New Policy on Reliability of the National Electrical System (NES) in Mexico

Foley & Lardner LLP

Foley & Lardner LLPOn May 15th, 2020, the Ministry of Energy (“SENER”) published in the Official Gazette (Diario Oficial de la Federación) its Policy on Reliability, Safety, Continuity and Quality of the National Electric System (the “Policy”).

The Policy is aimed at providing general guidelines that will allow SENER, the Energy Regulatory Commission (Comisión Reguladora de Energía, known as the “CRE”), and the National Center for the Control of Energy (Centro Nacional de Control de Energía, known as “CENACE”) - the independent system operator - to ensure that the electric supply is in compliance with the Reliability principle of the Electric Industry Law (Ley de la Industria Eléctrica, “LIE”). 

The Policy shall be mandatory for the planning and operation of the NES. Therefore, all participants in the power market will be bound by the Policy, including the Federal Electricity Commission (Comisión Federal de Electricidad, “CFE”), the authorities and the private sector (generators, suppliers, traders and users).

The publication of the Policy violates the due process and public consultation rules under Mexican law. The Policy was enacted by ignoring the mandatory regulatory consultation procedure that was supposed to be handled by the National Commission of Regulatory Improvement (Comisión Nacional de Mejora Regulatoria). The applicable laws provide that a regulatory impact assessment and a public consultation process shall be conducted whenever an administrative regulation could affect participants in an industry. 

As a result of this Policy, new regulations addressing dispatch rules, interconnection procedures, reliability analysis, and general operating provisions of the power market shall be prepared or modified by the CRE and CENACE in order to be consistent with the Policy. 

The Policy provides or establishes the following under these main topics:

I.  Operation of the NES

(a)  One of the main issues with the Policy is the modification of the current dispatch criteria to give priority to the “security of dispatch” over the economic efficiency criteria provided under the LIE and its regulations. Therefore, CENACE will have the authority to curtail the output of solar or wind power facilities. This new criteria is against Article 101 of the LIE, which provides that the dispatch of power stations will be based on the concepts of security of dispatch and economic efficiency. The LIE does not differentiate nor define a specific preference on the dispatch criteria. 

(b)  New ancillary services are established in order to ensure the reliability, quality, continuity, and safety of the NES as a result of the variability issues caused by the renewable energy sources. The rates for the new ancillary services will be defined by the CRE. The Policy considers that the costs for these new ancillary services should be borne by renewable energy generators, even when these costs benefit (and thus arguably should be distributed among) all market participants.

(c)  According to the Policy, solar and wind power stations will not be able to participate in the capacity market, even though these facilities would be available to generate power within the 100 critical hours of maximum demand on the NES. This will cause potential defaults under power purchase agreements executed between market participants, including those made at auctions. 

(d)  Solar and wind power facilities will be required to include voltage control equipment and systems to ensure reliability to the NES.

(e)  The Policy brings the CFE back to have a more proactive participation in the planning and operation of the NES and the interconnection procedure. Please recall that the Energy Reform fragmented the Mexican utility company into different entities, focused on generation, operation of the power grid, and the provision of basic electricity services. More importantly, as a result of the Energy Reform, the CENACE was removed from the CFE and has become a decentralized entity of the Mexican government, completely independent of the CFE, becoming Mexico’s independent system operator. Now, CFE will have a more proactive participation in the planning and operation of the NES, which is not consistent with the provisions of the LIE.

II.  Generation Permits

(a)  The Policy provides new roadblocks for generation permits. Now, an interconnection feasibility study from the CENACE will be required by the CRE in order to grant a generation permit. Therefore, in addition to the three main studies (i.e., indicative, impact and facilities) prepared by CENACE, the petitioners will now be required to have another study from CENACE to obtain the generation permit.

(b)  Generation permits and interconnection agreements shall include an early termination/rescission clause in case the developer does not commence/conclude work or if the project does not reach COD under the terms provided in the permit or the interconnection agreement, whose deadlines can only be extended once and for a period equal to one-half of the original term pursuant to the Federal Law of Administrative Procedure (Ley Federal de Procedimiento Administrativo).

(c)  If the CRE authorizes the assignment, lien, or transfer of the rights and obligations under a Generation Permit, the applicable terms provided in the permit for the commencement and conclusion of work and for COD cannot be modified.

III.  Interconnection

(a)  According to the Policy, all interconnection requests are suspended. SENER is to confirm the date on which interested parties may file new interconnection requests or continue with the ones already submitted. 

(b)  The feasibility study that CENACE will undertake for interconnection purposes will consider the following matters: (i) geographic dispersion of the renewable energy sources by node, region and system; (ii) the distance between the renewable energy sources per power substation, area, region and system; (iii) that no congestion exists at the interconnection point; (iv) the level of demand in the area, region and system; (v) the primary regulation capacity and voltage regulation per area, region and system; (vi) technical limitations; (vii) and the margin reserve, among others. CENACE may deny the interconnection request due to reliability issues. 

(c)  SENER is inaccurately interpreting the “nondiscrimination” and “open access” rules for the interconnection to the power grid rules provided under the Electric Industry Law. SENER now gives priority to the reliability of the grid over these basic principles of a competitive market. Therefore, if the interconnection request does not comply with the reliability principles under the Policy, the interconnection request will be rejected.

(d)  The expansion and modernization programs for the National Transmission and Distribution Grids will provide limits by zone, region and system to incorporate renewable energy power stations and distributed generation.

(e)  SENER has the authority now to define “strategic” power generation projects that are required to comply with the National Energy Policy. These strategic projects will have priority for interconnection into the power grid over any other project regardless of their queue in the interconnection procedure before CENACE.

IV.  Self-Supply and Distributed Generation (DG)

(a)  The National Electric System Development Program (known as PRODESEN) will define limits per area, region and system for the incorporation of DG with renewable energy sources.

(b)  The self-supply (abasto aislado) projects that will be interconnected to the power grid shall undertake interconnection studies in order to define the specific characteristics of the infrastructure required for the interconnection and the reinforcement work.

(c)  Self-supply to be interconnected to the power grid shall be required to pay the costs for the new ancillary services.

(d)  The interconnection of DG with variable sources must consider the installation of intelligent inverters with the capacity to regulate frequency and voltage, as well as the necessary equipment to monitor, communicate  and be controlled by CENACE.

V.  General Comments

(a)  The enactment of the Policy violated the due process of law. Moreover, the Policy is introducing/modifying concepts that were regulated under the LIE and its implementing regulations. Therefore, SENER has no authority to undertake such modifications, which should have been done by the competent authority through a legislative procedure. 

(b)  The Policy is not consistent with the antitrust concepts that a competitive power market should have and are regulated under the LIE.

(c)  Allowing CENACE to curtail solar and wind power generation based on reliability issues will prevent Mexico from complying with its obligations under the Climate Change Law, the Energy Transition Law and the Paris Accord. With this Policy, Mexico will be the first G20 country that will, in fact, breach the Paris Accord.

VI.  Legal Actions Against the Policy

(a)  As discussed above, considering that the publication of the Policy violates the due process of law and the public consultation rules provided under Mexican Laws, the interested industry participants may challenge the Policy before Mexican courts through a constitutional procedure (Amparo) and seek for an injunction. Federal courts may suspend the implementation of the Policy.

(b)  International investors may also seek for international arbitration under the bilateral or multilateral investment treaties Mexico has executed. For US investors, NAFTA or the USMCA (which investment protection is more restrictive than the ones provided under the NAFTA) will be an option to protect their investments in Mexico. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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