Mexico’s lower congressional house in the wee hours of Wednesday morning approved a controversial bill that would upend the rules governing the electric power sector, giving generation assets owned by state-owned Comisión Federal de Electricidad (CFE) priority in the dispatch order over private sector generators.


The chamber approved the bill to modify Mexico’s bedrock electricity law, the Ley de Industria Eléctrica, by a margin of 289 to 152, with one legislator abstaining.

The proposed law would give priority in the dispatch order first to CFE’s hydroelectric plants, then to its fuel-oil, nuclear, geothermal and combined-cycle natural gas-fired plants, regardless of cost, according to a primer on the bill published by EY Mexico analysts. Private sector generators would be relegated to the end of the dispatch order. 

The bill would also allow CFE plants that entered operation before Mexico’s 2013 market-opening energy reform to obtain clean energy certificates; eliminate the obligation of CFE to purchase electricity via auctions; allow the Comisión Reguladora de Energía (CRE) to revoke permits for electricity self-supply; and allow the modification and/or early termination of energy offtake agreements between CFE and independent power producers (IPPs).

The initiative, part of President Andrés Manuel López Obrador’s agenda to strengthen CFE and national oil company Petróleos Mexicanos (Pemex), has caused concern among diverse stakeholders in the North American energy market.

In a joint statement on Wednesday, the Global Wind Energy Council and Global Solar Council said the legislation “poses an unequivocal threat to all local and foreign private sector investment into Mexico’s formerly robust renewable energy market.”

They added, “Giving priority dispatch to state-owned utility CFE’s plants – fossil fuels and large-hydro plants that generate power with far higher costs and carbon emissions – undermines the principle of fair competition and puts Mexico’s climate commitments and investment environment at risk.” 

Another group sounding the alarm has been Mexican business chamber Consejo Coordinador Empresarial (CCE), whose president Carlos Salazar Lomelín on Wednesday implored Mexico’s senate — where López Obrador’s Morena coalition also holds a majority — to reject the legislation.

“CFE is a profitable company,” Salazar told reporters during a virtual press conference. However, he said, it is profitable only in the segments of transmission and distribution, where it holds a monopoly role, and in the supply of electricity to end-users, where it controls 73% of the market, with the remainder coming from cogeneration, self-supply and qualified electricity marketers. 

With the proposed legislation, CFE is attempting to change the rules in the one segment of electricity — generation — where it is not profitable, Salazar said.

CFE loses money in generation for “an obvious reason,” Salazar said, which is that it produces power with older and less efficient technology than that of private sector generators against whom it competes.

Citing figures from CRE, Salazar said that during 2020, the total cost of producing electricity from CFE’s plants was 26% higher on average than that of private sector generators operating under the IPP scheme, and 252% higher than the costs obtained through long-term auctions.

López Obrador has suspended the auctions, which were made possible by Mexico’s 2013-2014 market-opening energy reform.

Rather than seeking to change the rules for generators, CFE should be directing sorely needed investment to its profit-making segments, i.e. transmission and distribution, Salazar said. 

He also highlighted that Mexico’s supreme court recently struck down a previous attempt by energy ministry Sener to unilaterally enact similar changes in the power market. CRE has also sought to impose numerous rule changes tilting the playing field in favor of CFE and Pemex, all of which have been nullified by the courts, Salazar said. 

If CFE is favored in the dispatch order, industrial and commercial consumers will see their electricity costs skyrocket, further weakening Mexico’s already struggling economy, Salazar said.

Although natural gas is the leading fuel source in CFE’s current and planned fleet of power plants, the rule change favoring CFE should not be viewed as bullish for gas demand, according to Mexico City-based energy consultant David Rosales. 

In a recent podcast interview with NGI, Rosales said the proposed change would “destroy incentives” for new private sector projects in the power generation and industrial segments which rely on an efficient, merit-based electricity sector to compete.

The U.S. Chamber of Commerce also has expressed opposition to the legislation.

The group’s senior vice president for the Americas, Neil Herrington, on Feb. 5 called the bill “deeply troubling,” adding, “Such drastic changes would open the door for the reinstatement of a monopoly in the electricity sector and, we believe, would directly contravene Mexico’s commitments under the U.S.-Mexico-Canada Agreement (USMCA).”

Mexico’s federal antitrust commission Cofece said this month that the bill, “if approved on its current terms, would severely injure the competition conditions in the generation and commercialization of electric energy.” The group said the legislation “unjustifiably restricts open access to transmission and distribution grids,” allows CFE “to acquire electricity through non-competitive methods,” and “grants CFE with broad discretion to decide on the granting (or denial) of permits to operate as generator or supplier.”   

Local think tank Instituto Mexicano para la Competitividad (IMCO), meanwhile, said, “the spirit and letter of the initiative is to eliminate” Mexico’s wholesale power market “with a series of regulatory changes to benefit” CFE.

If approved, the bill “would not only go against [the constitution], but would set a dangerous precedent for investments in the country and the Mexican economy by attacking legal certainty and the rule of law,” researchers added.