Lopez Obrador’s electricty reform draws opposition from investors, U.S.

The restructuring, championed by populist President Andrés Manuel López Obrador, would eliminate independent regulators and halt public bids for electricity purchases, allowing the government to generate power without regard for cost or environmental impact.

U.S. officials have been outspoken in their opposition to the new law, which they say would put at risk $10 billion in American investments. It would also shift Mexico away from once-shared climate change priorities, and could force U.S. manufacturers in Mexico to power their factories with fuel oil, instead of cleaner sources.

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Mexico’s existing electricity law, introduced in 2013, brought market competition to the sector, allowing the country’s electricity commission to purchase power at relatively low cost and from a range of sources. The 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 Texas border, for example, foreign companies invested billions of dollars in wind farms. Millions of Mexican homes are powered by natural gas that comes from the United States.

The restructuring would allow the state-owned electricity 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 would not rise.

U.S. officials have warned the restructuring could have a dramatic impact on foreign investment, and might violate the U.S.-Mexico-Canada Agreement.

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

“We are concerned that the 2021 electricity law is likely to open the door to endless litigation, creating uncertainty and impeding investment,” U.S. 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 the 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 has barely touched on questions of efficiency, emissions, or prices. He has framed the effort instead 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 leave market dominance in the hands of private companies, mainly foreigners.”

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

The restructuring would return CFE to producing at least 54 percent of the country’s electricity. It would rely once again on less efficient, more polluting power plants and fuel oil extracted by the country’s national oil company. Victor Ramirez, a partner at the energy consulting firm Perceptia21Energia, said that it “means rising greenhouse gases by at least 15 percent in a single day.”

Analysts believe the new law would make it impossible for Mexico to meet its pledge to produce 35 percent of electricity from clean sources by 2024. It would also deter investment from manufacturers who have made their own emissions commitments. General Motors, for example, has suggested it will limit its future investment in Mexico if the country doesn’t deepen its commitment to renewable energy.

Manufacturers also worry that the restructuring could make electricity less reliable, posing a threat to Mexico’s substantial manufacturing industry as it attempts to convince U.S. and other companies to relocate operations from China.

López Obrador’s attempts to reshape the energy sector are at the core of his politics. In early 2020, his administration published two decrees creating obstacles to prevent renewable energy from being delivered 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 proposal in Congress to restructuring the Electric Industry Law. The legislation was quickly passed by a congress controlled by his Morena party. Forty-eight opposition senators took the new law to the supreme court for a constitutional review.

Seven of 11 supreme court justices found the reformed Electric Industry Law to be unconstitutional, but the ruling fell short of the 8-vote supermajority required to reverse 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 those appeals in the coming months. The most likely scenario, analysts say, is that appeals will paralyze 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 modify the constitution to allow for the electricity restructuring. Morena no longer has the majorities needed to do so. But because the vote is being held on Easter Sunday, with many lawmakers on vacation, the result is difficult to predict.

It’s the growth of renewable energy that López Obrador sees as among the biggest threats.

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

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

“They’re going to increase the use of one of the most polluting 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 at least as far back as 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. The moves fueled pride and a sense of sovereignty for millions of Mexicans, but both entities eventually decayed into inefficient companies rampant with corruption and embezzlement.

“I’ve always thought the initiative [to reform the constitution] was meant for [López Obrador’s] worshipers,” Ramírez said. “This initiative has no technical nor economic logic; it is merely a nationalist topic and a propagandistic one.”

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