The Struggle over Mexico’s Energy Sector: What’s At Stake?

The Struggle over Mexico’s Energy Sector: What’s At Stake?

Recently, Mexican President Andrés Manuel López Obrador stepped up his administration’s efforts to reform the country’s Electricity Industry Law. However, these attempts have received criticism from the private sector and lawmakers. The dispute has the potential to affect Mexico’s relations with regional partners like the USA and Canada and, depending on the outcome of legislative elections in June, may even cause constitutional changes.

Mexico’s Energy Laws

Since 1960, Mexico’s energy sector has largely been dominated by the federal government. However, important changes occurred in 2013 and 2014 when then-President Enrique Peña Nieto presented Congress with proposals to amend Mexico’s constitution to enable broader participation for private firms in the energy sector. 

One key change was the creation of the Electricity Industry Law (LIE) in 2014, which opened up the wholesale electricity market and engagement in power generation to private firms. This law placed Mexico’s Energy Regulatory Commission (CRE) in charge of issuing permits for electricity generation and distribution. Though Mexico’s Federal Electricity Commission (CFE), which until these reforms monopolised Mexico’s electricity, maintained control over electricity transmission and distribution lines, private firms were permitted to take part in construction, operation and maintenance at the cost of tariffs defined by the CRE.

Obrador’s Offensive

Since President Andrés Manuel López Obrador (often referred to as AMLO) was elected in 2018, the energy reforms have faced growing obstacles to their effectiveness. For example, Obrador cancelled planned energy auctions for oil and renewable energy upon entering office, reducing the scope for private companies to increase their involvement in Mexico’s energy sector. AMLO has also targeted the CRE, cutting its budget by over 70% between 2018 and January 2021.

Most significantly, in February AMLO presented Congress with a bill aiming to modify the LIE to give priority to power generated by the CFE and remove the need for the CFE to hold any power auctions, changes which would significantly undermine the position of private firms in Mexico’s energy market. The bill passed Congress in February without alterations before being approved by the Senate in early March. 

However, AMLO has not yet won the war over Mexico’s energy policy. On 11th March, following an appeal by a solar power firm, a federal judge ordered the suspension of the modified LIE with the justification of protecting the right to free competition. This move was followed on 19th March by the decision to suspend the modified law indefinitely. In response to these setbacks Obrador called for an investigation into the judge responsible, suggesting that corrupt businesses were behind the suspension. AMLO indicated that he would seek to amend the constitution in order to legitimise his changes and prevent further obstruction.

What’s At Stake?

One criticism brought forward by opponents of Obrador’s changes is that they will undermine Mexico’s efforts to protect its environment and meet goals to cut emissions. Critics argue that the government’s cancellation of renewable energy auctions and prioritisation of power generated by the CFE over private renewable energy providers will reduce the share of renewables in the sector. Moreover, bodies like Mexico’s Civic Observatory of Air Quality (OCCA) have argued that the increased fossil fuel use will likely result in an increased number of premature deaths owing to air pollution and that the changes violate the human right to health.

From another angle, AMLO’s energy policy has been attacked on the grounds that it will increase costs to the consumer as a result of the prioritization of the CFE’s older and less efficient infrastructure. In support of these claims, it has been reported that the energy generated by the CFE is approximately 295% more expensive than that generated by private power stations. Though AMLO has said that the direct cost of energy to the consumer will not rise, it is likely that the government will use subsidies to make up for the increased cost, ultimately at the expense of valuable public funds.

What Next?

Though Obrador’s plans have been halted for the moment, it is quite likely that he will be able to overcome the legal opposition through constitutional changes after midterm elections in June. AMLO’s party, Movimiento Regeneración Nacional (MORENA), currently holds slightly less than the necessary two-thirds majority in both the upper and lower houses of Congress to carry out such changes. If MORENA gains enough votes in the elections to form a two-thirds majority, it is highly probable that the modifications to the LIE and constitution will be able to pass unopposed. It’s still too early to tell how the election might unfold, though as of early March voter intention favours MORENA over its rivals; in one poll, 44% of respondents expressed their intention to vote for MORENA, compared to 10% for the next closest party.

If the changes are introduced, it is quite probable that a dispute will develop between Mexico, the USA and Canada given that AMLO’s changes arguably constitute a violation of the United States-Mexico-Canada Agreement (USMCA). This is because the USMCA’s terms forbid state-owned enterprises receiving preferential treatment, as would be the case if AMLO’s changes pass. Consequently, it is likely that Mexico will face dispute resolution proceedings with the US if AMLO doesn’t relax his proposed changes. If a ruling is made in favour of the US, Mexico may face penalties such as the introduction of new duties on Mexican goods which would likely in turn have a detrimental effect on Mexican industry and potentially increase pressure on the Obrador administration to roll back the reforms.

Regardless of whether or not AMLO’s proposals are implemented, it is probable that AMLO’s disconcerting attitude to foreign investment in the Mexican energy sector will lead foreign firms to exercise greater caution concerning investment over the medium term, especially if MORENA performs well in the June elections. Ultimately, the Mexican public are likely to lose out from a decline in investor confidence as critical sources of funding for cleaner and more efficient power generation infrastructure shrink.

About Author

Samuel Arnold-Parra

Samuel graduated from LSE in 2020 with a degree in International Relations and History. Since graduating, he has been building up experience in research and analysis. Currently, he is conducting voluntary research on Japanese national and sub-national responses to COVID-19. He is eager to use his skills in Spanish and Japanese to contribute valuable insights focusing on Japan and Latin America.