Building off of our previous summary, of President Andrés Manuel López Obrador's (AMLO) recent Mexican energy market reforms. 

As a reminder, the reforms were proposed as AMLO’s most recent attempt to reassert control over the Mexican energy landscape – a move highly criticized across the world.  As a result of this criticism and opposition to the proposed reform, AMLO’s proposal is on hold for now awaiting potential governmental action and public debate.

This week, public debate began in Mexico’s Chamber of Deputies (analogous to the U.S. House of Representatives), centered on the proposed changes to the Mexican constitution that could significantly reduce competition within the Mexican energy sector.  The proposed reforms would put $22 billion in clean energy investments at risk.  AMLO’s National Regeneration Movement (MORENA) is pushing the debate in what we can only gather is a hope to attempt passage of the package before the end of the current legislative session in April 2022.  To pass, the package will require a two-thirds majority vote in the Chamber of Deputies, Senate, and at least 17 local congresses. Adding to the political volatility of the situation, AMLO announced that he also plans to hold a recall vote on his term in March 2022 to solidify his power and bolster his mandate to take action on the proposed reforms. Officials in MORENA believe that winning that referendum will lend legitimacy to efforts aimed at securing constitutional change.    

What seems clear is that the ALMO’s primary focus remains on fossil fuel generation as the backbone of Mexican economic development at the expense of renewable energy.  This reality could set in motion one of the largest international hurdles faced by renewable energy developers and large energy buyers in 2022. 

Reform Consequences & Pushback     

The delay was driven in-part by concerns raised by many stakeholders that ALMO’s proposed reforms are likely to violate international agreements, harm domestic economic development, reduce investor confidence, and could lead to dirtier and more expensive electricity. A recent NREL draft study predicted that the reforms would increase carbon emissions between 26 and 65 percent, raise electricity generation costs between 31.2 percent to 52.5 percent, and also increase the probability of power outages by 8 percent to 35 percent. The results of the NREL study in all three scenarios offer reason for caution. 

In November, together with Cecilia Patrón, the Secretary General of the Partido Acción Nacional (PAN), the opposition party, stood firm against the reforms, stating that  PAN is “opposed to the electricity reforms as they are currently drafted and Mexican families know that, because it would cause a price spike for electricity bills by increasing state control.”  In the private sector, Pablo Zárate of FTI Consulting  said that, “the reform – which AMLO needs opposition lawmakers to approve – also puts supply chains at risk, as companies may not be able to decarbonize their operations in Mexico to meet international commitments.” In response to a question on the politics at play, Zárate said “There are [political] actors seeking to negotiate, changing a comma or something in the margins, but this is distracting from the main considerations and implications of the reform.”   

In the U.S., lawmakers in both parties have urged the Biden Administration to oppose the proposed reforms. Earlier this month, Senator Robert Menendez, Chair of the Senate Foreign Relations Committee, and three other Democratic Senators authored a letter urging Secretary of State Blinken and Secretary of Energy Granholm to oppose the reforms. The Senators not only objected to the climate implications, but argued portions of the proposal would contradict portions of the United States-Mexico-Canada Agreement (USMCA) designed to reduce national security concerns around critical mineral scarcity as well as threaten “$44 billion in private investment.” In the fall, a bipartisan group of Texas Senators and Representatives sent a letter decrying  “recent actions taken by the Mexican administration to favor state owned enterprises (SOEs) and push out American investment,” highlighting that the proposed reforms for violating the USMCA and called on the White House and U.S. Ambassador to Mexico Ken Salazar to take action.     

Outside of the United States, the Canadian Ambassador to Mexico, Graeme C. Clark  wrote a letter  to the head of Mexico’s Ministry of Energy (SENER) stating that the policy “puts at risk the operation and continuity of Canadian companies’ renewable energy projects in Mexico.”  

Corporate Impact  

These proposed energy reforms have unnerved foreign investors and large corporates operating in Mexico. Sarah Birke, The Economist’s Bureau Chief for Mexico, believes that the reforms will not only lead to “dirtier and more expensive power,” but that it would “damage investor confidence beyond the energy sector.” This is in part due to the damage this would do to many multinational businesses’ ESG goals. One such business is  General Motors, whose Mexico Chief  announced  the  American automaker would halt all investments in Mexico unless there were laws that promote renewable energy, threatening to claw back their announced investments of over $1 billion in electric vehicle production in Mexico beginning in 2023.  At the same time,  Fitch Ratings recently announced, “the energy initiative proposed by Mexico’s President López Obrador to amend the constitution would result in negative rating actions to private power projects were it to become law.”  It is clear the proposed energy reforms have unnerved foreign investors and large corporates operating in Mexico, and could alter business’ ability to procure clean and competitively priced electricity.  

As detailed more thoroughly in Sol’s previous article on the Mexican energy market, there is tremendous opportunity for growth in the Mexican renewable energy . While at this point, new utility-scale solar and wind projects are at a standstill, the distributed generation market continues to grow given robust customer demand and a strong domestic demand for solar.   

Next Steps  

As public debate on the reforms begins, key issues to follow include: 

1. The market structure created by the 2013 Energy Reform 

2. The State’s role in the power sector 

3. The goals of the 2013 reform and the results 

4. The constitutionality of the 2021 reform 

5. The environment and energy transition.  

With the debate in full swing, U.S. Secretary of Energy, Jennifer Granholm is in Mexico meeting with her counterpart, Mexican Energy Minister Rocio Nahle on potential solutions. AMLO has publicly stated that he will meet with Secretary Granholm and, “will provide information on why we need the proposed electric power reform.” Secretary Granholm issued a statement ahead of the talks saying she sees a “great opportunity” to work “towards decarbonization as a North American block.”.   

As of today, it appears robust stakeholder pushback has succeeded in preventing the quick passage of ALMO’s energy reforms. However, we will be closely monitoring developments to ensure any reforms promote, rather than hinder, decarbonization and the buildout of renewable energy.