May 28, 2020

Analysis of Applicable Provisions to Renewable Energies in Mexico

Holland & Knight Alert
Carlos Ochoa | Luis Rubio Barnetche | Daniel Jimenez

The Mexican National Center of Energy Control (Centro Nacional de Control de Energía or CENACE) published in the Market Information System (Sistema de Información de Mercado) the "Order to guarantee the efficiency, quality, reliability, continuity and security of the National Electric System, on the occasion of the recognition of the epidemic of disease caused by the SARS-CoV2 virus (COVID-19)" ["Acuerdo para garantizar la eficiencia, calidad, confiabilidad, continuidad y seguridad del Sistema Eléctrico Nacional, con motivo del reconocimiento de la Epidemia de enfermedad por el virus SARS-CoV2 (COVID-19)"].

I. Provisions Issued by CENACE

Among the actions set forth in the technical annex of this order (the CENACE Order), we highlight the following:

  1. Authorization of "must run" power plants in certain regions of the National Electric System (Sistema Eléctrico Nacional or SEN) in order to control the regulation of voltage, minimizing the opening of transmission lines.
  2. Suspension, as from May 3, 2020, of the preoperative tests, which are necessary to operate new solar and wind plants.
  3. Application of operational actions and strategies to strengthen the sufficiency, quality and continuity of the electricity supply.

The CENACE Order was issued under the justification of implementing measures as a response to the drop in electricity consumption caused by COVID-2019. However, the document does not specify the reasons why said drop in consumption generates instability in the SEN, the relationship of the proposed measures with COVID-19, nor the criteria or parameters under which the measures were established.

In accordance with Article 108, section IV of the Law of the Electric Industry (Ley de la Industria Eléctrica or LIE), the CENACE must operate the "Wholesale Electric Market" in conditions that promote competition, efficiency and a level playing field. On the other hand, Article 4 of the same law establishes that the generation and commercialization of electrical energy are services that shall be provided in a free competition regime.

To that effect, on May 7, 2020, the Federal Commission on Economic Competition (Comisión Federal de Competencia Económica or COFECE), issued a series of recommendations to the CENACE Order. It identified that (i) the suspension (indefinite and unjustified) of the entry into operation of new solar and wind power plants would strengthen the market position of active operators, and (ii) the potential unjustified limitation of the dispatch of electricity to wind and solar power plants would reduce their ability to compete and would favor conventional power plants operated by the Federal Commission of Electricity (Comisión Federal de Electricidad) regardless of their efficiency.

Based on the foregoing, COFECE recommended a review of the appropriateness of the CENACE Order and, in this review, consideration, among others, that the measures adopted must be based on strict technical criteria directly linked to aspects of reliability, continuity and stability of the SEN, criteria that must be public and not grant undue discriminatory treatment to certain power plants, and guarantee the economic dispatch of the plants according to their costs, from lowest to highest.

Notwithstanding that the COFECE recommendations are not binding, we consider that the grounds on which they were issued can serve as a basis to challenge the CENACE Order before domestic courts.

Regarding energy matters, pursuant to Article 132 of the LIE, SENER and not CENACE, is the authority with jurisdiction to issue this type of order. In addition, the 22nd transitory article of the Decree issuing the Energy Transition Law (Ley de Transición Energética) sets forth that, within two years following the entry into force of the obligations regarding clean energy certificates, COFECE would carry out an evaluation on the competitiveness of the clean energy certificates market and would issue recommendations to improve its performance. To date, COFECE has not issued such recommendations.

II. Provisions Issued by SENER

On May 15, 2020, the Ministry of Energy (Secretaría de Energía or SENER) published in the Federal Official Gazette (Diario Oficial de la Federación or DOF) the "Order that issues the Policy on Reliability, Safety, Continuity and Quality in the National Electric System" ("Acuerdo por el que se emite la Confiabilidad, Seguridad, Continuidad y Calidad en el Sistema Eléctrico Nacional" or SENER Order), which entered into force on May 16, 2020.

The SENER Order significantly modifies the Mexican energy policy on renewable energies and abrogates the "Notice to publicize the reliability policy, established by SENER" ("Aviso por el que se da a conocer la política de confiabilidad, establecida por la SENER") published in the DOF on Feb. 28, 2017.

Among the most important changes introduced by the SENER Order are the following:

  1. SENER will have a leading participation in the definition of strategic projects for power plants, which will have preference to interconnect to national transmission networks or general distribution networks.
  2. The introduction of barriers to entry and consequent generation of uncertainty on the continuity of renewable energies. Among others, the order introduces the "opinion on interconnection viability" ("dictamen de viabilidad de interconexión"), which must be obtained by all power plants before CENACE.
  3. An obligation to include an early termination clause in all generation permits or interconnection contracts that have not yet been signed.
  4. CENACE is empowered to reject interconnection requests in which: (i) there are already congested transmission and transformation elements, or (ii) there is a lack of generation resources to compensate for the intermittency and maintain control of frequency and voltage.
  5. Introduces an express obligation applicable to the "Intermittent Clean Energy Power Plants" (i.e., solar and wind powers plants) to permanently guarantee voltage control, despite the fact that by their very nature wind and solar energies entail voltage variations derived from meteorological causes.

COFECE has not yet issued any recommendations to the SENER Order. However, the SENER Order raises similar competition concerns to those of the CENACE Order, in contravention of Articles 4 and 33 of the LIE.

In energy matters, by limiting the development of solar and wind plants in Mexico, the SENER Order violates several sections of Article 14 of the Energy Transition Law (Ley de Transición Energética).

In relation to regulatory improvement provisions, SENER failed to prepare the regulatory impact analysis of the SENER Order in terms of Article 66 of the General Law of Regulatory Improvement (Ley General de Mejora Regulatoria).

Holland & Knight attorneys have extensive experience in matters related to the renewable energies, antitrust and litigation. For more information, contact the authors or Holland & Knight's Mexico City office.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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