A proposed regulatory overhaul of Mexico’s energy sector would cause havoc for private power generators as all of their supply contracts with non-state offtakers would be cancelled, according to analysts at Fitch Ratings Inc.

Mexico power mix

Through a bill sent to the lower house on Sept. 30, President Andrés Manuel López Obrador is seeking to restore the primacy of state-owned utility Comisión Federal de Electricidad (CFE) in the power market. The bill, if passed, would modify the constitution and upend the current merit-based dispatch rules, prioritizing plants owned by CFE.

The proposal would “bring Mexico’s entire power supply chain — generation, transmission, distribution and supply — under CFE control, ending the autonomy of the country’s independent system operator,” said...