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Policy Review

Mexico's New Electricity Law: Reforms introduced to create competitive market [free access]

October 1, 2014

In August 2014, the Mexican government passed secondary energy reform laws, marking the conclusion of the legislative process aimed at reforming the country’s energy sector. The process for overhauling Mexico’s energy sector was initiated in December 2013 when the Mexican Senate approved a landmark Energy Bill, thereby opening up the energy sector to private players. The defining of the secondary laws was imperative in order to initiate the reform process.

 

The Ley De La Industria Eléctrica or the Electricity Industry Law, which comes into force as part of the enactment of the secondary legislations, is expected to have significant implications on the structure and functioning of Mexico’s power market. The new electricity law has implications for all segments of the power sector—regulation, generation, transmission and distribution, and trading.

 

Under the new law, generation, purchase and sale of electricity have been opened to free competition, allowing for private investment. The law puts into place provisions for the creation of a wholesale power market, with generators, power market companies and large scale consumers being allowed to participate. The state-owned Comisión Federal de Electricidad (CFE) or the Federal Electricity Commission, which has been a dominant player in the market so far, will be just one of the competitors in the new generation market. As per the new law, generation companies are allowed to participate in power marketing activities, however, only through their affiliates. Further, generation companies producing renewable energy will be eligible for clean energy certificates.

 

While the development of the transmission and distribution network will remain under state control, that is, with CFE, the private sector will be able to participate in the financing, construction, operation and maintenance of such facilities. The move aims to engage the private sector in order to share its expertise and technology to help expand and improve Mexico's transmission and distribution networks. Also, the law grants special priority to the use of land/underground surface for undertaking electricity transmission and distribution activities over any other activities, including hydrocarbon related activities.

 

In order to take part in all segments of the electricity market, CFE will be restructured to operate through separate affiliate companies. As per the new law, new CFE entities will have to compete on an equal footing with private players in the generation and marketing segment. While transmission and distribution will remain an exclusive right of CFE affiliates, these entities will not be allowed to participate in the sale and purchase of electricity.

 

The law divides power suppliers into three categories—basic service suppliers, qualified service suppliers and last resource suppliers. Mexico’s energy regulator Comisión Reguladora de Energía (CRE) regulates the tariffs of basic suppliers, with their key customers being residential consumers and small businesses. Qualified suppliers are those who provide electricity pursuant to freely negotiated power purchase agreements (PPAs) with large end users. The last resource suppliers provide electricity to qualified customers (registered with CRE and with demand exceeding threshold limit, which is presently set to 3 MW) in emergency cases under maximum rates. Power market suppliers are required by law to acquire clean energy certificates.

 

Presently, the Secretaría de Energía (SENER) or the Department of Energy undertakes policy functions such as issuing the country’s energy policy, developing the grid infrastructure plan, etc. With renewable energy becoming a national priority, SENER will also be responsible for setting renewable portfolio standards. CRE, in addition to issuing regulations and guidelines relating to the functioning of the power market, will now be responsible for granting permits (for setting up 0.5 MW and above generation facilities, owning and operating private interconnection lines from generation facilities to the grid, and for supplying power), setting grid tariffs, issuing clean energy certificates, etc.

 

Under the new law, the Centro Nacional de Control de la Energía (CENACE) or the National Centre of Energy Control, which presently functions as a division of the state-owned CFE, will be decentralised. CENACE will function as an independent network operator and will be responsible for the control of the National Electricity System (SEN), operation of the wholesale market, providing non-discriminatory open access to the country’s transmission and distribution network. Another key responsibility of CENACE will be to plan and propose grid expansion projects, which was earlier being done by CFE. A key step towards awarding greater autonomy to CENACE was the recent formal appointment of its board members. Once CENACE has been completely decentralised, it will support CFE for a period of 12 months to ensure continued and efficient operations of the latter’s networks.

 

Conclusion

This reform process initiated by the Mexican government aims to increase competition in the power generation sector as well as offer consumers options of securing their power needs at more competitive prices. The increased private sector involvement in the grid business will improve transmission and distribution supply services. The operation of the wholesale electricity market through an independent agency is expected to further driver competition in the sector.

 

The past few months have witnessed key regulations being passed to transform the country’s power sector into a more competitive, transparent and open model. However, the desired impact of these regulations is only expected to be witnessed in the longer run. That said, Mexico has taken a step in the right direction with the new legislation.