Thursday, 27 August 2020 22:10

Electrical storm

The Mexican government announced new rules in May governing the development of electricity generation projects, handing the government more control over the industry, and we spoke to lawyers about the ramifications for companies already involved in the sector, and the likelihood of litigation going forward

Juan Carlos SerraBy Adam Critchley

Mexico’s energy ministry (SENER) has tightened its control over the electric power industry with the announcement of new rules concerning the participation of renewable energy projects, giving more authority to state utility CFE as the predominant player, citing the need to guarantee supply to the country’s grid.

However, the new rules are a slap in the face to the renewables industry, which had grown its participation in the country’s electricity sector as a result of the 2013 energy reform, which allowed for the carrying out of three electric power auctions, and which successfully awarded capacity generation to a number of players, and led to the development of wind and solar farms in several states. The buildout of renewables projects also obeyed the previous government’s targets of making renewable energy generation a bigger part of the country’s energy matrix, comprising 35 per cent by 2024, and 50 per cent by 2030, goals which appeared attainable with the auctions, but which now look unlikely to be met.

Private sector companies are within their right to go to tribunals to contest new rules regarding the development of electricity generation projects in Mexico, the country's Energy Minister Rocio Nahle announced following the government's introduction of new rules governing the electricity sector, in apparent anticipation of the legal battles ahead as energy project developers, particularly those that have already signed contracts as a result of tendering winning bids at auction, seek to achieve redress.

Nahle said the government will respond to the private sector's demands and is not closing the door to dialogue. The new rules have been met with anger by many industry insiders, who see the changes as a partial rolling back of the energy reform, introduced in 2013 by the previous federal administration, and which threw the energy sector open to more private investment and has resulted in the construction of a number of utility-scale solar power facilities and wind farms, part of the then government's pledge to ramp up the participation of renewable energy in the country's energy matrix.

Mexico's employers' confederation Coparmex said in a statement that the new rules “will drive away significant investments in the country, while causing interested parties to go to national and international courts to demand that Mexico’s government complies with its obligations.” Several companies involved in renewable electricity generation have already filed direct injunctions against the measures announced by the National Electricity Control Centre (CENACE) on April 29. However, those injunctions were challenged by CENACE and state utility CFE, as they violate the Injunction Law.

‘A STEP BACKWARDS’

“It is important to point out that, independently of the granting of those temporary suspensions, they will continue their legal process, and we will have to be mindful of the final resolutions that are announced in relation to the definitive suspension by the ruling,” according to Juan Carlos Serra (pictured), of Mexico City-based law firm Basham Ringe y Correa.

“It is also likely that companies will take out injunctions against the decree that sets out the measure in protection of the so-called reliability, security and continuity of the national electricity generation sector,” he says. “Representative groups in the sector, such as the private sector have said that they will pursue all legal means against the agreement, and it is likely we will see lawsuits filed against it,” he says.

Serra says the move could limit the participation of renewable energy projects in the country’s generation matrix, and prove to be a discouragement to new investments.

“Above all for the way in which it is being carried out by the federal government, as the decision was not duly analysed by the National Commission for Regulatory Improvement (Comisión Nacional de Mejora Regulatoria) in order to determine the regulatory impact that the publishing and implementation of the decree would have on the electricity sector,” he says.

“And especially on the renewable energy sector, and which could contravene the current legislation and also send the wrong signal to the industry in the sense that there is no security or legal certainty with respect to the applicable regulatory framework, and which is an obstacle to, and discourages, foreign investment in the sector,” he says.

“At the same time, with respect to the content of the agreement, part of the new rules could be interpreted as a step backwards for the electricity sector in Mexico, by seeking to strengthen the CFE as a key player in the country’s electricity sector, affecting the conditions for competition that had been generated by the 2013 energy reform.”

Asked whether the move will affect the federal government’s goal of achieving 35 per cent of renewable power generation capacity in its energy matrix by 2024, and 50 per cent by 2030, as set out in the 2013 reform, and as part of Mexico’s commitment to the COP21 Paris climate agreement, Serra said it would likely impede the attainment of those goals.

“As renewable energy projects in Mexico are affected, as they can’t begin electricity generation, or their development by foreign companies is suspended, Mexico’s production of clean energy will decline, and that will be an obstacle to achieving those percentages set out by the reform,” he says. He adds that the development of projects awarded in Mexico’s electricity auctions could also be affected.

The previous Mexican government successfully carried out three auctions following the energy reform, although the fourth, which was scheduled to take place in late 2018, was postponed by President López Obrador and never reinstated.

“From our perspective, the announcement means that some projects already under development as a result of the auctions could be affected,” Serra says.

“The senate’s energy commission identified some of the projects that could be affected, and for that reason presented proposals so that CENACE and SENER modified the plans to respect the permits issued for the projects, and to avoid discrimination against renewable energy projects.”

“Those projects that were in the planning stage and which have yet to be developed will have to evaluate the impact of the measures to determine whether they would still be financially viable,” Serra says.

“They will have to take into account the commitments acquired in their contracts and the legal consequences if the projects are no longer developed.”

The government of President López Obrador has been harshly criticised by the renewables sector for the rolling back of the development of the sector in Mexico, and for giving more priority to hydroelectric projects, a form of generation that has been seen as problematic in other countries in the region, such as Colombia, as it is adversely affected by extreme weather conditions, such as droughts.

But rather than having abruptly turned against the development of renewables, Serra says the new measures obey a policy that seeks to strengthen state utility CFE and provide it with a more predominant role in the country’s electricity sector, as it enjoyed prior to the reform.

“The federal government’s policy is to ensure that the country’s electricity is predominantly generated by CFE-owned power stations, despite the fact that some of those power stations are more pollutant,” Serra says.

But that policy also intrinsically limits the participation of the private sector.

“The government is sending a signal to the sector and investors seeking opportunities in Mexico’s electricity space, and which could be construed as limiting that participation,” he says. 

According to SENER, the ministry defines strategic power station projects as those whose development and implementation are necessary to comply with the country’s national energy policy, and which should be given priority connection to the grid.

“That could be interpreted as the federal government being the one that determines which electricity generation projects are strategic, displacing others, such as renewable energy projects,” Serra says.

The government cited the need to guarantee electricity supply to the grid as the motive for the new regulations, as well as energy security, given that wind and solar power are characterized by their intermittency, and would require back-up from thermoelectric and other more conventional power sources, such as oil-fired power stations. But what Mexico is really lacking, rather than more conventional power stations, is transmission and distribution infrastructure, Serra says, to avoid a ‘bottleneck’ preventing the connection of new projects, as has happened in other countries, such as Chile, as it increased its renewable energy generation capacity.

“We believe that supply to the grid was already guaranteed, and all the measures taken post-energy reform, including the electric power auctions, were done so with the aim of guaranteeing supply and sufficient capacity,” Serra says.

In the wake of the new rules, law firm Thompson Knight advised that foreign investors in Mexico’s electricity sector may want to examine whether they have claims under one of Mexico’s 32 agreements for the promotion and reciprocal protection of investments, and six free trade agreements. “These treaties may allow foreign investors to bring claims, for example, that Mexico has not provided their investments with fair and equitable treatment. If so, these investors may be able to initiate international arbitration, including before the International Center for Settlement of Investment Disputes (ICSID),” the law firm said.

DISCOURAGING INVESTMENT

Bernardo M. Cremades Jr. (pictured below), a partner in the litigation and arbitration practice at B. Cremades y Asociados in Madrid, agrees that the government is setting itself up for conflict with the sector. “There will be litigation,” he tells The Latin American Lawyer.

“Renewable energy companies are taking out injunctions in Mexican courts to challenge the new rules. If those injunctions are not successful, foreign investors could make use of treaties for the protection of investments to claim compensation for damages suffered in arbitration courts,” he says. “It’s important to point out that this situation could generate huge losses, not only for renewable energy companies, but also for other players in the sector, such as companies that construct power stations, suppliers and other contractors. Furthermore, the new rules may not be the last. Look at Spain, for example, where the cuts to renewable energy participation took place in several phases,” Cremades Jr. says.

Bernardo Cremades JrHe also believes that the new rules will prove a discouragement to foreign investment in the sector. “By making access more difficult for participants, foreign investment will be discouraged. Furthermore, the legal uncertainty it creates will be a blemish that could have a negative effect on foreign investment in Mexico in other sectors. And those effects do not take long to be noticeable, with Iberdrola [the Spanish electricity generation company that is the largest foreign investor in Mexico’s electricity sector] having announced in recent weeks that it is cancelling a $1.2 billion investment in a co-generation plant Mexico. That will likely not be the only case,” Cremades Jr. says.

And he adds that, more than a reversal of the previous government’s policy of promoting investment in renewable energy, the policy of President Andrés Manuel López Obrador is one of favouring Pemex, the country’s state-owned oil company, which reported massive losses in first quarter, shortly before the new rules for electricity generation were announced by the government.

“The Mexican government is giving priority to electricity generation using fossil fuels, and which is a step backwards compared with the global trend,” Cremades Jr. says.

According to a note by law firm Norton Rose Fullbright, the new policy imposes a new requirement on developers to obtain a generation permit. Developers will have to request an interconnection feasibility opinion from CENACE before applying for a generation permit from energy regulatory body CRE. The new requirement is in addition to the interconnection studies that CENACE must conduct to determine what upgrades are required to connect a project to the grid.

“It is a clear attempt to set roadblocks to the interconnection of privately-owned power projects,” the law firm says in the note, penned by Raquel Bierzwinsky, Javier Félix Muñoz and Carlos Campuzano.


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