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Mexico’s Energy Reform
Power Industry Law
On August 11th 2014, a Decree promulgating the Power
Industry Law was published in the Official Federal Gazette,
entering into force on August 12, 2014.
The Power Industry Law repeals the Law of the Federal Public
Service of Electric Energy (the “Former Power Law”), which has
regulated the power industry in Mexico since 1975. The Power
Industry Law will regulate the activities of the power sector in
Mexico, including power generation, which will no longer be
considered an exclusive activity of the Mexican State. Private
entities may now generate power in a broader way1. Likewise, it
opens the opportunity for private parties to trade power.
Power transmission and distribution, as well as the planning and
control of the National Power Grid, remains reserved exclusively
to the Mexican State, but with the possibility of contracting
private parties for the performance of these activities.
Transmission and Distribution
The Mexican State will undertake power transmission and
distribution activities as a public service and through its entities
or State Productive Companies (“SPCs”) or their subsidiaries,
that will act as transmitters and distributors. Given the
transformation of the Federal Electricity Commission (“CFE”)
into an SPC, it is likely that it will act as the State’s power
transmitter and distributor.
The possibility is left open for the Mexican State, through its
transmitters or distributors, to form associations or enter into
agreements with private parties for the performance of the
activities related to the public service of power transmission and
distribution, such as financing, installment, maintenance,
management, operation, expansion, modernization, monitoring
and conservation of the necessary infrastructure for the
rendering of such service.
1 Although this was already allowed under the previous legal regime, but only through certain modalities (e.g. self-supply or cogeneration) and subject to
Furthermore, the Power Industry Law provides that the public service of transmission and distribution will encompass activities of social interest and public order. Therefore, these will have precedence over any other activity that implies the use of the Mexican subsoil or surface properties.
Power Generation and Marketing A permit from the Energy Regulatory Commission (“CRE”) will be required to generate power either by private parties or SPCs (e.g. CFE) if their power plants have a capacity equal or higher than 0.5 MW, or if the power plant is represented by a generator in the Wholesale Power Market, regardless of its capacity.
The Power Industry Law no longer regulates the granting of power generation permits under the modalities regulated by the Former Power Law (self-supply, cogeneration, small production, independent power production, exportation and importation). Once the Power Industry Law becomes effective, no different power generation modalities will be distinguished and power generation permits will only be subject to this new law.
The marketing of power and its sale to end consumers,will require a permit from CRE under certain modalities, with the main ones being: (i) basic supply2, on the part of a main supplier directly to end consumers, (CFE will be the most important supplier for basic supply), or (ii) qualified supply3, a qualified supplier through the Wholesale Power Market to qualified consumers.
Qualified Consumers are those that have registered themselves before CRE to freely participate in the Wholesale Power Market and may receive power from any generator having a permit from CRE for qualified supply.
The Ministry of Energy (“SENER”) will be entrusted with determining the levels of consumption or demand for a private party to be considered a Qualified User. It is expected that users from the industrial or business sectors with high consumption levels will be the ones that will meet applicable requirements.
In the meantime, transitory articles of the Power Industry Law, establish the circumstances in which a private party may be considered a qualified user: (i) those having an interconnection agreement with CFE executed prior the enactment of the Power Industry Law; (ii) those with an average demand equal or higher than 3 MW during the first year after the Power Industry Law becomes effective; (iii) those with an average demand of at least 2 MW after the first anniversary of the enactment of the Power Industry Law; (iv) those with an average demand of at least 1 MW after the second anniversary of the enactment of the
2 The “basic supply” is defined by the Law as the power supply provided under regulated tariffs, to any person that request such supply, not constituting a “qualified consumer”.
3 The “qualified supply” is defined by Law as the power supply provided under a competition regime to “qualified consumers”.
Power Industry Law; and (v) any other consumption center complying with the respective provisions to be issued by SENER.
SENER will establish the terms under which individual consumers that comprise a group with the same economic interest (e.g. Oxxo convenience stores), may be able to sum-up their individual consumption needs of their respective consumption centers, in order to meet the overall consumption or demand levels required to be considered qualified consumers.
Wholesale Power Market
The Power Industry Law also provides for the creation of a Wholesale Power Market in which generators may place their power production and trade it in accordance with market rules. The Wholesale Market will be operated by a new government entity called National Energy Control Center (“CENACE”) that will also be in charge of the operational control of the National Power Grid. Prices of transactions carried out under the Wholesale Market will be calculated by CENACE according to the offers received, based on power plant generation costs, among other factors.
The Power Industry Law does not establish a minimum percentage of national content. However, SENER may establish minimum percentages and other national content conditions in the corresponding agreements. The Ministry of Economy will establish the methodology to measure the degree of national content in the power industry.
Land Use and Occupation The power industry is considered a public utility and therefore the occupation and use of lands, including easements, will be necessary for carrying out power transmission and distribution activities, as well as for the construction of power plants when required in certain locations. Mining concession holders and assignments, permits or contracts holders, will have to allow the laying of ducts, wires or any other infrastructure required for power transmission and distribution. The best access possible to installations and rights of way of the National Power Grid will be allowed, in exchange for fair compensation. CRE will issue provisions allowing for access and fair compensation.
Payment amounts and the terms and conditions for the use and occupancy will be negotiated and agreed between land owners or land holders (private owners that are part of an ejido or agrarian community) respecting at all time the rights of indigenous communities, pursuant to applicable laws and international treaties entered by Mexico. There must be transparency in the negotiation, publishing the terms agreed upon by the parties. Certain procedures are provided where the
parties, the Ministry for the Agrarian, Territorial and Urban Development, the Institute of Administration and Appraisal of National Property, Federal Courts and Agrarian Courts, will participate to assist the parties to determine fair payments, adapting best international practices.
Other aspects to considerIt is important to note that private generators currently holding a generation permit granted under the terms of the Former Power Law, may maintain their permits and their terms, as long as this does not contravene the provisions of the Power Industry Law. Once the Wholesale Power Market begins to operate, holders of permits granted under the Former Power Law, may request a change to a consolidated power generation permit governed by the Power Industry Law.
Applications for self-supply, cogeneration, independent power production, small production, importation and exportation permits submitted prior to the enactment of the Power Industry Law, will be issued pursuant the terms of the Power Industry Law and will be regulated under its terms, as long as they do not contravene it.
Also, power generators having an interconnection agreement subject to the Former Power Law, may not extend it. However, certain provisions of the agreements may be amended, such as the addition, removal or modification of consumption centers, the sale of surpluses and or services backup. Regardless of the above, it is important to mention that transitory provisions of the Power Industry Law describe certain events in which a permit holder may enter into an interconnection agreement regulated by the previous legal framework, for a term of up to 20 years:
i.When the interested party has requested a permit for ageneration project and has paid the fees corresponding to such permit;
ii.If the interested party notifies CRE of its intent to continuewith the corresponding generation project, within 60 calendar days following the enactment of the Power Industry Law;
iii.If the interested party provides evidence to CRE, by no laterthan December 31, 2016, that the necessary financing for its project is in place, and that it has agreed to the acquisition of the necessary equipment for at least 30% of the total investment required for the acquisition of fixed assets of a project; or
iv.If certain transmission capacity has been allocated to theinterested party given its participation in an open season carried out by CRE, prior to the date in which the Power Industry Law becomes effective.
There are certain legal instruments that are pending to be issued in order to complete the new legal framework that will regulate the new Mexican power sector. CENACE, which will
become one of the most important participants for power transactions and operations to be carried out in Mexico, will be created six months after the enactment of the Power Industry Law. With respect to new models of contract, these will be issued by CRE nine months after the enactment of the Power Industry Law. Nevertheless, there are certain relevant terms that are not defined by the Power Industry Law, such as the date in which the Wholesale Power Market will begin operations, or the term in which the President will issue the Regulations to the Law.
ConclusionThe Power Industry Law represents a structural transformation of the power industry in Mexico as it allows the participation of parties from the private sector in activities of the power industry and, maintains exclusively for the Mexican State the security, continuity, management and control of the power public services systems. However, new opportunities are opened for private companies interested to participate in the Mexican power sector, without disregarding the possible participation of the Mexican State, all for the purpose to increase the productivity of the Mexican power industry.
Please let us know if you have any questions regarding the Power Industry Law
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