Between doubts and legal chaos: this is how the Mexican electricity sector is

If a company is going to install 3,000 solar panels in Mexico and its client demands a repurchase contract for that investment valued at more than one million dollars in case the laws change, something that is not going well. And that the company accepts because it has lost other projects and needs work, confirms this.

This has been the reality for businessman Manuel Vegara during the presidency of Andrés Manuel López Obrador, who last year amended legislation to prioritize the state-owned electricity company over private companies - which have a greater commitment to renewable energy - and who tried to consolidate these changes in the constitution but the opposition parties in Congress prevented them from doing so.

The electricity sector celebrated that victory but remains mired in uncertainty as there are seemingly contradictory laws that are putting investments at risk.

Vegara's company, Mexico's Pireos Power, has been installing solar panels since 2018. Although it was not directly affected by the changes in the Electricity Industry Act of 2021, because it makes relatively small installations, it did suffer its consequences.

In 2021, it lost projects worth three million dollars from two large customers who decided to leave their commitment to solar energy for another time and has gone from 90 workers to just 35.

“We won several tenders with a shopping center that had several branches, with a chain of shoe stores and in the last two or three years those projects have not been carried out,” Vegara explained. “We had to survive with small installations in houses or with customers who were braver and despite the uncertainty they were encouraged to invest.”

At least he didn't have to buy back the panels he placed on the roofs of a logistics center, a small island of clean energy north of polluted Mexico City.

The scenario for large companies in the sector is similar. In May 2019, Spanish energy company Iberdrola issued a statement that said: “Mexico builds trust: Iberdrola will invest up to $5 billion during the current federal administration.” None of that happened and there were no public explanations.

When opposition parties blocked the constitutional reform proposed by the ruling party in the Chamber of Deputies on Sunday, “the initial feeling was one of relief,” Vegara acknowledged. “But we know that the president is not going to leave things like this and the uncertainty is not settled even though the fat storm has passed.”

The big energy companies are silent, immersed in dozens of legal resources and afraid for the money they have at stake. Neither Iberdrola, the one most attacked by President López Obrador in his morning conferences, nor the American Chamber of Commerce, which brings together some of the major US energy companies, agreed to comment to The Associated Press.

Mexico's Business Coordinating Council this week reiterated its call for a “clear, transparent and reliable legal framework.”

“Mexico now has two systems that are contradictory operating simultaneously,” explained Miriam Grunstein, associate academic at the Mexico Center of the James Baker Institute of Rice University.

On the one hand, the constitution, which is more open to the market since the reforms of 2013 when the sector was liberalized. On the other hand, the Electricity Industry Act amended in 2021 to establish privileges for government electricity generation - which is much more polluting - to the detriment of private companies, thereby closing spaces to free competition and rendering the body that was the arbiter of the market inoperative. In addition, the rule allows for the review and cancellation of contracts with retroactive effect.

The government assured that these amendments were intended to correct past abuses or excessive advantages that foreign companies had, such as being exempted from certain payments. For companies it was a change in the rules of the game in the middle of the game and they denounced that their rights had been violated.

The result was hundreds of resources that, in most cases, have protected companies even though the legal battle continues.

“You are giving white to some and black to others and the difference is between those who are protected and those who are not,” explained Grunstein. “It is a system that privileges companies that have the most resistance.”

However, he said, many are tired and are considering international arbitration.

To further complicate the picture, the Supreme Court of Justice has ruled on the issue on several occasions this month, but not clearly. Although most of its members considered that the electricity law is contrary to the magna carta, they did not declare it unconstitutional.

That's why Ken Salazar, the US ambassador to Mexico, said that more litigation could only be expected.

Faced with this scenario and with a divided Congress, the solutions do not seem simple and while some in the sector propose that direct negotiations should be opened with companies, others see it unfeasible.

The demand of the private sector is clear: they want certainty to know how, when and in what to invest, something that will only be achieved by reforming the law and if there is effective pressure from international markets.

“The United States is increasingly irritated” that free trade agreements may be being violated, said Grunstein, who, however, believes that the neighboring country still does not seem willing to take stronger action.

“This is a struggle between two models and two country visions,” said Vegara, the director of the solar panel company. On the one hand, the neoliberal, in which there could have been abuses; on the other, the statist, who slows down investment and puts the environment at risk.

And in between citizens who don't know if they will have to pay more for light.

According to the businessman, only in the middle can be the sweet spot: achieving a model that guarantees free competition and boosts clean energy so that Mexico meets its climate commitments while ensuring that Mexicans - especially those most in need - have good electricity service at reasonable prices.

But for now, he added, dialogue between the two country visions seems impossible.

With information from AP

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