Mexican renewable energy projects affected by new measures

By DLA Piper on May 19, 2020

By: Kate Brown de Vejar | Marcelo Páramo Fernández

On April 29, 2020, Mexico’s National Center for the Control of Energy (Centro Nacional de Control de Energía, or “CENACE”) issued a Resolution to guarantee the Efficiency, Quality, Reliability, Continuity and Security of the National Electric System (“CENACE Resolution”). The measures were issued in response to the coronavirus disease 2019 (COVID-19) pandemic. They will have a significant negative impact on the profitability, and indeed the viability, of multiple solar and wind energy farms in Mexico. Then, on May 15, 2020, Mexico’s Minister for Energy (Secretaría de Energía, or “SENER”) published a further Resolution establishing the “Policy of Reliability Security Continuity and Quality of the National Electric System” (“SENER Resolution”), including elements which purport to justify, or provide a legal foundation for, CENACE’s earlier action.

In this article, we analyze these measures and the purported justifications for them, as well as relevant public statements by Mexico’s President and its Minister for Energy. We note the widespread criticism of the measures by commentators, Mexico’s own administrative authorities, and foreign governments representing the interests of their investors in the sector, and set forth various avenues available to investors in the sector for challenging the measures.

The measures

The operative part of the CENACE Resolution declares that, as of May 3, 2020: (i) all pre-operative testing is suspended for intermittent electricity generation facilities (that is, solar and wind farms), and (ii) preferential access to the grid will be granted to non-intermittent (conventional) electricity generation facilities. The effect of these measures is that:

wind and solar farms which have not yet completed their pre-operative testing will not be able to sell the electricity they generate through the National Electric System (Sistema Eléctrico Nacional, or “SEN”); and
CENACE has discretion to limit the extent to which any electricity generation facility can send its electricity to the SEN if, according to CENACE, it could put the stability of the SEN at risk; intermittent electricity generation facilities will certainly be the most affected by this measure.

The CENACE Resolution does not provide for an end date for the measures. Nor does it state that the measures will automatically cease to have effect when Mexico’s declaration of sanitary emergency due to the COVID-19 pandemic is lifted. As a result, the duration of the measures is uncertain, and there is a risk that they could continue to apply even after the immediate health risk of COVID-19 has passed.

These measures will reportedly impact 44 renewable energy facilities, 28 solar and wind energy farms that are already in operation and selling electricity to the grid, and 16 projects that are still in the construction phase, representing a total investment of US$6.4 billion.

Understanding the justification and motivation for the measures

The text of the CENACE Resolution seeks to rely on the current COVID-19 health emergency to justify the measures. It notes the decrease in the demand for electricity due to the lower level of economic activity during the current emergency, and states that it is therefore necessary to reduce the operation of intermittent electricity generation facilities in order to provide security to the SEN.

It is relevant that, in Mexico, the majority of wind and solar farms are privately owned and operated. By contrast, Mexico’s conventional (fossil fuel) electricity generation facilities are owned and operated by Mexico’s 100 percent State-owned productive enterprise, the Federal Electricity Commission (Comisión Federal de Electricidad, or “CFE”). It is also widely known that CFE’s conventional electricity generation facilities use fuel oil purchased from Mexico’s 100 percent State-owned productive enterprise, Petroleos Mexicanos (“PEMEX”). The CENACE Resolution is therefore favorable to PEMEX to the extent that it promotes the continued purchase of its fuel by CFE, at a time when international oil prices, and PEMEX’s revenues, are low.

Mexico’s President, Andrés Manuel López Obrador, stated in his morning address on May 6, 2020 that the reason for the CENACE Resolution is to prevent CFE from losing money and to give CFE priority access to the electric grid to the detriment of privately held interests in wind and solar farms. Notably, the President made no mention of the COVID‑19 health emergency when discussing the rationale for the measures. Mexico’s Minister for Energy, Rocío Nahle García, has made similar public statements. In an interview on May 5, 2020, the Minister clarified that it was her decision to adopt these measures and that she had instructed CENACE to issue the Resolution. Consistent with the President’s remarks, the Minister stated that the measures are designed to preserve a particular percentage share of grid access for CFE. Mention of the COVID-19 pandemic was also noticeably absent from her remarks.

Then, late on Friday May 15, 2020, SENER published the SENER Resolution, including elements which purport to justify, or provide a legal foundation for the earlier CENACE Resolution. The SENER Resolution states that CFE will have a more “proactive” role in the sector, including with respect to planning. This gives CFE significantly more power and discretion and sits uncomfortably with the concept of free market competition in the electricity sector.

The publication of the SENER Resolution was, itself, shrouded in controversy, with Mexico’s National Commission for Regulatory Improvement (Comisión Nacional de Mejora Regulatoria, or “CONAMER”) initially refusing to green-light the measure. CONAMER expressed the view that since compliance with the new measure would likely increase (rather than decrease) market costs, the measure would need to go through the procedures set forth in the General Law for Regulatory Improvement (Ley General de Mejora Regulatoria) – procedures designed to ensure that any new regulation reduces rather than increases costs, and improves regulatory efficiency. The head of CONAMER, César Hernández Ochoa, resigned on Friday afternoon, and the SENER Resolution was promptly published that evening.

Criticism of the measures and avenues to challenge them

The criticism of the CENACE and SENER measures has been widespread.

On May 7, 2020, Mexico’s Federal Commission for Economic Competition (Comisión Federal de Competencia Económica, or “COFECE”) issued an opinion to the Minister for Energy, the Regulatory Commission for Energy (Comisión Reguladora de Energía, or “CRE”) and CENACE stated that the CENACE Resolution is illegal in a number of respects, not least because it violates the rules of free competition in the electricity generation market.

Priority access to the grid for CFE-generated electricity is difficult to justify both economically, given that CFE’s conventional plants have a higher cost of generation, and environmentally – CFE’s fossil fuel-based electricity generation facilities produce high levels of environmentally damaging emissions, meaning the measures are inconsistent with Mexico’s commitment to renewable energy targets. Commentators have also been quick to point out that the characterization of the CENACE Resolution as a necessary measure arising out of the COVID-19 pandemic appears to lack foundation and that the measures in the CENACE Resolution violate various provisions of the Electricity Industry Law (Ley de la Industria Eléctrica) as well as the Federal Law of Economic Competition (Ley Federal de Competencia Económica). The measures are therefore susceptible to challenge on a number of grounds before Mexico’s administrative and judicial authorities, once access to those authorities resumes.

The European Union and the Canadian Government both wrote to the Ministry for Energy late last week (before the publication of the SENER Resolution), expressing their concerns in connection with the CENACE Resolution and the effect that it will have on foreign investments in the renewable energy sector.

In the aftermath of the publication of the CENACE and SENER Resolutions, foreign investors in wind and solar electricity generation facilities in Mexico may wish to consider their rights and potential remedies under applicable investment treaties and other investment instruments. In this regard, please see our series of articles on the potential for investment claims arising out of measures taken by States in response to the COVID-19 pandemic:

COVID-19 – a legitimate basis for investment claims? This article examines whether measures taken by States in response to the COVID-19 pandemic could provide a legitimate basis for claims under bilateral investment treaties (BITs) or other investment protection agreements.
State defenses to investment claims arising from COVID-19 This second piece addresses some of the key defenses available to States under customary international law.
COVID-19 and investment claims under NAFTA This third article focuses on potential claims by investors under the North American Free Trade Agreement (NAFTA), and its successor instrument, the Agreement between the United States of America, the United Mexican States, and Canada (USMCA), as a result of COVID-19-related measures adopted by those States.

If you have any questions regarding these new requirements and their implications, please contact the authors, any member of our Energy team or your DLA Piper relationship attorney.

Please visit our Coronavirus Resource Center and subscribe to our mailing list to receive alerts, webinar invitations and other publications to help you navigate this challenging time.

This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.

_______________________________________________

Please also visit our Coronavirus Resource Center and subscribe to our mailing list to receive alerts, webinar invitations and other publications to help you navigate this challenging time.