Mexico’s Energy Reform: Red, White, and (not) Green

On August 12th, Mexican President Enrique Peña Nieto presented his long-awaited energy reform proposal, which is now awaiting approval from Congress. There has been quite a bit of speculation and debate, both before and after the proposal was unveiled, about its reach and potential impacts, especially on the national oil company, PEMEX. Even though the proposal was divided into two sections, oil & gas, and electricity, the latter sector has been largely left out of the public discussion. Furthermore, the President’s proposal did not consider reforms for another important part of the energy sector: renewables.

State oil ownership in Mexico is a delicate issue, steeped in history and accompanied even by a national holiday, and with reason: oil is crucial to Mexico’s economy, accounting for one-third of federal income. However, Mexico’s oil production has been decreasing since 2004, as shallow reserves have started running low, and there is a lack of national technical capacity to explore unconventional sources. It is no mystery that allowing private investment in the oil industry could boost Mexico’s hydrocarbon production and with it, its economy, but privatizing national resources is not a political option. President Peña Nieto’s proposal seeks to attract investment without privatizing by reversing the constitution’s ban on private contracts in upstream oil and gas development (i.e. exploration and production) and offering a share in profits. Other oil and hydrocarbon sector reforms include restructuring PEMEX and increasing its transparency and accountability.

President of Mexico, Enrique Peña Nieto

The proposal’s reform of the electricity market, which has largely missed the headlines, includes a simple yet powerful change: enabling private participation in power generation, while maintaining state control over transmission and distribution. Currently, the state-owned Comision Federal de Electricidad (CFE) holds a monopoly over electricity generation, distribution, and transmission. While amendments to the Public Electricity Service Act in 1992 partially opened electricity generation to the private sector, it did so only for self-supply, cogeneration, Independent Power Producers (IPP) exclusively selling to the CFE and planned under CFE’s strategy, small production (less than 30 MW), imports to satisfy self-supply needs, and exports to other countries. In addition, since the CFE controls transmission and distribution, it also chooses from which power generators to purchase electricity. This in turn limits competition in the electricity sector and has contributed to electricity prices that are on average 25 percent more expensive than in the United States. The reform would also establish an independent systems operator to boost competitiveness by determining power producer participation in the electricity market based on lowest generation costs. If properly implemented, Mexico’s electricity reforms will increase competition in power generation and help bring down prices.

So the energy reform could help bring down electricity costs, but how does it fit with Mexico’s climate and renewable energy policy? While there is some language in President Peña Nieto’s proposal regarding the need for the continued development of clean energy sources to transition into a sustainable energy and reduce Mexico’s greenhouse gas (GHG) emissions, there is nothing in the proposed reforms that affect the renewable energy sector directly. Nevertheless, if the reform passes, there will be indirect effects that should not be ignored. On one hand, the further development of Mexico’s oil and gas resources will result in higher levels of GHG emissions; on the other, opening the electricity sector to private generators will allow more players in the market, including renewables, which are becoming cheaper every day.

Last year, Mexico set GHG emission reduction targets of 30 percent by 2020 and 50 percent by 2050, compared to baseline emissions in 2000. To meet this target, it is estimated that Mexico will have to generate at least 35% of its electricity from renewable resources by 2024.  This mandate supports additional laws passed in 2008 for the development and financing of a sustainable energy system transition. Currently, however, less than 20% of the country’s electricity generation is renewable, of which the majority (16%) is hydro. Of the 691 permits of private electricity generators that the energy regulatory commission has approved, only 125 were renewable energy projects (mostly wind and hydro installations). Mexico lacks fiscal incentives for large-scale deployment of renewables, and unless these and other measures are fully implemented, it will most likely fall short of its targets.

Experts believe President Peña Nieto’s energy reform will get congressional approval, as it falls short from privatizing Mexican oil and gas, but the real extent of the reform will not be understood until the secondary laws, which will concretely describe how the bill will be implemented, are drafted. With this in mind, there is still hope additional language regarding incentives for the development of renewable energy will be included.

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