The energy reform proposal of President Andrés Manuel López Obrador has opened the biggest schism with the private sector so far this six-year term. Cancellation of current contracts, elimination of autonomous regulators and uncertainty about the operating conditions of private power plants: there is no paragraph of the text that does not worry. With this constitutional initiative, a blow to the liberalization of the sector, the Government has crossed the “red line”, say employers and businessmen consulted. Now they are bracing for intense lobbying in Congress, as they explore options before international arbitration tribunals to claim multi-million dollar awards if approved.
Of the 39 pages sent to Congress last week, the second transitory article is the one that causes the most alarm: “The electricity generation permits granted and the electricity purchase contracts with the private sector are canceled.” Despite the principle of non-retroactivity in the Constitution and López Obrador’s old promise to respect what has already been signed, the Government now wants to make a clean slate: cancel current contracts and limit the energy produced by individuals to 46% of the total. “They went to the extreme of our fears,” says Julio Valle, spokesman for the wind and solar associations.
At stake is the future of a sector that has attracted some 44,000 million dollars in private investment, 19,000 in renewables, since it began to open in the 1990s. The 2013 reform, promoted by Enrique Peña Nieto and which López Obrador wants to dismantle, created an energy market and established auctions for the Federal Electricity Commission (CFE) to buy cheap energy from private parties – in 2017 the Italian company Enel offered the lowest prices for generation of the world back then. Mexico thus became the spoiled child of large multinationals. According to the government, private power plants now generate 62% of the energy consumed, a growth that the reform wants to put a cap on.
For businessman Luis Flotte, the proposal is costing him dearly, even without being approved. He created his solar panel installation company in the heat of the 2013 reform and has already built seven photovoltaic plants. Suddenly, the picture has blackened. In the last hours, he has lost two contracts worth about three million pesos, about $ 140,000. Clients have called him to postpone the installation of panels “because a lot of uncertainty is being generated.” The Secretary of Energy, Rocío Nahle, assured that the counter-reform does not eliminate distributed generation, small-scale electricity production, but Flotte is not trusting. “It is important that the scope of the wording is clarified. Being so open, it encompasses everything, “he says.
He is not the only one confused. Executives from two large companies in the sector wonder what will happen the day after the reform is approved. The text proposes to cancel all the contracts of the private centrals – either with the CFE or with a company – without detailing what is coming. It limits itself to saying that the parastatal will buy energy from the private companies based on production costs and that “it will establish the contract modalities”, predictably in secondary laws that will come after the reform. By eliminating the Energy Regulatory Commission and integrating the National Energy Control Center into the CFE, the decision on purchase rates is no longer in the hands of an autonomous regulator.
“There is a ball of question marks. Are the permits canceled the day after approval? Are we not going to be able to generate? ”, Says the director of regulatory affairs of a large company. Another senior executive affirms that the Government “has not stopped to think about how to apply it.” “It’s quite panicky. As it would be the sole buyer, CFE may want us to sell to it at a loss. And if we did not want to sell energy to it, the plant would not operate. We would have to hibernate it and wait for a new government or sell it, “he explains to this newspaper on condition of anonymity.
The threat of bankruptcy
With the cancellation of contracts and future operating conditions in the air, the new regulation threatens to leave private plants on the brink of bankruptcy. About 90% of the income generated by a private renewable power plant goes to pay the debt, according to Julio Valle. “If you stop paying financing for a month, you hand over the keys to the plant to the bank. All renewable projects would enter a high risk of default“, it states.
And, like a nervous system, the fear of reform in the energy sector has carried over to the rest of the economy. Among the contracts that the proposal proposes to cancel are self-supply companies between private plants and companies that represent around 14% of GDP, according to calculations by the Confederation of Industrial Chambers (Concamin). Grupo Bimbo, Femsa, BMW, Liverpool, among others, buy their electricity from private plants, which offer cheaper prices than those of the CFE. The initiative would force companies to source from the parastatal.
The businessman Régulo Salinas, representative of Concamin, predicts a loss of competitiveness. “CFE fees have always been very expensive. If industries wanted to compete in the market, they required cheaper energy prices. With the reform, they would have to buy CFE under their conditions ”. The average generation cost of the parastatal in 2020 was 1,413 pesos per megawatt / hour, compared to slightly less than 700 pesos from the private sector and 401 from private renewable plants, according to CRE data cited by Concamin.
The private sector is not going to sit still. “They don’t let us go. Now it’s all or nothing ”, says one of the executives consulted. As it is a constitutional reform, there are doubts about the usefulness of domestic legal resources. If approved, international arbitration panels emerge as the only way to obtain compensation for canceled contracts that can reach $ 60 billion, according to Concamin. Mexico has about 40 investment protection treaties, says expert arbitration lawyer Adrián Magallanes. “The spectrum of foreign investors that can be protected is quite wide,” he says. “But the attitude for now has been to inform yourself and wait. Until damage is suffered, I doubt that the proceedings will begin ”.
In the immediate, there is a battle in Congress. Morena, the president’s party, seeks to vote on the reform in the Chamber of Deputies before December 15. The employers have already begun to request meetings with legislators allied with Morena and with the opposition. The eyes are mainly on the two parties whose votes will define the success or failure of the initiative. “In the case of the PRI and the Green, the idea is to go into more detail with the deputies to show them all the implications,” says Régulo Salinas, although he prefers not to reveal the names of the politicians. Discretion is imposed now that President López Obrador has asked legislators to decide “if they are in favor of the people or of companies.”
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