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Mexico moves to kill power market reforms

WildEarth Guardians/Flick

Boom expected for off-grid projects

- Allows state-owned CFE to avoid buy tenders
-
Company's financial woes likely not solved by measures

By Sheky Espejo/Platts

MEXICO CITY
Petroleumworld 11 20 2020

Mexico is moving closer to effectively canceling its power market reforms by limiting competition and enabling the state-owned utility CFE, according to observers.

Mexico's Energy Regulatory Commission, or CRE, has voted to remove regulations that forced CFE to buy power through public tenders, mandated by laws created after a 2013 reform of the sector that allowed for private investment.

The CRE has also extended the useful life of old, dirty CFE plants that were supposed to come offline soon, and allowed the utility to build new plants and fit them under the legal regime in place before the reform.

The changes have been approved over the last few months, and are part of a series of actions taken by the regulator and the country's Energy Secretariat in a bid to strengthen the state utility.

The latest move effectively eliminates the possibility of future tenders as it kills the incentive for big producers to be in Mexico, Rosanety Barrios, a former Sener official who helped with the drafting and implementation of the reforms, told S&P Global Platts.

"First they canceled the tenders already announced, then they canceled the issuing of all new permits for energy generation, then they blocked the access to gas to those who already have a permit, and now this. They are closing the loop eliminating direct competition in power generation," Barrios said.

Strengthening CFE and the state oil company Pemex has been a priority for the administration of President Andres Manuel Lopez Obrador, who has claimed that previous administrations weakened them intentionally to justify reforms.

Although the modifications approved by CRE are not final, they are technical opinions that could validate future rulings by the Secretariat, said Paul Sanchez, a Mexico-based independent consultant. "They are effectively killing the reform," he said.

The projects from the tenders organized by the previous administration generated roughly 1.5 million of the 23.4 million MW/hour acquired by CFE through September, with the lowest costs for the utility, according to Mexico-based think tank PMCE.

Not a silver bullet

The resolutions made by CRE could aid the utility keep competitors at bay, but it will likely not solve its financial woes, sources said.

Even if the measures approved by CRE are followed through by future Sener rulings that limit the participation of private participants in generation, this only applies to the power that CFE buys to sell to residential customers, and not to industrial users where the profits are made, said Daniel Sanchez, a partner specialized in Mexico's energy sector at law firm Baker McKenzie.

"Industrial users will continue to use the tools at their disposal to generate their own electricity or buy it from someone that offers a better price than CFE," Sanchez said, adding that this demand from industrial and commercial users will create a "boom" for off-grid or inside-the-fence projects in Mexico.

CFE has reported financial losses of more than $3.3 billion in the first three quarters of 2020, according to official filings to the Mexican Stock Exchange.

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