Mexican reforms pose risks to energy transition and USMCA, says think tank

Energy reforms approved by Mexico's lower house of congress on Wednesday will deter private sector investment, slow down the energy transition and conflict with the USMCA free trade agreement, according to local think tank IMCO.

"It is a cocktail of uncertainty," Jesus Carrillo, economy director at the IMCO competitiveness institute, told BNamericas. "There's no clarity about how the private sector can participate and there's the potential risk of violating the USMCA."

The constitutional reforms, which need to be approved by other institutions before they become law, will change the legal status of state-owned utility CFE and national oil company Pemex from that of a "productive company" to a "public company". 

In the electricity market, this will allow Mexico to prioritize electricity generated by CFE over power from independent producers, which in Mexico are mainly wind and solar power companies.

"It means that the electricity dispatched will be more expensive and more polluting," Carrillo said. 

Although Mexican deputies on Wednesday removed a proposal that would make the State responsible for leading the energy transition, Carrillo said the reforms would have a negative impact on Mexico's energy transition.

The constitutional changes will be a disincentive for renewable energy companies to generate low-cost clean power in Mexico, he said.

The reforms also stipulate that the State will have the exclusive responsibility for electricity transmission and distribution.

"It's these which need the highest levels of investment after years of underinvestment by CFE," Carrillo said. "There is no public money for this and it's not clear what mechanisms can be used for the private sector to participate."

USMCA concerns

The reforms may be incompatible with the USMCA agreement between the US, Canada and Mexico.

"There could be a conflict with the USMCA because a market is de facto being closed which was not declared as excluded from the treaty," Carrillo said.

The USMCA will be reviewed by the three countries in 2026. 

The US has requested dispute settlement consultations with Mexico over its energy policies but has not yet called for a dispute settlement panel to be convened. 

Investment falls

Since Mexico turned toward energy nationalism with the election of Andrés Manuel López Obrador in 2018, there has been a slump in investment in electricity generation.

According to IMCO, investment in power plants fell from US$54bn in 2013-18 to US$13bn during the López Obrador administration in 2019-24.

López Obrador's successor Claudia Sheinbaum, who took office on October 1, has said she will continue to prioritize energy sovereignty.

FDI in Mexican electricity generation, 2013-18 vs. 2019-24 (US$mn)

Source: IMCO