Mexico Power Industry: The End of Legados to Push Private Markets

HIGHLIGHTS:

• The new Mexican Administration has started to study and make adjustments to energy policy and regulation. That work along with rulings from Energy Regulatory Commission (CRE) and Centro Nacional de Control de Energía (CENACE) is expected to adjust the landscape of the power market.
• Legados, power plants grandfathered by Mexico's 2013 Power Reform, that do not achieve complete operation and allocation of total capacity during this year, will have to justify an extension or migrate to the new Electric Industry Law.
• With these changes in the power market, it is expected that there will be an increase of investment and migration to private models for generating, delivering and selling power, leaving the government to certain niches to be defined by its six-year policy in current discussion.

Grandfathered projects known as Legados are power plants subject to the generation permit granted or in process of being granted under the repealed law of the Public Electricity Service. Mostly, Legados were designed for satisfying demand of industrial and commercial clients. In some cases, the power plants are a good alternative to supply of Comisión Federal de Electricidad(CFE), or complementary to demand of final users.

Under the 2013 Power Reform, Legados continued their normal lifespan. Whether in development, construction or operating, they will have up to 20 years of lifespan only. Those plants in the process of reaching the commercial operation date must use full capacity before Dec. 31, 2019, and present evidence of that to Energy Regulatory Commission (CRE). The granting of justified exceptions are in process of discussion.

The Power Reform also opened a wide range of opportunities for onsite generation, power batteries and sales from private generators of all sizes, even allowing, under certain circumstances, the peer-to-peer (P2P) model.

Energy Policy and Regulation Under Review

Since Dec. 1, 2018, the new Mexican Administration has started to study and make adjustments to energy policy and regulation. That work along with rulings from CRE and Centro Nacional de Control de Energía (CENACE) is expected to adjust the landscape of the power market.

In addition to the criteria and regulation in discussion, CRE already issued a criteria in November 2018 that allows final users to sell energy to other third-party buyers without having a permit or registration, under the following rules:

• final users need to present a filing before the CRE within the next six months of starting the sale to third-party buyers, under penalty of up to US$890,000
• qualified users participating into the wholesale electricity market selling power to third-party buyers must fulfill requirements of coverage for qualified suppliers
• the criteria only applies for final users that acquire energy for self-use or use inside its facilities through a supplier with a permit or as a participant of the wholesale electricity market, through a qualified supplier
• for purpose of such criteria, facilities of the final user refer to any real estate in which the final user has the title of property, use or lawful possession. Inside this definition includes holding title under a wide range of contracts, such as purchase sale, lease, trust, etc. Co-ownership is allowed if final user has the supply contract
• third-party buyer must have possession title of facilities or electric equipment inside the real estate of final user, not have an energy supply contract, not be a participant of the wholesale electricity market or owner of the facilities of the final user
• facilities of the third party eligible for this criteria are: Electric vehicle charging stations, mobile charging stations, apartments, offices, commercial space and areas at malls, factories, workshops or similar facilities, among others
• equipment of the third party eligible for this criteria are: Electric vehicle, cell phones, mobile units for services and similar equipment, among others
• final user must allow third-party buyer to receive energy from suppliers with permits, if it elects to do so

In 2019, Legados are heading toward the final stage for completing operation and allocating total capacity. In other words, Legados that do not achieve that during this year, will have to justify an extension or migrate to the new Electric Industry Law.

On the other hand, the attractive prices of solar modules, their market adoption in residential and commercial demand, the new methodology for basic supply in discussion by CRE, as well as current needs of investment in transmission and distribution infrastructure, are driving an increase for onsite projects that could fuel commercial real estate investments and electric vehicles markets.

In addition, financial institutions are adjusting to merchant price conditions of power purchase agreements (PPAs) and competing with the financial technology (FinTech) market.

According to official government data from 2018, it is expected that electric gross demand will grow an average of 3.1 percent for years 2018 to 2032. However, these figures were based on an expected gross domestic income (GDI) of 3.2 percent.

Conclusion and Takeaways

As these events concur into the power market, it is expected that there will be an increase of investment and migration to private models for generating, delivering and selling power, leaving the government to certain niches to be defined by its six-year policy in current discussion.

It is time for investors and consumers to tune-in their power strategy to adjust to the new normal.

Holland & Knight's energy law attorneys have extensive experience on advising private investors and government in a variety of projects in the electricity sector. For more information, contact Holland & Knight's Mexico City office.   

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