In May, Mexico’s Secretariat of Energy (Sener), the government energy regulator, published regulations in the country’s official gazette, which impose new restraints on companies that generate electricity from wind and solar. 

The move follows the resolution of Cenace, the electricity operator, on April 29, to suspend ongoing testing processes and deny any renewable plant under construction permission to the grid during the Covid-19 pandemic. The government has justified its intervention on the grounds that the intermittency of wind and solar is unreliable. 

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Energy giants such as Iberdrola, Enel and Engie have piled into the country’s renewable energy sector since energy reforms in 2013 opened up the market and encouraged the provision of clean energy.

Mexican president Andrés Manuel López Obrador (known as Amlo) has previously suggested he wanted to bring the energy sector under the control of the state-owned oil and electricity companies, Pemex and CFE, and these latest attempts to change government policy constitute a severe blow to private companies operating in Mexico.

Power grab 

The burgeoning renewable energy market has attracted FDI investments with a total capital expenditure of $20.3bn since 2013, according to data tracked by fDi Markets. 

By April this year, the country’s total renewable energy installed capacity had reached 22,128 MW, according to global risk consultancy Verisk Maplecroft, second only to Brazil in the region in terms of total capacity. 

The Sener regulations grant state CFE plants priority access to the grid. In the name of energy security, they will subject renewable plants to studies, impose additional costs and deny them the ability to sell capacity. This means that it will be more difficult and costly for wind and solar plants to acquire a permit and run effectively.

The battle lines between the Mexican government and the private sector have therefore been drawn, leaving companies, which had been attracted to Mexico’s favourable geographical conditions for renewable energy, rattled.

“It's essentially a power grab by the government over the energy sector in the time of the Covid-19 epidemic but it follows their general hostility to the renewable energy sector from before the pandemic,” says Mark Keller, an analyst at the Economist Intelligence Unit. 

Game of politics

Mr Lopez Obrador has repeatedly railed against the policies of the previous administration under former president Enrique Peña Nieto and does not want to see Pemex and CFE “lose out to private companies, which he inherently views as potentially corrupt and prone to price gouging”, Mr Keller adds. 

It is ordinarily the case that a country with an expanding renewable energy market tends to tolerate any intermittencies as a necessary step on the road to cleaner air and greater cost efficiency. In contrast, the Mexican president has referred to wind turbines as “fans” and deemed certain renewable energy companies “dirty businesses”.

If the tussle between the government and the private sector does not come as a total surprise, the acceleration of these retractive measures should not be overlooked. 

Energy consultant Gonzalo Monroy says that the regulations were pushed through by the ministry of energy without any consultation or approval from Conamer, the regulatory body. 

Mr Monroy adds this “assault on private investment” was prefigured in Mr Lopez Obrador’s decision to cancel a $13bn Mexico City airport project last year. Nonetheless, foreign companies continued to pour capital into renewable energy plants. In 2020 alone, foreign investors announced eight projects worth $1.3bn between January and April, fDi Markets figures show. 

Some investors have been aware of the “looming threat” of the president’s plans to renationalise the energy sector, he says, while others have been “blinded” by the pursuit of their own interests in a growing market.

'A tall order’

In light of the recent constraints, energy companies are assessing possible legal avenues. Italian multinational Enel, for example, has obtained a temporary suspension of the Sener’s measures. 

A spokesperson for Enel says: “We will continue to supply competitive and sustainable energy to all of our customers (which includes CFE), while we monitor the regulatory evolution in the country and continue with the legal actions aimed to suspend these policies.”

As of March 31, its subsidiary Enel Green Power Mexico has 200 MW of projects under construction.

It is expected that if the government pursues its nationalistic policy, and finds itself besieged by mounting legal cases, the issue may well escalate to the Mexican Supreme Court. 

Naturally, countries to which some of these large energy companies belong, are likely to lean on their diplomats to apply additional pressure, perhaps even invoking the World Trade Organisation’s dispute settlement mechanism.

José Valera, a partner at law firm Mayer Brown, says that energy companies should nonetheless be “very concerned”, as they are dealing with a government that views its state-owned energy monoliths not “as a means to end but as an end in themselves”.

Though diplomatic pressure is the most effective means of forestalling these measures, Mr Valera predicts that it will be a “a tall order”, adding that this is an ideological move and “it is very difficult to bend ideology”. 

Even if Pemex and the CFE contract for services in the future, the investment opportunities in this new energy landscape will look greatly reduced.

“Added costs and concerns over contract sanctity and legal certainty will likely deter investment in new projects in 2020 and 2021,” says Karla Schiaffino, senior Latin America Analyst at Verisk Maplecroft. 

Latin America saw record inflows into the sector in 2019 making it the world's second most attractive destination for foreign investment in the sector. The Covid-19 pandemic has led to a drop off this year, but it is hard to imagine Mexico being at the forefront of investors’ minds for expanding renewable energy operations as business rebounds. 

Ms Shiaffino adds that even ahead of the midterm elections for Mexico’s lower chamber of Congress in 2021, a swing back in favour of prospective investors looks optimistic: “Amlo has a proven capacity to protect his political capital by deflecting responsibility for adverse policy results… and it is highly likely that he will ward off criticism for the economic and environmental fallout of the change in the regulatory framework.”