Lopez Obrador’s electricity reform sparks opposition from US investors

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Mexico’s congress will decide on Sunday whether to give the government near-total control over the country’s power sector in what analysts say is one of the biggest threats to the country’s private sector in years, moving away from clean energy production, jeopardizing foreign investment and driving a wedge with the United States.

The restructuring, championed by populist President Andrés Manuel López Obrador, would eliminate independent regulators and end power takeover bids, allowing the government to generate electricity regardless of cost or environmental impact .

US officials have openly opposed the new law, which they say would jeopardize $10 billion in US investments. It would also move Mexico away from once-shared climate change priorities and could force US manufacturers in Mexico to fuel their factories with fuel oil, instead of cleaner sources.

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Mexico’s current electricity law, introduced in 2013, introduced market competition to the sector, allowing the country’s electricity commission to purchase electricity at a relatively low cost and from various sources. Cheaper alternatives often come from renewable energy plants owned by private companies, which have pushed less efficient public plants out of the market.

In northern Mexico, along the border with Texas, for example, foreign companies have invested billions of dollars in wind farms. Millions of Mexican homes are powered by natural gas from the United States.

The restructuring would allow the state-owned power company, the Federal Electricity Commission, or CFE for its initials in Spanish, to also serve as a regulator. It would also eliminate tenders, allowing CFE to buy electricity from its own plants at higher costs. The government insists that electricity costs for consumers will not increase.

US officials have warned that the restructuring could have a dramatic impact on foreign investment and could violate the US-Mexico-Canada agreement.

U.S. Trade Representative Katherine Tai referred to the law in a letter to Mexico’s economy secretary last month. “While we have tried to be constructive with the Mexican government to address these concerns,” she wrote, “there has been no change in policy in Mexico, and American businesses continue to face arbitrary treatment and over $10 billion of US investment in Mexico, much in renewable energy facilities, is now more at risk than ever.

“We are concerned that the Electricity Act of 2021 will open the door to endless litigation, creating uncertainty and hampering investment,” US Ambassador Ken Salazar said last week.

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Energy consultant Gonzalo Monroy warned that the restructuring “would mark Mexico with a scarlet letter that says Mexico does not honor contracts, it changes rules, it is arbitrary with inversions”. Such a message, he said, “would create an inertia where no new investment would come.”

López Obrador’s public explanation of the restructuring barely addressed questions of efficiency, emissions or price. Rather, he framed the effort in political terms. In a recent book, “Halfway There”, he wrote that a market-driven electricity market was “contrary to the public interest and perversely sought to ruin the national electricity industry and to leave market dominance in the hands of private, mostly foreign companies.”

When López Obrador took office in December 2018, CFE produced 54% of the country’s electricity. Private companies offering clean energy alternatives have since entered the market alongside CFE’s more expensive coal and oil-fired power plants. Private companies now produce 62% of Mexico’s electricity, according to the bill that will be voted on in Congress.

The restructuring would allow CFE to produce at least 54% of the country’s electricity. It would again rely on less efficient and more polluting power plants and fuel oil extracted by the country’s national oil company. Victor Ramirez, a partner at energy consultancy Perceptia21Energia, said this “means an increase in greenhouse gases of at least 15% in a single day”.

Analysts believe the new law would prevent Mexico from meeting its commitment to produce 35% of electricity from clean sources by 2024. It would also discourage investment from manufacturers who have made their own emissions commitments. General Motors, for example, has suggested limiting its future investments in Mexico if the country does not deepen its commitment to renewable energy.

Manufacturers also fear the restructuring will make electricity less reliable, posing a threat to Mexico’s important manufacturing industry as it tries to convince the United States and other companies to relocate operations from China. .

López Obrador’s attempts to reshape the energy sector are central to his politics. In early 2020, his administration issued two executive orders creating barriers to prevent renewable energy from being brought to the power grid for distribution. The decrees were suspended after being appealed in court.

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Then, in February 2021, López Obrador presented a bill to Congress to restructure the electrical industry law. The legislation was quickly passed by a congress controlled by his Morena party. Forty-eight opposition senators have taken the new law to the Supreme Court for constitutional review.

Seven of 11 Supreme Court justices ruled the reformed Electrical Industry Act unconstitutional, but the decision fell short of the 8-vote supermajority required to overturn the changes.

Private companies and environmental groups have appealed the law. Among their concerns was whether the new law would allow the government to retroactively invalidate their contracts. The court will discuss these appeals in the coming months. Analysts say the most likely scenario is that the appeals will cripple the law for several years until Congress is reconfigured and the law is changed again.

This Sunday, the House of Representatives will vote on AMLO’s initiative to amend the constitution to allow for electricity restructuring. Morena no longer has the necessary majorities to do so. But because the vote takes place on Easter Sunday, with many lawmakers on vacation, the outcome is hard to predict.

It is the growth of renewable energy that López Obrador sees as one of the biggest threats.

“Renewable energy is cheaper than fuel-based energy,” said Montserrat Ramiro, a former commissioner at Mexico’s energy regulator and now a global fellow at the Wilson Center. “This administration saw this as a decrease in CFE because its electricity is more expensive, and they understood this as a loss of sovereignty.”

Analysts expect the additional electricity generated by the government under the new law to come from fuel oil, which is refined by state oil company Pemex.

“They’re going to increase the use of one of the dirtiest sources of electricity,” said Tony Payan, director of the Center for the United States and Mexico at Rice University.

Energy has been tied to Mexican identity since at least 1938, when then-president Lázaro Cárdenas nationalized the sector.

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Cárdenas created two public monopolies: PEMEX, to develop and sell oil, and the Electricity Commission, to generate and distribute electricity. These measures fueled the pride and sense of sovereignty of millions of Mexicans, but the two entities ultimately turned into inefficient businesses, endemic to corruption and embezzlement.

“I have always thought that the initiative [to reform the constitution] was intended for [López Obrador’s] faithful,” Ramírez said. “This initiative has no technical or economic logic; it is simply a nationalist and propaganda subject.

If the constitution is changed, Ramiro said, “the damage would be profound. “Recovering from this could take decades.”

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