Mexico reportedly using electricity reforms to undo 32 legacy contracts

At the heart of electricity legislation reforms now before Mexico’s congress, President Andrés Manuel López Obrador’s government is looking to renegotiate a number of power purchase agreements.

The administration is seeking to strike a deal with 32 independent generators that it committed to buy power from before the introduction of the wholesale electricity market, with agreements going back to 1997 in some cases.

That legislation, which includes a wide range of reforms to help bolster state-owned power company CFE, would also pave the way for the utility to avoid having to pay out as much as 1.57tn pesos (US$78.1bn) under those contracts over the next two decades.

According to a “senior energy sector official” cited by daily El Universal, the objective of the legislation is to “reduce these payments as much as possible with adjustments in the terms of the contracts that began being signed in 1997, with the first electricity generation permit under the independent producer scheme that energy regulatory commission [CRE] awarded to AES Mérida III to build a plant with generation capacity of 532MW for exclusive sale to CFE.”

These comments are in line with those repeatedly made last year by senior energy officials decrying agreements made with the earliest pioneers in private renewable generation projects, including industrial self-supply contracts, attacking them for fixing exorbitant rates for decades, as well as being agreed in non-transparent or possibly corrupt transactions.

While those 32 contracts are relatively small in number, they have resulted in a significant financial burden, costing the company billions of pesos every year. 

The contracts were ostensibly designed to help the private companies behind the projects pay off construction costs over a long period of time. However, the El Universal source said, “considering the construction of a combined cycle plant represents an investment of US$400mn” the construction of all 32 would amount to 256bn pesos with exchange rate adjustments.

With CFE already having paid 935bn pesos on those contracts, “they have already amortized their initial investments and have obtained 679bn pesos on top,” according to the unnamed source, with more than a trillion pesos still due on the contracts that, in some cases, do not expire until 2044. 

Asked by the daily how much of a discount the authorities are looking to obtained, the source said, “We are making it a case-by-case analysis, but we expect to obtain a real benefit for the state and CFE.”

LONG-TERM COMMITMENTS 

Roughly 60% of the 1.57tn pesos that CFE is set to pay with the 32 contracts would go to Spanish energy giant Iberdrola’s Mexican operations, with commitments to the firms local units amounting to 933bn pesos. 

Some of the big-ticket contracts are tied to three of Iberdrola México’s combined cycle facilities: the Escobedo (Noreste) 878MW combined-cycle plant located north of Monterrey, Nuevo León, and the Topolobampo II (Noroeste) and III plants in Sinaloa, with installed capacities of 911MW and 779MW, according to Iberdrola data. 

The contract on the Escobedo plant, said the source, entails initial costs of US$346mn for the plant, now five years into operations, with CFE’s commitment to purchase electricity amounting to 314bn pesos (or about US$15.6bn) through 2043, highlighting the disproportionate benefit to the private firm. 

For the operation and delivery of electricity of the Noroeste combined cycle plant, whose construction cost Iberdrola US$334mn, CFE has committed to buying 225bn pesos in electricity up to 2044.

For the Topolobampo III plant, which required an investment of US$375mn for construction, CFE has committed to power purchases of 198bn pesos through 2044. 

All three of these contracts went into effect in 2019 for a 25-year period, having been negotiated just before López Obrador came into office in December 2018.  

Another combined-cycle plant, Grupo Norte Energía’s Norte III (Juárez) 907MW facility, which needed US$562mn in capex supplied by GN Energía subsidiaries Abeinsa and Abener Energía, has a contract through 2044, under which the CFE is obliged to buy more than 300bn pesos in energy over the next 23-24 years. 

For other plants such as Norte and Norte I, awarded to Spain’s Unión Fenosa (Naturgy) and Cobra, CFE is committed to purchases amounting to 120bn pesos and 70.7bn pesos, respectively.

'GIGANTIC ABUSE'

Gonzalo Monroy, energy sector analyst and managing partner at energy consultancy GMEC, told El Universal that the way the federal government is trying to negotiate with independent power producers through the reform initiative is a "gigantic abuse, they are not doing it in good faith."  

The latest attempt to change the contracts – the current legislative proposal – is only the latest maneuver by the AMLO administration, which has tried various strategies at the regulatory and administrative level since an early attempt by business owners to negotiate in February 2019 fell through, said Monroy.