- Mexico’s government is pressing on with controversial reforms that would see state-owned utility CFE own more than half of the energy market.
- The implications are severe for renewables investors and for the emissions-cutting plans of manufacturers with operations in Mexico.
- Many foreign companies and investors are said to be considering bringing lawsuits against the government.
Update: On 18 April, Mexico’s opposition politicians voted against the reform, with 275-233 in favour: well short of the two-thirds majority required for President López Obrador to press ahead with his reform plans. He has since announced plans to nationalise the local lithium sector, which he argues will only require a simple majority in Congress. Despite the defeat, the considerable uncertainty in the Mexican energy market that has already hindered foreign investment is unlikely to go away as nationalism remains at the heart of the president’s agenda.
Controversial energy market reforms planned in Mexico are expected to hit the renewables sector particularly hard and create setbacks for the emissions-reduction plans of local and foreign companies with operations in the country. The proposals – which are expected to further reduce investment into and access to solar and wind power – have sparked intense lobbying and look set to prompt a wave of investor-state dispute settlements (ISDSs), say legal experts.
The reforms are a cornerstone of President Andrés Manuel López Obrador’s nationalist agenda. They were first tabled in September 2021 but have not yet been implemented amid fierce opposition. The bill made it to the Supreme Court just last week and, despite a majority of judges voting against key aspects, it ultimately survived.
A much-anticipated vote in Congress – originally scheduled for November but repeatedly postponed – is now scheduled to take place on 17 April. Most believe it will pass, but perhaps with some elements removed.
The stated aim of the bill is to strengthen the market share of state-owned power utility Comisión Federal de Electricidad (CFE) by reversing previous reforms that opened up Mexico’s energy market to private investment. The government plans to tear up existing electricity generation permits and sales contracts and effectively seize foreign-owned energy assets, with CFE’s market share going from 38% to 56% of Mexico’s total power demand.
Critics say the changes will undo years of economic growth, drastically reduce competition and push up prices in energy markets, violate international treaties and be environmentally harmful.
“There’s opposition from the private sector, from academia and research institutions and from columnists and opinion writers. There is basically no single figure outside the government that is supportive of the proposal,” says Leonardo Beltrán Rodríguez, Mexico’s former deputy secretary for the energy transition.
“The problem is that the opposition is very technical, while the proposal is a highly political narrative,” he tells Capital Monitor. “The government isn’t interested in talking about the technical aspects – it’s all ideology.”
The country needs $10bn in investment between now and 2024 to meet its clean energy goals, yet the pace of new capital flows has slowed considerably as Congress has debated the bill. Investment in new renewable projects has fallen almost 80% from its 2017 peak of $6.2bn.
“The main concern for investors is they have no idea what is going to happen,” says Alberto Fabio Gonzalez, a partner at renewables-focused private equity firm Banverde in Guadalajara. “Any additional investments are on hold, and whatever they already have in place may now be at risk. The energy sector in Mexico is losing attractiveness.”
“In theory, the reforms are energy source-agnostic, but really the only source of power generation in Mexico with foreign ownership is renewables – and foreign ownership is what the president is targeting,” says Bob Heinrich, vice president at energy consultancy NUS in New Jersey.
Some felt the writing had been on the wall when Obrador took office in 2018. An executive at a London-based renewable energy-focused asset manager says his firm had been considering buying assets in Mexico but decided not to when the new administration was voted in, reflecting a sharp drop in foreign direct investment into energy since 2018 (see chart below).
“We are afraid of the kind of thing he’s doing, trying to nationalise everything. It causes a lot of problems for foreign investors,” he says. “And now [with the planned reform] it’s even worse. The government’s changes will affect not only renewables but all kinds of energy investment – as well the export of energy to the US.”
Seeking treaty protection
Some are said to be considering legal reparations: foreign investors are apparently weighing up the likelihood of their success in an ISDS.
Mexico is signatory to dozens of investment treaties with other countries – most notably the US-Mexico-Canada Agreement, which succeeded the North American Free Trade Agreement (Nafta). Such agreements typically include provisions stating that governments cannot cancel contracts without good reason or discriminate against foreign companies.
“We’ve been talking to investor clients for some months now about where they stand, and it seems that if the reform is passed as it’s been proposed, many will have a legitimate claim against Mexico,” says Fernando Rodriguez-Cortina, an international arbitration partner at US law firm King & Spalding in Houston. “The current proposal violates those treaties, as there is clear discrimination against foreign investors, and they will be seeking damages.”
Investors in energy in Mexico across the board will be affected by the reforms. “The proposal has completely shut down foreign investment in the Mexican energy sector – both oil and gas and renewables,” says Will Waggoner, chief executive of Pan American Petroleum. “We had investors lined up and ready to bid on new licensing opportunities, and those opportunities are now gone.”
If the bill makes it through Congress, these claims could begin materialising as early as the second half of this year, adds Rodriguez-Cortina.
The presence of such treaties may even afford foreign investors better protections than local ones, says Gonzalez, who believes there could be hundreds of cases brought against the government.
Rising power costs
There are major implications for foreign investors and businesses – particularly American ones – operating in Mexico, says NUS’s Heinrich.
That’s because in the early noughties there was “tremendous growth” in manufacturing in Mexico, largely down to Nafta making the country an attractive low-cost location because of its low labour costs. US companies that started or expanded manufacturing in the country include conglomerates General Motors, Honeywell and Nestle, and many in biopharmaceutical firms.
This new industrial demand led to a huge growth in electricity consumption. With CFE struggling to meet demand, the then-government under President Vicente Fox Quesada introduced incentives for foreign investors to enter the market by always dispatching the cheapest energy available onto the grid – which is often produced by private companies, and typically from renewable sources.
These companies will face higher costs – analysts say electricity generation will become 32% to 54% more expensive – and will also be prevented from meeting their emissions reduction targets by limiting the availability of renewable power in Mexico.
“The issue for my clients is that almost all of them have decarbonisation targets, mostly with 2025 or 2030 as the first step,” says Heinrich. And many of them have significant manufacturing operations in Mexico, accounting for a large chunk of their global carbon footprint.
“Yet renewable energy is going to become not just more expensive, but probably not even available at any cost,” he adds. “That’s a massive challenge, and it’s why automotive manufacturers are lobbying so heavily in both the US and Mexico to influence this in some way. These are large organisations under pressure to reduce their Scope 3 emissions [those produced by a company’s supply and value chain rather than the company itself].”
Some of NUS’s clients are wondering whether it would be cost-effective to move multiple factories to another Latin American country with more easily accessible renewable energy, he adds.
Whatever the outcome of Sunday’s vote, rebuilding trust in Mexico’s support for renewable energy and climate action – or indeed for foreign investment in general – will not be easy.
Joe Marsh contributed to this article.