Mexico's power reform debate pushed back to 2022

Debate on government-proposed constitutional reforms to Mexico’s electric power sector has been pushed well into 2022 and with it an extension of the climate of uncertainty hitting investment across the board, says expert Pablo Zárate. 

“It’s difficult to think that an investment committee from any sector is not going to take this into consideration,” Zárate, managing director at FTI Consulting, told BNamericas. “It’s so big that I think it contaminates the entire environment of large projects and investments.”

The reform “has a clear focus on [state-owned utility] CFE now dominating generation,” he added. “But that doesn’t mean that there won’t be significant impacts throughout the entire economy. Passing this reform fundamentally transforms country risk considerations.” 

Alejandro Moreno Cárdenas, leader of the PRI, one of the three main opposition parties, pushed the timetable for debate to the second half of 2022 in a speech Monday, saying the reforms will only be discussed after state elections are held next June.

Morena, the ruling party backing the legislation, needs to get at least one of the opposition parties on board to obtain the required two-thirds approval for constitutional reforms in congress.

Among the various proposals in the package is the cancelation of all power generation and sales contracts, with the mechanism for renegotiating the contracts expected in secondary legislation.

Any renegotiation, however, would leave the final word on approval up to CFE, which would also become the sole purchaser of power. 

The reforms, said Fitch Ratings in a statement Monday, “would result in negative rating actions to private power projects were it to become law.” 

“Due to the set of things it raises, the reform could actually send almost all of the country's private generation assets into default,” Zárate said.

“The [legal wording] that seeks to cancel all permits and PPA contracts is very clear – and the more they insist that new ones would be issued later, that does not solve the problem, nor does it guarantee the continuity of the projects.” 

But this is not the only problem, he added, the reforms give priority dispatch to CFE generation and put the entire supply chain – generation, transmission, distribution – under the state company’s control.

“So, in many cases … we would be talking about crossing the thresholds established in the project finance covenants,” said Zárate.

Private players have invested some US$26bn since the energy reforms of 2013-14 to grow the country’s renewable capacity. Since 2014, Mexico has added 5.6GW of wind capacity and 7GW of solar, all built by private producers.

US ambassador to Mexico Ken Salazar echoed those sentiments in comments Tuesday expressing “serious concerns” over impacts from the reforms on investments in renewable energy made in Mexico.

At a press conference, Salazar said US companies have made investments of billions of dollars so “of course, they’re worried, but I think there are possibilities that this can be resolved.”

Salazar also said Mexico requires investment from US companies, not only in the power sector, but also in many other areas.

“American companies provide hundreds of thousands of jobs, and we have to ensure that they will have the energy they need,” he said. “And it has to be within the framework of the supply chain.”

He also said there is goodwill on both sides to find a solution to the issue. “We are seeing how the reasons for the reform can be better understood, seeing if there are ways to reach a resolution.”