Mexico energy regulator proposes death by attrition for self-supply, co-generation

Mexico’s renewables sector may have hit another regulatory roadblock with a draft proposal from the energy regulation commission (CRE) that would essentially force a phase-out of self-supply and co-generation contracts. 

The move is the latest to support concerns in the private electricity sector that the administration of President Andrés Manuel López Obrador (AMLO) is orchestrating a slow death of private participation in the energy industry, in this case a death by attrition targeting one of the key modalities for private electricity generation and distribution that came out of the 2014 structural energy reforms.

As detailed in the draft regulation proposed to Mexico’s regulatory oversight entity (Conamer), it would allow for existing self-supply and co-generation permits to remain valid; however, future modifications to these arrangements, say via expansion or reduction of generation output or to add partners or clients in power purchase agreements, would be disallowed.

The move is in line with other areas of developing energy policy, for example recent statements that would allow continued participation in the oil and gas sector for companies already in development like Talos and Eni, but with the AMLO administration now making it clear that it will hold no new deepwater or E&P contracts.

CRE’s latest move could hold serious implications for firms that have already invested deeply in the self-supply modality, like Sempra Energy’s Mexican subsidiary IEnova. It still requires a final approval process involving CRE before going into effect. 

It reads specifically, “The scope of this modification deals with requests for changes in authorized persons as beneficiaries of the electricity generated in self-supply or co-generation permits, including those expressly stated in the expansion plans when the permit was granted or in the last modification approved by the CRE.” The draft submission is available in Spanish and English here.

IEnova, issued their own response to the proposed draft (available in Spanish here), objecting to the CRE proposal as owner/operators of two major solar works in progress – the Border Solar Norte PV project in Chihuahua state and the Don Diego Solar PV project in nearby Sonora state.

IEnova called on Conamer to declare the proposed changes to be of “high regulatory impact” – a designation that would trigger a much more rigorous regulatory review process touching on market competition, social benefits, legal certainty, transparency and more. 

The energy contractor said in its objection that the proposed draft meets the requirement for stricter review, as the proposal “does generate compliance costs for individuals, since it eliminates the right established both in the transitory tenth of the law of the electrical industry as in article 36 division I of the law of the public service of electric power to modify the permits of self-supply power plants granted by the CRE to include new partners and charge centers." 

“For permit holders of self-supply power plants granted by the CRE, this modification implies the impossibility of delivering energy to new self-sufficient partners, with the consequent costs and losses derived from breach of contracts and the impossibility of carrying out expansion plans,” continued IEnova.

IEnova has been boosting its partnerships with the Border Solar project, finalizing in December a fourth power purchase agreement with a non-utility for the 150MW project.

The new offtaker is Mexican cement company Grupo Cementos de Chihuahua (GCC). The 15-year PPA is set to kick in by January 2021, when the plant will start supplying GCC’s cement factory and offices in the city of Juárez. The contract will cover 20% of GCC’s power consumption in Mexico, according to a report from M&A research firm Power Finance & Risk.

Renewables feel target on their back 

Many companies could be affected by this change.

There are 303 power plants operating under self-supply contracts, distributing energy to 70,318 members, according to the energy ministry’s electric system development program (Prodesen) for 2019-2033, one of several details reported by media outlet Expansión.

The ministry has furthermore identified 255 private companies with permits for self-supply, for small production, export and import; which generated 45.8TW, which represent 14% of national consumption.

Most of these plants do not exceed 100MW of generation capacity, but the largest are located in the combined cycle technologies of plants from companies such as Iberdrola, Techint, Savvi Energía, Grupo México and Pemex; two AES México fluidized bed thermoelectric plants, two in IEnova (Costa Azul) and Energía Ramos turbogas, as well as more than a dozen wind power plants that exceed 100MW.

CFE wish list 

The CRE move comes on the heels of a leaked document from state power company (CFE) in December that seeks to increase transmission costs, put limits on interconnection of solar and wind power, cancel self-supply contracts and undercut the benefits of CELs (clean energy certificates).

Such an agenda, posited in the leaked CFE “wish list”, would destroy “the incentives for competition and private-sector investment,” according David Shields, energy consultant and editor of the publication Energia a Debate, speaking to BNamericas in December. 

The CRE draft, published February 13, appears to suggest that CRE is moving forward with this agenda and could stifle new privately operated power supply plants, according to some industry experts. 

“What CRE wants to do is limit [their ability to set up] new charge centers. It is telling them: if it is not in any expansion plan that you presented to us before this came out and if it is not within your permission, then we will not take it into account,” said Bernardo Cortés, senior associate of the Dentons López Velarde law firm, as reported in local daily El Financiero.

The newly installed plants under this scheme, Cortés said, are the ones that could see their business model limited, as they may not have all their generation capacity assigned. 

Safe for now 

The proposed regulation, nevertheless, appears to leave other sensitive areas to the renewables sector untouched for now. 

Bravos Energía is set to announce the results of its first private energy auction in late March and in comments to BNamericas on Monday the company's CEO, Jeff Pavlovic, stressed the narrow focus written into the regulatory draft.

“The draft regulation is not related to the private auction, since only the power plants that operate in the wholesale electricity market [MEM] regime can still participate in the auction,” Pavlovic told BNamericas.

“The [CRE] preliminary draft would affect the generation projects that operate in the self-supply and c-generation regimes, which were in force before the start of the electricity market. So there is no overlap between one subject and another,” he added.

However, there appears to be room for concern after a memo from electricity grid regulator (CENACE) recently raised eyebrows in the sector in declaring that the only transactions on the MEM that would be legally recognized under Mexico’s electrical industry law (LIE) are those operated by CENACE itself.

Pavlovic insisted after that memo, in comments to BNamericas, that this was not the case, and that their auction was moving ahead as planned.