Mexico’s Energy Industry Update

May, 2020

The Direction of
Mexico’s Policy for the
Power Sector: A recap
of recent events

In December 2018, the current Administration entered office and there was a
sense of general uncertainty among the industry as to the direction the new
energy policy was heading. Through events such as the presentation of the
National Electricity Program in Malpaso, Chiapas in December 2018 some broad
themes began to emerge. Even though the direction of the power sector policy
was not completely clear, one goal was clear: the strengthening of state-owned
utility, the Federal Electricity Commission (CFE).

In the interim, different actions taken by the Government have been focused
towards that goal, and it has become clearer during recent months how that
intention may translate into practice. Starting with the modification of the
terms of strict legal separation of CFE in March 2019, there have been different
attempts to strengthen CFE, which all seem to follow what CFE’s Solicitation
Document made public by the media in December 2019.

This document presents a timeline of the relevant events in Mexico’s Power Sec-
tor that are related to the Government’s goal towards CFE. It also provides a brief
description of key events and their current status.

1
 Power Sector Policy Timeline

2019
Changes to Strict Mar 25
Legal Separation of CFE
SENER publishes modifications to
the terms for the strict legal separation
Oct 28 Modification to the
of CFE (TESLs), originally published in 2016. Guidelines for CELs
SENER publishes changes on the
granting of Clean Energy Certificates
Suspension of Changes Dec 11 in the Official Gazette.
to CELs Guidelines
Following lawsuits, Federal Judges granted
12 definite suspensions to the modifications
published by SENER until legal resolution. Dec 21 CFE Solicitation Document
This document directed towards CRE and
SENER attempted to strengthen the CFE and

2020
was made public by the Financial Times.

CRE proposes Changes Feb 13

to Legacy Rules
CRE publishes proposed regulatory change
to a previous 2017 decision that would prevent
modifications to legacy self-supply permits.
Feb 18 CONAMER Rejects Changes
to Self-Supply Rules
CONAMER rejects CRE’s proposed regulatory
change, demanding to carry out a
Peso devaluation Mar 23 regulatory impact assessment.
Parallel to the outbreak of COVID-19
and the oil price crisis, the Mexican Peso
reached a new historic low at $25.36 MXN/USD.

Suspension of Activities Mar 24 Mar 24 Credit Rating Downgrade: S&P

due to COVID-19
A temporary suspension of non-essential
activities as a measure of prevention
of COVID-19 began.
CENACE Agreement
CENACE publishes changes to dispatch
and a freeze on interconnections of new renewable
facilities in a response to the Covid-19 effects on demand.
S&P downgrades Mexico’s sovereign rating and
CFE and Pemex’s ratings to BBB from BBB+.
Apr 17 Credit Rating Downgrade:
Fitch and Moody’s
Fitch downgrades Mexico’s sovereign rating to BBB-
and Pemex’s to BB-. Moody’s follows downgrading
both to Baa1 and Ba2, respectively.
Apr 29

May 15 SENER Policy Agreement

SENER Publishes a revised policy document
proposing to alter the roles of CRE, CENACE and CFE.

Suspension of the May 19

CENACE Agreement
Following lawsuits, Federal Judges stayed
the implementation of CENACE’s Agreement.

2
Changes to the Strict Legal Separation of CFE – Mar 25, 2019

On March 25, 2019, the Ministry of Energy (SENER) published a draft version
of proposed changes to the terms for the strict legal separation of CFE (known
as TESLs)1, originally issued on January 11, 2016, as part of the 2013 Energy
Reform. The original Terms were designed to horizontally and vertically divide the
company to facilitate competition in the then new wholesale market, ensuring
that CFE did not exert market power while enhancing the firm’s economic value
and profitability as a state-owned enterprise. The new Administration argued that
CFE’s operational costs have increased and efficiency has been reduced. Thus,
SENER aimed to reform the TESLs to “meet
operation and maintenance requirements of Latest release of both
the generation (plants they hold) to enhance
efficiency, increase CFE’s competitiveness
the CENACE and
and reduce operation costs, seeking to ease SENER Agreements
costs for end users”. must then be analyzed
Modifications include the reorganization as part of a greater
of CFE Gencos, CFE generation companies, energy policy goal of
known as subsidiary productive enterprises
(EPS), into one “or the needed number” com-
strengthening state-
panies and related Business Units, contracts owned CFE through a
with private entities in transmission and dis-
tribution would be conducted by CFE’s EPS,
variety of mechanisms.
CFE generation, transmission, commercial-
ization and procurement companies could perform distribution activities and
the elimination of CFE generations companies’ inability to share information on
planning, operation, maintenance, and commercial strategy of its plants with
other CFE companies, generators, or marketers. It was claimed that the mea-
sures would result in a reduction of tariffs for end users and that CFE will not
build or operate plants that negatively impact the results of the MEM. In general,
these modifications demonstrate how the new administration plans to reform
the CFE structure. They also provide some general guidelines on potential future
changes to CFE that could be pursued in the years ahead. The reallocation of
CFE’s Generation assets2 was finally published in November 25, 2019.

1
https://www.dof.gob.mx/nota_detalle.php?codigo=5555005&fecha=25/03/2019
2
https://www.dof.gob.mx/nota_detalle.php?codigo=5579715&fecha=25/11/2019

3
 Modification to the Guidelines for CELs – October 28, 2019

On October 28, 2019, the Ministry of Energy (SENER) published the “Modification
to the Guidelines for the granting of Clean Energy Certificates (CELs)3” in the
Official Gazette of the Federation. Prior to the Modification, Legacy Power Plants
were only entitled to receive CELs for the “new” Clean Energy produced from
increases in generation capacity, carried out
Even though there is through projects subsequent to the Electricity
Industry Law (LIE), starting operations after
no public record on August 11, 2014. Through the Modification,
when CFE’s Solicitation SENER eliminated the requirement that
plants must be “new” so that Legacy Power
Document was shared Plants would have the right to receive CELs
with CRE and SENER, for all the electric energy they generate from
Clean Energy sources, regardless of the date
it appears that the on which they have entered into commercial
energy policy of 2019 operation. Thus, CFE’s hydroelectric and other
Clean Energy power plants, would receive
and 2020 has followed a CEL for each MWh of energy generated,
document’s requests. amounting to approximately 75% of the CELs
in circulation. The net result of this would
have been an imbalance in the CEL market resulting in a drastic price reduction of
the CELs, impairing an important revenue source for existing plants and making
new renewable power plants less likely to find financing and be constructed.

In response, many renewable energy companies in Mexico filed lawsuits with

different legal authorities against the changes. By December, 2019, judges of the
Federal Judicial Authority (PJF) granted 12 definite suspensions to the measures
until the lawsuits are resolved, given the imminent and irreversible damage that
is implied. The lawsuit processes are ongoing.

CFE Solicitation Document – December 21, 2019

At the end of 2019, the Financial Times made public a solicitation document4
apparently released by the Federal Electricity Commission (CFE) and directed to
the Energy Regulation Commission (CRE) and to the Ministry of Energy (SENER)
in an attempt to strengthen the CFE. The solicitation document has paved the
way to further actions taken by government. Important requests and their impact
can be seen in the following table.
3
https://www.dof.gob.mx/nota_detalle.php?codigo=5576691&fecha=28/10/2019
4
https://www.energiaadebate.com/file/1381/index.pdf

4
 Request Impact on Policy

The guidelines for the granting of Clean Energy Cer-

tificates (CELs) should be changed to grant CELs to Led to the Modification to the Guidelines for the
all clean generation sources including those of the Granting of Clean Energy Certificates published by
CFE so that CFE Basic Supply complies with its obli- SENER.
gations regarding clean energy and avoids penalties.

A limit for intermittent renewable energy should be Both the CENACE and SENER Agreements set limits
set for the operation of new renewable power plants.

Limit the start of operation of projects with Legacy

and Self-Supply contracts, deny the incorporation of
Included in solicitation document made by the CRE
new partners into said contracts and limit the modi-
to modify the Legacy Self-Supply Rules.
fication of conditions for the start of operations such
as start dates and terms of construction.

The participation of the CFE, with CENACE, in the

CFE “proactive participation” in the planning of the
planning of the National Electric System (SEN)
SEN is discussed in the SENER Policy Agreement.
should be allowed.

SENER Agreement intends to provide CFE Transmis-

Update Regulated Transmission and Distribution
sion and Distribution all budgetary and administra-
rates
tive resources to maintain and equip the grid.

In the SENER Policy Agreement it is stated that CFE

The approval of pending generation permits for CFE
could propose strategic projects to SENER who will
should be given preferential treatment over market
decide at their discretion which projects will be
participants.
approved and granted with permits.

Generators should be charged transmission costs

and other charges such as the cost of contract
Included as the SEN ancillary services in the SENER
administration, a backup fee for failure and mainte-
Agreement.
nance, capacity costs, and the cost for the backup
service for intermittent renewable generation.

Review the distributed generation consideration Constraints for distributed generation are included
mechanisms to avoid negative effects on CFE. in SENER Agreement.

Maintain a stable electricity tariff for commercial Even though gas price and Local Marginal Prices
and industrial users even if generation costs de- have been significantly decreasing during 2020, CFE
crease. tariffs have remained relatively stable.

Wheeling charges (“Porteo”) should be increased

especially for private renewable energy and cogen-
Has not yet been addressed.
eration companies with Legacy Interconnection
Contracts.

CFE Basic Supply should charge for 100% of the

capacity delivered to projects Self-Supply Legacy Has not yet been addressed.
contracts.

Recognize fuel costs and fuel types, start-up costs,

parameters of the thermal generation and variable
operation and maintenance costs in the CRE’s Has not yet been addressed.
Registration and Accreditation Manual for market
participants.

5
Changes to the Legacy Self-Supply Rules – February 13, 2020

The CRE intended to modify a 2017 resolution that5 prevents the Legacy Self-
Supply and Cogeneration projects from modifying their permits. In effect, the
changes to the resolution6 would halt the inclusion of new clients, plant expan-
sions and loads for said contracts. The modifications were first proposed by the
Federal Electricity Commission (CFE) in its 2019 solicitation document. The CRE
sent the modifications in a solicitation document to the National Regulatory Im-
provement Commission (CONAMER) on February 13, 2020, asking for an exemp-
tion of the Regulatory Impact Assessment. However, on February 17, 2020 the
solicitation was rejected with CONAMER demanding the CRE present the solici-
tation along with a Regulatory Impact Assessment for approval. The solicitation
with the proper Regulatory Impact Assessment has not yet been presented to
CONAMER.

CENACE Agreement – April 29, 2020

On April 29th, the National Center for Energy Control (CENACE), Mexico’s
electric system operator, released an “Agreement to Guarantee the Efficiency,
Quality, Reliability, Continuity and Security of the National Electric System (SEN)
Due to the Pandemic caused by virus SARS-CoV2 (COVID-19)7”. The Agreement
states that the Energy Ministry requested CENACE to take all necessary actions
to guarantee the National Electric System’s (SEN) efficiency, continuity and
reliability as demand for power has dropped among end users as a consequence
of the recent pandemic Phase 3 safety measures.

The document highlights certain points arguing that renewable intermittent

power plants (wind and solar) stress the system’s reliability in sufficiency, quality
and continuity of the power supply as they do not contribute to the primary
regulation of frequency control. It also noted that wind and solar plants do not
contribute physical inertia for the stability of the SEN.

On account of this, the Agreement imposes important restrictions for wind and
solar power plants without a specified duration, including a suspension, starting
May 3, 2020, of Pre-Operational tests for renewable wind and solar power plants.
Additionally, CENACE indicates they will register new “must-run” power plants,
in order to maintain voltage regularity and minimize transmission line opening
conditions and add physical inertia and short-circuit failure currents.
5
https://dof.gob.mx/nota_detalle.php?codigo=5479929&fecha=17/04/2017
6
http://187.191.71.192/portales/resumen/48825
7
https://www.cenace.gob.mx/Docs/MarcoRegulatorio/AcuerdosCENACE/Acuerdo para garantizar la eficiencia,
Calidad, Confiabilidad, Continuidad y seguridad del SEN 2020 05 01.pdf
6
 In Mexico, wind and solar generation assets are mostly owned by private
companies therefore they are the ones affected by the Agreement released.
The Business Coordinating Council (CCE), the biggest business lobby group in
Mexico, published a press release8 in which it expressed its concerns over the
measures taken by the Agreement, stating that the measures impose barriers
to competition for an indefinite period and legal measures will be taken to
defend competition and the right of Mexican people to a healthy environment.
International business Chambers and industry participants also reacted with
public opinions addressed to the Ministry of Energy and Economy. Consequently,
renewable energy companies and private sector associations filed lawsuits against
the Agreement. Federal Judges granted suspensions for 23 power plants to the
Agreement’s measures and on May 19, 2020 CENACE reversed the Agreement’s
initial structure to allow renewable power plants to continue carrying out pre-
operational tests that are needed to result in commercial operations. On May
25th the entire Agreement was indefinitely suspended (stayed) by the Judge as
the legal process moves towards resolution over the next months or potentially
years. CENACE and CFE published opinion pieces arguing against the Judge’s
resolution.

SENER Policy Agreement – May 15, 2020

On May 15, 2020, SENER published the “Policy for the Reliability, Security,
Continuity and Quality in the National Electrical System”9 in the Official Gazette
of the Federation. Through this Policy, the Energy Ministry intends to impose a
number of tests and limitations on new solar and wind power. While the Policy
states it will provide for “the orderly increase in generation with intermittent
clean energy” it also argues that the intermittent generation profile of some
renewable power plants is risky for system reliability. Some of the envisioned
limitations include altering the spacing between power plants and consideration
of local demand to determine the issuance of future permits and generation.
Additionally, the document proposes that, generators pay for SEN ancillary
services, and further, the CFE will be able to propose priority projects. It would
also give the CENACE the right, even before the CRE, to reject new generation
permit requests. The Policy also envisions that CFE will have “proactive
participation” in the planning of the SEN, including input into transmission and
distribution projects as well as control protocols.

8
https://www.cce.org.mx/el-reciente-acuerdo-del-cenace-atenta-contra-las-operaciones-e-inversiones-en-
energias-renovables/
9
https://www.dof.gob.mx/nota_detalle.php?codigo=5593425&fecha=15/05/2020
7
Government Policy and Sector Outlook
Even though there is no public record on when CFE’s Solicitation Document
was shared with CRE and SENER, it appears that the energy policy of 2019 and
2020 has followed document’s requests. Latest release of both the CENACE and
SENER Agreements must then be analyzed as part of a greater energy policy goal
of strengthening state-owned CFE through a variety of mechanisms.

It is important to note that the Authorities have acted without following the le-
gally defined processes to alter regulations. The processes followed by several
institutions have been seriously challenged including those of CONAMER and
the CRE. Furthermore, the foreign investment outlook for the country has a real
possibility of being impacted. Dialogue between the private and public sectors to
improve regulation in a legal and inclusive manner has been damaged.

Even though the Covid-19 pandemic has tested the reliability of the SEN and
intermittent renewable energy sources may potentially further stress the sys-
tem, the outlined policy changes also have the net effect of limiting competitive
market processes. Additionally, the transmission and distribution grid suffers
important limitations due to under investment causing reliability issues through
the grid. The expected choices for these investments and upgrades are also not
clear since the Energy Infrastructure Plan announced by the Government at the
beginning of 2020 was never published.

It is early in a changing process to quantify how many power generation projects

will in fact be affected by the recent SENER Policy Agreement. However, it seems
clear that the entire value chain is likely to be impacted resulting in reduced
generation project development.

For any request, please contact us:

Ruth Guevara, Partner

rguevara@zumma.com.mx