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.
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.