Get 40% Off
👀 👁 🧿 All eyes on Biogen, up +4,56% after posting earnings. Our AI picked it in March 2024.
Which stocks will surge next?
Unlock AI-picked Stocks

Explainer: Mexico's electricity spat pits investors against more state control

Published 03/06/2020, 13:07
Updated 03/06/2020, 13:10
© Reuters. FILE PHOTO: Mexico's President Obrador holds a news conference in Mexico City

By Adriana Barrera and David Alire Garcia

MEXICO CITY (Reuters) - The Mexican government's fight with private power firms over access to the grid owned by state-run Comision Federal de Electricidad, or CFE, threatens further legal conflict over new plants as well as the country's transition to a greener future.

The spat directly affects more than $6 billion (£4.77 billion) in partially or already built wind and solar power plants and the grid's technical stability. President Andres Manuel Lopez Obrador's push for a stronger state role in the energy sector also could strike another blow to his already shaky reputation with foreign investors.

Canada and the European Union have weighed into the fight in support of their investors, which include Spain's Iberdrola (MC:IBE) and France's Engie (PA:ENGIE), that have invested in the Mexican power sector.

LEGAL BATTLES

CENACE, the grid operator, triggered the battle in late April by abruptly moving to prioritize system reliability over cost even though it had been designed several years ago to favor lowest-cost power regardless of supplier.

The same order put a freeze on 44 renewable power plants that were in the process of coming online.

It cited the coronavirus pandemic as a justification given falling demand and the need to ensure uninterrupted supply that it argued was being compromised by intermittent wind and solar plants.

The order had the effect of favoring CFE plants that burn fossil fuels, especially natural gas but also highly polluting fuel oil, which state-run oil company Pemex produces at its aging refineries. Critics allege the government's true agenda is helping Pemex ease its glut of oil which can no longer be used by the shipping industry due to international regulations enacted earlier this year.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Several firms and environmental groups have filed legal challenges to CENACE's order, which judges have temporarily suspended as the legal process continues.

In a subsequent development, Mexico's Energy Ministry last month issued a decree to give the state more say over who can generate electricity and how much, again citing the pandemic as a rationale.

MORE GOVERNMENT CONTROL

Lopez Obrador, a leftist energy nationalist who has pledged to avoid rate hikes, has said his predecessor's 2013/2014 energy reform was designed to cripple both Pemex and the CFE. That reform widened an already open power generation market, while reserving transmission and distribution for the CFE.

Manuel Bartlett, the CFE's chief and Lopez Obrador's ideological ally, told Reuters last month that previous policies were subsidizing renewable power producers by forcing the CFE to absorb costs associated with transmission and maintaining grid stability.

He also blasted what he described as the previous administration's decision to allow companies to build power plants without adequate planning and called on private firms to pay more for transmission and the CFE's baseload power costs.

Since then, another energy regulator issued a resolution in line with Bartlett's call, setting higher transmission rates for private producers. The new rates have not yet been published.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.