la Mejora Regulatoria-CONAMER) to publish the SENER Resolution in the Gazette without undergoing any public review and comment or cost-benefit analysis and the then-director of CONAMER, César Hernández Ochoa, had rejected the request. In the early evening of May 15, 2020, Mr. Hernández resigned from his office, and the SENER Resolution was published later that night in the evening edition of the Gazette, an edition historically reserved for extraordinary or emergency circumstances. The SENER Resolution has not been subject to any regulatory analysis or public review period.15 Further, some questions from industry stakeholders from the first submission of the SENER Resolution remain unanswered in the CONAMER system following publication of the SENER Resolution in the Gazette.
The SENER Resolution combines policy statements and expansive regulatory restructuring rules that attempt, in part, to address implementation of the Electricity Industry Law (Ley de la Industria Eléctrica) and regulate certain criteria applicable to the operation of the electricity market in Mexico and its associated infrastructure. In doing so, the SENER Resolution provides additional discretionary regulatory power to CENACE and CRE and increases CFE's role and dominance in the Mexican electricity market. This calls into question, as it relates to CFE, its various roles within the electricity market and the policies relating to separation and transparency applicable to CFE.
The SENER Resolution states that one of its primary objectives is to guarantee electricity supply under the principle of reliability, and to do so according to national objectives, including, among others: management of demand and consumption; achievement of a sovereign-led energy transition and the orderly incorporation of clean energy and distributed generation; strengthening the strategic planning of CFE and its affiliated productive state-owned companies (empresas productivas del estado filiales); clarification of rules for granting generation permits and power plant interconnection contracts; and establishment of policy alignment of the electric industry among CENACE, CRE and other governmental entities. The very concepts that serve as the basis for the new policies and regulatory changes-reliability, stability, continuity and quality-are only conceptually (and not technically) defined, leaving them open to potentially discretionary interpretation and application. In light of prior developments within the electricity market, including the revisions to the regulatory framework governing clean energy certificates in early 2019, public announcements from governmental leaders regarding the electricity industry in Mexico (see Endnote v) and the CENACE Resolution, private stakeholders have expressed concern regarding the lack of technical definition in these core operational concepts.
The SENER Resolution justifies its sweeping changes by citing deviations in the SEN that could cause grid reliability issues and emphasizing the need for a continuous, active power balance that targets having the national aggregate power generation equal to the power consumed in the country at all times. SENER delegates the power to formulate the rules for much of the new framework to CENACE through its power to develop an annual national operation plan for power plants, and to conduct interconnection feasibility studies and issue related opinions. CENACE's annual plan will formulate requirements for power plants to guarantee the power supply throughout the year, and must be approved by the CRE and SENER.
Based on reliability issues, in its review of any request for a generation permit, the CRE may require an interconnection feasibility opinion issued by CENACE. Per the SENER Resolution, CENACE will evaluate the feasibility of requests for interconnection opinions based on various factors, including, among others, the following: (1) the geographical dispersion of wind and solar energy power plants by zone, region and system; (2) the technical limitations with the penetration of intermittent wind and solar energy power plants by electric substation, zone, region and system; (3) the climatological characteristics of each interconnection point by zone, region and system; (4) the spacing between wind and solar energy power plants by electric substation, zone, region and system; (5) the effect on reliability due to the displacement of conventional power plants by wind and solar energy power plants; and (6) the margin of backup capacity to compensate for intermittent generation by wind and solar energy power plants, as well as their unavailability, compared to conventional generation. These factors have raised grave concern among investors because they appear to lay the groundwork for discrimination against wind and solar power plants-the vague description and circumstances where these factors apply leave room for dispatch to favor conventional fuel-fired power plants, without regard to cost.
The SENER Resolution establishes that wind and solar plants with existing generation permits and interconnection contracts will not be impacted by the new rules. However, it also states that any such plant with a canceled generation permit or interconnection contract, or in need of an amendment to an existing generation permit or interconnection contract, may be subject to CENACE's increased scrutiny, including the requirement for an interconnection feasibility opinion.
If any wind or solar energy power plant requests a feasibility opinion at an interconnection point in a zone or a region in which there is already interconnection or transmission congestion, to manage and maintain control of the frequency, voltage and reliability of such area, CENACE may, based on the criteria of sufficiency, dispatch stability and economic efficiency, reject such request. The SENER Resolution does not prescribe how CENACE should evaluate such criteria and offers no procedures for the means by which any such rejection may be challenged or appealed; rather, it states only that SENER will determine the reopening date for receipt of such requests and follow-up on pending requests in due course.
SENER also empowers CENACE to determine the necessary actions to maintain the stability of dispatch in compliance with the objectives of reliability, stability, quality and continuity, including the authority to reduce the generation of, or disconnect, wind and solar energy power plants due to the intermittent nature of their energy supply.
The SENER Resolution came into force on May 16, 2020, and stakeholders are actively working to analyze its impact. Some, including the American Chamber of Commerce of Mexico and various Mexican chambers and councils have already publicly expressed their objections to it.16 The SENER Resolution further cements the policies underpinning the CENACE Resolution, but on a permanent basis and, unlike the CENACE Resolution, is not tied to the COVID-19 pandemic. In his recent "mañanera" press conferences, President Andrés Manuel López Obrador vigorously defended the legality of both the CENACE Resolution and the SENER Resolution (see Endnote v).17
On its face, the SENER Resolution appears contrary to existing Mexican energy law and it reflects a policy reversal from the prior administration's efforts to encourage foreign investment in the sector. It may also be inconsistent with existing legal rules that require the injection of power into the grid at the lowest price, and legitimizes the objectives of the "pliego petitorio" by providing significant discretionary power to CENACE and also openly favoring CFE's interests, including favoring the dispatch of conventional power plants. The SENER Resolution also does not appear to help Mexico achieve the goals it committed to in the Energy Transition Law (Ley de Transición Energética) to redistribute its energy matrix to reduce its reliance on fossil fuels and achieve a minimum of 35% clean energy sources by 2026. We anticipate stakeholders in the wind and solar industry are likely to undertake similar actions to those already being pursued in respect of the CENACE Resolution, including change in law, force majeure and extraordinary event claims under power purchase agreements, and the filing of amparo claims to suspend the implementation of the SENER Resolution. In addition, challenges with respect to the process by which the SENER Resolution was published, and its apparent unwinding of existing legislation through administrative regulation, are likely to form part of these proceedings.
Furthermore, foreign investors, from countries such as Spain, France, Japan, China, the United States and Canada, invested in the renewable energy sector attracted by the energy reforms implemented by the previous administration, and are among those directly affected by the CENACE Resolution and the SENER Resolution. Beyond the amparo claims and other legal proceedings that may be pursued under Mexican law, some of these investors may also consider potential claims under investment treaties. Mexico has entered into 35 bilateral investment treaties (BITs) to date, the vast majority of which are in force, and is a contracting party to 25 international instruments providing varying levels of protection to foreign investments. While some BITs provide a wide range of substantive protections, such as fair and equitable treatment, full protection and security, guarantees against unlawful expropriation, observance of undertakings, most favorable treatment and non-discrimination, others offer a narrower scope of protection.18 In addition, Mexico's ratification of the International Centre for Settlement of Investment Disputes ("ICSID") Convention in 2018 has further strengthened Mexico's international commitments as regards the protection of foreign investment. Foreign investors in Mexico are now able to submit investment disputes to the ICSID, an arbitral institution established under the aegis of the World Bank, and to have awards rendered by ICSID tribunals directly enforced in countries that are party to the ICSID Convention.
While the full impact of the measures on the specific investments is still unclear, the measures already taken are expected to have a detrimental economic effect on foreign investment in the Mexican power sector and have created a climate of legal insecurity, which is not a favorable environment for other investors or additional investments by existing investors. These measures will affect generators differently depending on various factors: the state of development or operation of the plants, a view as to whether these measures would ultimately be of a temporary or permanent nature, and how each of the CENACE Resolution and SENER Resolution is ultimately implemented. Affected foreign investors should conduct a careful analysis to determine Mexico's potential liability for breach of its international obligations under applicable treaties. Key questions will include whether these measures are discriminatory or arbitrary in nature, whether they substantially deprive investors of their investment, whether they have been legitimately adopted or are a means to further a political agenda and whether they are contrary to investors' legitimate expectations. The measures should be analyzed in light of the specific substantive protections afforded to foreign investors under the applicable treaties and the concrete manner and degree in which the measures affect the relevant investor.
Coming on the heels of the airport project cancellation, the cancellation of the fourth renewable energy auction, the cancellation of the oil and gas field exploration auction and the renegotiation of certain long-term gas pipeline contracts, the administration's most recent actions targeting renewable energy power producers have further clouded the outlook for foreign investment in Mexico. The justifications set forth in the CENACE Resolution and the SENER Resolution refer to an outdated transmission infrastructure network in Mexico struggling to adjust to the introduction of considerable renewable generation capacity as a key reason for the electric stability and reliability problems that the resolutions seek to address.19 The administration appears to be directing its ire at the wrong target by labeling renewable energy as the culprit for the country's transmission challenges, which will likely further discourage foreign and private investment. Instead, additional foreign and private investment could be encouraged and mobilized as an important tool to help improve Mexico's power grid, consistent with the goal to generate at least 35% of power from renewable sources as set out in the Energy Transition Law (Ley de Transición Energética), and to promote investments for other enhancements to the system such as "smart grid" capabilities, all towards the goal of alleviating the alleged technical concerns noted in the CENACE Resolution and SENER Resolution.
Finally, it is unclear how these recent actions further the administration's objective of placing the Mexican people first, on either an economic or a quality-of-life basis. By prioritizing more expensive, fuel-burning power generation facilities, even leaving aside the potential impacts to public health (and the related longer term costs), Mexicans will be paying more one way or another in the near term-either as consumers through higher electricity bills or as taxpayers through government subsidies to CFE.
1. Luis Pazos, "Santa Lucía o Texcoco. Pérdidas y Ganancias," Centro de Investigaciones Sobre la Libre Empresa, Sept. 2020, at 12.
2. Revista Expansión, "El Gobierno de AMLO cancela la cuarta subasta eléctrica," Revista Expansión, Feb. 1, 2019.
3. Arturo Solis, "El gobierno de AMLO cancela subastas petroleras pendientes," Forbes México, December 11, 2018.
4. Jude Webber, "Pipelines Dispute Adds to Mexico Investment Fears," FIN. TIMES, July 16, 2019. Jude Webber, "Mexico Reaches Deal to Settle Pipeline Contracts Dispute," FIN. TIMES, Aug. 27, 2019.
5. President López Obrador was quoted as stating "Instead of filing claims against the government for its actions, private energy companies should be asking the government for forgiveness." Pedro Villa y Cana, "En vez de demandar por energías limpias, IP debería pedir disculpas: AMLO," El Universal, May 18, 2020. The director of CENACE, Rocío Nahle, stated that the government's energy policy is to rescue CFE and PEMEX. Sean Goforth, "Mexican Minister Claims Attack on Renewables Is for Energy Security," BNamericas, May 18, 2020.
6. In the original Spanish, the "Acuerdo para garantizar la eficiencia, calidad, confiabilidad, continuidad y seguridad del Sistema Eléctrico Nacional, con motivo del reconocimiento de la epidemia de enfermedad por el virus SARS-CoV2 (COVID-19)," CENACE website.
7. ASOLMEX & AMDEE, "Afectaciones a energías renovables por acuerdo de CENACE," May 7, 2020. "En riesgo inversiones por US$ 6,400 millones en renovables: ASOLMEX, AMDEE," Energía a Debate, May 7, 2020. Mark Stevenson, "Mexico Cites Virus in Slapping Down Renewable Energy," THE SAN DIEGO UNION-TRIB., May 17, 2020. Anthony Harrup & Robbie Whelan, "Mexican Government Moves to Tighten Grip on Electricity Market," WALL ST. J., May 17, 2020.
8. CENACE Oficio No. CENACE/DOPS/079/2020 in respect of the CENACE Resolution, May 19, 2020.
9. Resolution from the Cámara de Diputados, LXIV Legislatura, Grupo Parlamentario del Partido Revolucionario Institucional in respect of the CENACE Resolution, May 5, 2020.
10. COFECE opines that several of the measures in the CENACE Resolution imply that CENACE may favor conventional power plants over renewable energy power plants, irrespective of the cost of the power produced by the relevant plants, and in contravention of the legal framework rules for the wholesale electricity market in Mexico (el Mercado Eléctrico Mayorista) ("MEM"). COFECE also points out that the methods that will be applied to lift the temporary suspension of all preoperative testing for renewable energy plants as mandated in the CENACE Resolution are not defined, leading to uncertainty in the market and to the possibility of discretionary action. "Emite COFECE recomendaciones referentes al Acuerdo del CENACE," COFECE website.
11. Following publication of the COFECE Opinion, on May 11, 2020, the president of COFECE, Alejandra Palacios, published an editorial in El Norte, in which she noted that COFECE has the power to issue an opinion on the CENACE Resolution, but currently does not have power to take any action to restrain CENACE, and requested that the Mexican legislature address COFECE's lack of enforcement power vis-à-vis other governmental agencies that take anti-competitive actions. Alejandra Palacios, "Del CENACE y los riesgos a la competencia," El Norte, May 11, 2020.
12. "AmCham hace un llamado a la libre competencia y certeza jurídica en el Sector Energético," Oil & Gas Magazine, May 18, 2020. Diego Oré & Dave Graham, "Energy Dispute Deepens between Mexico and Foreign Allies," Reuters News, May 16, 2020.
13. Comisión Federal de Electricidad, "Pliego Petitorio," Oct. 2, 2019.
14. In the original Spanish, the "Acuerdo por el que se emite la Política de Confiabilidad, Seguridad, Continuidad y Calidad en el Sistema Eléctrico Nacional".
15. "Renuncia César Hernández como comisionado de CONAMER tras desacuerdo con SENER," Oil & Gas Magazine, May 15, 2020.
16. The Business Coordinating Council (Consejo Coordinador Empresarial) of Mexico publicly urged the Secretary of Energy to revoke the SENER Resolution, highlighting loss of investor confidence in the Mexican energy sector as Mexico continues to undermine the legal basis of agreements executed under the previous administration. According to the Employers' Association of Mexico (Confederación Patronal de la República Mexicana) the SENER Resolution breaches Mexico's obligations under NAFTA and is expected to result in both national and international claims to pressure the Mexican government to comply with its obligations. The head of the Confederation of Industrial Chambers of Mexico (Confederación de Cámaras Industriales de los Estados Unidos Mexicanos) noted that the SENER Resolution sends a contradictory message about Mexico's commitment to investment in renewable energy at a time when certainty is needed in light of the COVID-19 epidemic. Julia Love, "'Flagrant Violation': Business Groups Pan New Mexican Energy Rules," Reuters Bus. News, May 17, 2020.
17. "Defenderemos nuestro criterio en tribunales: AMLO, sobre batalla legal por política energética," Forbes Mexico, May 21, 2020. "AMLO señala corrupción en energías renovables," Acueducto Online, May 21, 2020.
18. Among the investment chapters and treaties, which might be of relevance for foreign investors, are, to name a few: (1) the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Aug. 3, 2018, Austl. Gov't Dep't of Foreign Aff. and Trade (the CPTPP entered into force on Dec. 30, 2018 and was signed by Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore and Vietnam, but has so far entered into force in Mexico, Japan, Singapore, New Zealand, Canada, Australia and Vietnam), (2) the BIT between Mexico and Japan, Agreement between Japan and the United Mexican States for the Strengthening of the Economic Partnership, Japan-Mex., Sept. 17, 2004, 2768 U.N.T.S. No. 48744 (entered into force on April 1, 2005), (3) the BIT between Mexico and China, Agreement between the Government of the United Mexican States and the Government of the People's Republic of China on the Promotion and Reciprocal Protection of Investments, Mex.-China, July 11, 2008, 2626 U.N.T.S. 3, No. 46763 (entered into force on June 6, 2009), (4) the BIT between Mexico and Spain, Agreement on the Promotion and Reciprocal Protection of Investments between the United Mexican States and the Kingdom of Spain, Mex.-Spain, Oct. 10, 2006, 2553 U.N.T.S. No. 45554 (entered into force on April 3, 2008), (5) the BIT between Mexico and France, Agreement between the Government of the Republic of France and the Government of the United Mexican States on the Reciprocal Promotion and Protection of Investments, Fr.-Mex., Nov. 12, 1998, 2129 U.N.T.S. 175, No. 37099 (entered into force on Oct. 12, 2000), (6) the North American Free Trade Agreement, Can.-Mex.-U.S., Dec. 17, 1992, 32 I.L.M. 289 (1993) (entered into force Jan. 1, 1994) and (7) the new Agreement between the United States of America, the United Mexican States and Canada, Nov. 20, 2019, Off. of the U.S. Trade Representative, (expected to enter into force on July 1, 2020).
19. See also "Mexico's Power Sector Update: MXN2 Trillion Investment for 2017-31," Global Transmission Report: Information and Analysis on the Global Electricity Transmission Industry, Sept. 10, 2017; Ron Binz, Riccardo Bracho et al., "A Report on the Implementation of Smart Grids in Mexico," Jan. 2019; Jonathan Robinson & Rocco Canonica, "Markets Needed to Bridge Mexico's Power Generation, Transmission Gaps," S&P Global, Nov. 13, 2019; and Jonathan Spencer Jones, "Mexico's Renewables Market Remains Mired in Uncertainty," GTM, Oct. 3, 2019.
Article originally published on 27 May 2020
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