Foreign Investment Protection Mechanisms in Mexico for Renewable Energy Investments

The Ministry of Energy (Secretaría de Energía or SENER) on May 15, 2020, issued the Order for the Reliability, Safety, Continuity and Quality Policy in the National Electric System (the Order).

The Order considerably modifies Mexico's energy policy in several ways. Particularly, and for the purposes of this alert, the Order establishes a new criterion of "reliability" for the supply of electric energy. Its purpose allegedly is to ensure consistency and control in the frequency and voltage of power plants.¹

Among the arguments expressed in the Order, it is emphasized that the intermittent clean energy power plants (centrales eléctricas de energía limpia intermitente), particularly wind and solar energy plants, depend to a great extent on the weather, thus compromising the stability of Mexico's National Electric System and adversely affecting the final consumer as a consequence.

Therefore, with the aim of reducing the alleged uncertainty generated by the intermittencies of clean energies,² the Order creates multiple entry and continuity barriers for power plants. Likewise, it grants the National Center for Energy Control (Centro Nacional de Control de Energía or CENACE) extensive control over decisions on the viability of the power plants.

Modifications to the Renewable Energy Power Plants Policy

Below are some of the most substantial changes affecting renewable energy providers:

1. SENER will have an important say over electricity projects, in particular with regard to the selection of projects that will be granted priority over others.
2. Multiple barriers for the entry of new and continuity of intermittent clean energy projects are created. One of these is a new "interconnection viability opinion" that the power plants must obtain, which will be issued by CENACE.
3. There is an obligation to include an early termination clause in all generation permits or interconnection contracts that have not yet been signed. In other words, all intermittent clean energy projects that are carrying out impact or installations studies, etc., and for which the execution of an interconnection contract is requested, must provide for the possibility of early termination.³
4. CENACE now has the authority to reject requests for interconnection studies where: 1) there are already congested transmission and transformation elements, or 2) there is a lack of generation resources to compensate for the intermittency and to maintain frequency and voltage control.
5. There is an express obligation for the power plants to guarantee permanent voltage control, regardless of the fact that, by their very nature, wind and solar energy involve variations in their control caused by meteorological variations.⁴

International Investment Protection

This new intermittent clean energy policy requires reconsidering the risk scenarios for foreign investors in Mexico and, if applicable, evaluating whether the damages or injury caused to foreign investments and investors could warrant an investment arbitration claim (specifically to recover the cost of investments and losses caused by these new measures).⁵

The Order appears to contain multiple questionable provisions that, in addition to being subject to claims under Mexican law, could end up being resolved before international investment arbitration tribunals.

Subject to a detailed analysis of the provisions of the international instrument to which a particular investment or investor may have access depending on their nationality, it is possible to identify various elements of the Order that might constitute violations of the investment protections typically offered in investment treaties. These commonly include protections against direct and indirect expropriation and a guarantee of fair and equitable treatment, often held to include the protection of the investor's legitimate expectations.⁶

It is important to remember that domestic proceedings, such as administrative proceedings or writs of amparo, do not, as a general rule, exclude international investment arbitration insofar as these dispute mechanisms do not lead to the same result that is pursued in investment arbitration (i.e., compensation for the damages suffered).

Investment arbitration aims to compensate the investor for the damages caused by the treaty violation of the host state, with interest to and from the date of payment.⁷

Specific investment protections are contained in international treaties to which Mexico is a party, such as the North America Free Trade Agreement (NAFTA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),or multiple Bilateral Investment Treaties (BITs) concluded with a number of countries such as Spain and the Netherlands for example.

The specific instrument foreign investors in Mexico can invoke depends on their nationality. Although the provisions contained in the different treaties appear similar at first, there are sometimes important differences between the different protections they offer, and it is advised to analyze and compare the different options before initiating arbitral proceedings. In the same context, the specific protection violated, as well as the applicable treaty, will have to be carefully studied to determine its scope.

Finally, it is important to consider that these mechanisms are subject to time limits established in the treaties themselves, which generally limit the possibility to initiate an arbitration to the three or four years following the invoked violation, with an average cooling-off period of six months during which the investors are expected to consult with the government in view of reaching an amicable agreement to avoid arbitration altogether. For these reasons, investors are well advised to consider the timing of their potential claims.

Holland & Knight attorneys have extensive experience in energy, litigation, commercial and investment arbitration matters. For more information, contact the authors or Holland & Knight's Mexico City office.

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.

Notes

¹ This Order is in addition to another order issued by the National Energy Control Center on April 29, 2020, in which due to the recognition of the epidemic generated by the SARS-CoV2 virus (COVID-19), different temporary measures were granted to regulate the Mexican National Electrical System, restricting, among other things, the entry into commercial operation of various wind power and solar plants.

² Para. 8.2 of the Order.

³ Para. 5.6 of the Order.

⁴ Para. 10.2 of the Order.

⁵ The foregoing, regardless of the dispute mechanisms that states may have against Mexico, particularly countries such as Canada, under the Comprehensive and Progressive Treaty of Trans-Pacific Partnership (CPTPP), to the extent that this agreement limits or restricts the commitments of foreign investment assumed in energy matters by Mexico (if applicable, this provision could be in violation of other treaties such as the United States-Mexico-Canada Agreement (USMCA), once it enters into force and is contrary to the commitments made by Mexico).

⁶ For instance, the new guidelines of the Order, insofar as they are applicable to investments that are already in development, could constitute barriers to obtain an interconnection contract, thereby violating the principle of Fair and Equitable Treatment or even configure an indirect expropriation of the investment.

⁷ Restitution may be available in certain cases.