The decree over the weekend has sparked outrage among Mexican and foreign investors who had been allowed to sell their power into the government-operated grid. Industry associations said it will affect 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.
It is not the first such tussle for President Andrés Manuel López Obrador, a champion of the state-owned oil industry who dislikes renewables and private-sector energy projects. Since taking office in December 2018, he has canceled planned bidding on private oil exploration and forced private firms to renegotiate gas pipeline contracts.
The new rules published late Friday appear to accomplish several of his goals: to guarantee income for the government’s electrical power provider; boost consumption of government stockpiles of fuel oil; lessen the role of private power generators; and avoid breakdowns in the ageing, inadequate power-transmission system.
What was striking was that his administration cited the coronavirus pandemic — and the economic shutdowns that accompanied it — to justify the measure.
The government defended the new rules, saying they “will allow the National Electrical System to ensure reliability in the face of a decrease in demand for electrical power due to the pandemic, and due to the fact that renewable energy projects are intermittent and produce oscillation in the electrical system and cause interruptions. Power feeds from these sources will have to be postponed during the pandemic.”
There were reports that several of the companies involved in the sector — many of which are Spanish, Canadian or American — were planning appeals to their embassies, the courts or arbitration panels. However, none of the companies could immediately be contacted to confirm that.
Mexico's pricey electrical rates had long hampered industry, but big firms thought they had found the magic solution in the early 2000s: They could sustainably source electricity from their own renewable projects, or those of specialized firms, and get both cheaper and greener power.
But Mexico has been slow to build the kind of transmission infrastructure that could move power from the coastal or desert areas where wind and solar projects are, to the industrial cities where it is needed. Mexico also has been slow to build supplementary plants for the times when wind or sun power naturally decreases.
But the situation really hit crisis levels when the pandemic caused a huge drop in electricity demand as factories closed. The state-owned Federal Electricity Commission — which operates mainly natural-gas and fuel-oil fired plants — simultaneously saw its income drop, while fossil fuel stockpiles grew amid falling world demand and overproduction.
There was literally nowhere for the fuel oil to go if the state-run plants didn't burn it, and no money to subsidize the unused power plants. Meanwhile, transmission-system issues threatened to become worse as new projects came on line.
“They were clumsy in the way they did this, but there really wasn't much of a way out,” said Eduardo Prud'homme, a partner in the energy consulting and analysis firm Gadex. “There is certainly an ideological element to this and a clear lack of vision, but the operating problems are real.”
While López Obrador's administration hotly denied the move would damage foreign investors' confidence in Mexico, it does deal a major blow to the promise of a competitive, well-regulated, transparent energy market.
Instead, it appears to put the Federal Electricity Commission — headed by Manuel Bartlett, an old-time politician whose career has been marked by scandal — in the position of the fox in charge of the hen house. The Mexican Federation of Industrial Chambers accused the government of ramming through Friday's decree.
“This last measure clearly marks a violation of the rule of law by giving extra-legal powers to the federal electricity commission," the federation wrote in a statement.
And it will renew scrutiny of López Obrador's lack of green credentials, despite an ambitious program to plant fruit and timber trees. He has insisted on building a major refinery project at a time when oil prices collapsed, and has focused on shoring up Mexico's debt-laden state oil company as a centerpiece of economic policy.