Introduction

On April 29, 2020, Mexico’s electricity grid operator (CENACE) indefinitely suspended testing and grid connections for renewable energy plants. Citing COVID-19-related concerns relative to the “intermittent nature of renewables,” the suspension barred renewable energy plant development as an unreliable grid threat “until further notice.”[1] On May 15, in support of CENACE’s decision, Mexico’s Minister for Energy (SENER) issued an executive agreement[2] to modify Mexico’s energy policy. The policy modifications[3] limited clean-energy production, imposed additional operational requirements for solar and wind projects, and authorized CENACE to reject new plant study requests.[4]

On February 3, 2021, Mexico’s Supreme Court ruled that the regulatory changes in the country’s electricity market were unconstitutional. According to analysts, this ruling increases the risk of a presidential bill modeled on similar lines being overturned by the courts if it gets congressional approval. Additionally, a group of bipartisan U.S. lawmakers claimed that the policies violate the U.S.–Mexico–Canada free trade agreement. As a result, neither the CENACE nor SENER directives remain in effect.[5] The recent victory of President Joe Biden may help the U.S. establish a new relationship with Mexico’s energy sector, as Biden has outlined foreign policy changes to promote clean energy investment in Mexico.

A Brief Overview of Mexico’s Energy Policies

Timeline of Events[6]

Dec. 3, 2018
The Mexican government suspends the fourth energy auction one day before bids are due, citing a change in staff and the need to review the objectives and scope of the auction.

Jan. 29, 2019
Two major transmission projects, the Baja California and Yautepec-Ixtepec transmission lines, are canceled.

Feb. 1, 2019
SENER announces the cancellation of the planned fourth energy auction.

Oct. 28, 2019
SENER publishes a decree to modify the criteria for recognition of clean energy certificates (CELs). SENER seeks to allow older clean generation assets to be certified. The changes are rejected, as CELs were designed for new renewable power to help decarbonization objectives.

Dec. 24, 2019
The CFE drafts a proposal that seeks to increase transmission costs for independent private generators.

Feb. 13, 2020
The CRE proposes rule changes to the National Commission for Regulatory Improvement (CONAMER), seeking to prevent legacy projects from making modifications to their permits.

April 29, 2020
CENACE issues a resolution to generators on May 1, suspending all pre-operative connection tests for wind and solar power plants. A few weeks later, SENER publishes a new policy imposing several barriers on renewables due to intermittency and threats to grid stability.

June 10, 2020
The CFE announces an increase in fees to high- and medium-voltage rates paid by private companies for the use of transmission and distribution lines (tarifas de porteo).

Aug. 12, 2020
The CRE rejects the publication in the Official Journal of the Federation of agreements regarding distributed-generation rules, including regulations for small generators and the addition of storage to PV projects. The CRE will prepare modifications to distributed-generation rules.

Oct. 7, 2020
The CRE approves a resolution to amend the legal framework for holders of legacy self-supply and cogeneration permits. The resolution prohibits these permit holders from modifying expansion plans and adding new off-takers not originally in the permits. COFECE has pointed out this resolution reduces incentives to invest in the sector and generates further uncertainty.

Jan. 29, 2021
Mexico’s president, Andres Manuel Lopez Obrador (AMLO), sends the Chamber of Deputies of the Congress proposed amendments to the Electricity Industry Law, namely an “Initiative with a Draft Decree by which various provisions of the Electricity Industry Law are amended and added.”[7]

Feb. 3, 2021
The Supreme Court of Justice of the Nation repeals the proposal with a majority of four votes.

Feb. 23, 2021
The lower house approves the bill, which has already been labeled as unconstitutional and going against the United States–Mexico–Canada Agreement (USMCA) by some legal experts in Mexico. AMLO must now sign it.

March 3, 2021
Mexico’s Senate passes the bill to change key parts of the Power Industry Law (LIE) in a 68–58 vote.

March 9, 2021
The “Decree by means of which several provisions of the Power Industry Law (LIE) are added and modified” is published in the Federal Official Gazette, an amendment which results from a law initiative filed by President Lopez Obrador. According to the initiative, the decree seeks to reverse the “Energy Reform” implemented from December 2013.

March 11, 2021
The Second District Court of Administrative Matters Specialized in Economic Competition grants to a plaintiff the provisional suspension of the “Decree by means of which several provisions of the Power Industry Law are added or modified.” Accordingly, the Ministry of Energy, the Energy Regulatory Commission and the Federal Electricity Commission must continue to apply the provisions of LIE, in accordance with the text in effect prior to the publication of the LIE Amendment, until such time as a decision is made on the definitive suspension.

What Does This Mean for International Investors?

According to industry groups, the new measures have impacted at least 28 solar and wind projects that were ready to go online, and 16 more under construction, with a total of $6.4 billion in investments, much of it from foreign firms.[8] International investors, such as Canada and the European Union, have formally declared that the new measures threaten their investments in Mexico. According to the U.S. Chamber of Commerce, Mexico’s new energy policies violate the U.S.-Mexico-Canada trade agreement, known as the USMCA.[9] Mexico has investment treaties with over 35 countries,[10] including the U.S., Canada, Spain, the U.K. and others. For international investors, investment treaties may provide a further legal tool to respond to the new policies, including:

• The obligation for Mexico to treat investors’ investments fairly and equitably, or in line with principles of customary international law.
• The obligation to treat investors no less favorably than the Mexican state accords its own nationals (national treatment).
• The obligation to treat investors no less favorably than a state accords to nationals of third-party states (most favored national treatment).
• The obligation to compensate, at fair market value, any expropriation of covered investments.
• The obligation to comply with any contractual obligations assumed with regard to investments in its territory.

In addition, Mexico’s ratification of the International Centre for Settlement of Investment Disputes (ICSID) Convention in 2018 may protect international investments. Foreign investors in Mexico are now able to submit investment disputes to the ICSID, an arbitral institution established under the aegis of the World Bank, and to have awards rendered by ICSID tribunals directly enforced in countries that are party to the ICSID Convention. Investment tribunals have previously found that measures by governments to suspend or revoke renewable energy contracts can rise to violations of the Fair and Equitable Treatment standard under customary international law and/or unlawful expropriations.

How Can Biden’s Climate Plan Promote Clean Energy Projects in Mexico?

As Mexico remains a vital destination for U.S. natural gas exports, President Biden has an opportunity to help redefine Mexico’s energy objectives despite the country’s recent policy changes. According to Biden’s climate proposal, his administration plans to fully integrate climate change into U.S. foreign policy and national security strategies, as well as the country’s approach to trade.[11]

First, Biden plans to create a more integrated energy grid from Mexico through Central America and Colombia supplied by increasingly clean energy. The recent completion of the Samalayuca-Sásabe pipeline and the scheduled completion of the Tula-Villa de Reyes pipeline later this year should further increase U.S. pipeline exports to Mexico.[12]

Next, Biden will attempt to make the United States’ trade partners, including India, Mexico and Canada, adjust to his policies and leadership. This strategy includes imposing carbon adjustment fees or quotas on carbon-intensive goods from countries that are failing to meet their climate and environmental obligations. The goal of these measures is to incentivize trade partners to sustain their climate commitments. These trends will have a strong impact on the Mexican sphere, as Mexico’s trade relationship with its northern neighbor as structured by the USMCA is key to Mexico recovering from an economic recession fueled by the coronavirus pandemic. “Biden will try to give tax breaks on R&D in renewables,” said Ramón Basanta, CEO of ATCO Energía. “[H]e will perhaps value a decrease in carbon emissions or sanction polluters. This will affect trade severely, [as] all transnational companies in Mexico will have to adapt to this agenda.”

Biden’s biggest influence will likely come from the U.S. interest in the geopolitical sphere. Biden plans to demand a worldwide ban on fossil fuel subsidies. “In my opinion, Biden will try to present Mexico, Canada and the U.S. as a geopolitical bloc to oppose the Russian and Chinese ones. There will be a period of competition between them, and the U.S. alone will not be able to do so,” argued Basanta, adding that Mexico might have to change its current energy policy direction as a result. Rodrigo Osorio, director of the Energy Agency of Puebla, agrees that an energy policy shift is on the table. “Mexico will surely experiment with changes in its energy policies as a collateral effect, [as] enforcing a clean energy revolution is a priority for Joe Biden. It is expected for [Mexico] to face much more pressure from the U.S. to implement a political agenda that promotes renewables, the creation of green jobs, and investment in science and technology toward the reduction of carbon emissions from the energy sector,” Osorio told Mexico Business News. Altogether, it is likely that a focus on these international regulations will lead to higher foreign private investment in Mexico’s renewable energy sector.

[1] El Centro Nacional de Control de Energía (CENACE)
[2] Agreement setting forth the Policy of Reliability, Safety, Continuity, and Quality of the National Electric System
[3] New policy in Mexico puts dagger in private participation in the electricity sector
[4] Why Mexico Is Pushing (to Slow Down) Clean Energy: QuickTake - Bloomberg
[5] Mexico blocks private renewables energy expansion - dialogochino.net
[6] Reform meets opposition: Mexico’s PV market faces decline amidst regulatory uncertainty - IHS Markit
[7] Mexico’s President Proposes Amendments to Electricity Industry Law - Energy Central
[8] Mexico cites coronavirus in slapping down renewable energy – Times Free Press
[9] US business chamber slams Mexico electrical power law - ABC News
[10] This includes 29 bilateral investment treaties, notably with Spain, Italy, Denmark, the U.K., Korea, France, Germany, the Netherlands and China, among others, in addition to significant multilateral trade and investment treaties such as the North American Free Trade Agreement (NAFTA); its successor, USMCA; and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which, to date, Australia, Canada, Japan, Mexico, New Zealand, Singapore and Vietnam have ratified.
[11] Plan for Climate Change and Environmental Justice - Joe Biden
[12] Opinion | The Energy Solution Latin America Needs - The New York Times