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The policy and regulatory framework

i The policy background

Clean energies are not the same as renewable energies. Pursuant to the Electricity Industry Law (LIE), clean energies are those sources of energy and electricity generation processes whose emissions or residues, when they exist, do not exceed the thresholds established in the applicable regulatory provisions. Therefore, clean energies encompass renewable energies.

The LTE defines renewable energies as energies whose sources reside in phenomena of nature, processes or materials susceptible to being transformed into energy usable by human beings, and that regenerate naturally so they are available continuously or periodically; and when generated do not release polluting emissions.

The sources of renewable energy, according to the LTE, are:

  1. wind;
  2. solar radiation, in all its forms;
  3. the movement of water in natural channels or in those artificial channels with existing reservoirs, with systems for generating capacity less than or equal to 30MW or a power density, defined as the relationship between generation capacity and reservoir surface, greater than 10 watts/m2;
  4. oceanic energy in its different forms, namely, tides, marine thermal gradients, marine currents and salt concentration gradients;
  5. the heat of geothermal deposits; and
  6. the bioenergy sources stipulated in the Bioenergy Promotion and Development Law.

Certain tax benefits may be applicable to those seeking to invest in renewable energies. Special net tax profit account (CUFIN) rules allow a corporation to distribute dividends to its shareholders despite a lack of taxable profits generated at the corporate level.

Mexican corporations must have a CUFIN, the balance of which will be increased by, among other things, the net tax profits received by the corporation, and decreased by the dividends and profits distributed to its shareholders. The net tax profit is the result of subtracting the income tax paid (at a rate of 30 per cent), and other concepts, from the taxable income.

In this regard, Mexican law allows corporations exclusively engaged in (1) energy generation from renewable sources, and (2) efficient electricity cogeneration systems, to have an energy net tax profit account (Energy CUFIN), which relies on the above-mentioned CUFIN rules. The Energy CUFIN follows the same rules as the CUFIN, except that the concept of 'net tax profit' is replaced by 'investment profit', which is the result of subtracting the 'deemed income tax' from the 'deemed taxable income'.

The deemed taxable income is obtained by substituting the accelerated depreciation rate (100 per cent) for the 5 per cent depreciation rate on machinery and equipment for the generation of energy from renewable sources, or from efficient electricity cogeneration. The deemed income tax is the result of applying the 30 per cent tax rate to the deemed taxable income.

As with the CUFIN, to the extent that a corporation holds a positive balance in its Energy CUFIN, it would be able to distribute dividends to its shareholders in an amount equal to that positive balance, withholding 10 per cent on dividends distributed to individuals and to foreign residents. Also, as with the CUFIN, any distribution of dividends out of the Energy CUFIN decreases the account balance.

Finally, taxpayers distributing dividends or profits from the Energy CUFIN for investment in renewable energy must keep a cumulative record of the distribution of dividends or profits made in each year.

ii The regulatory and consenting frameworkRegulatory bodies and clean-energy certificates

The LIE ascribed special value to electricity from clean energies through clean-energy certificates (CELs). CELs are titles issued by the Energy Regulatory Commission (CRE) that certify the production of a certain amount of electricity from clean energy sources and that serve to meet load-centre consumption requirements.

For the acquisition of CELs, the SENER sets requirements to be met by the following mandatory participants: suppliers; qualified users and market participants; final users who receive electricity by isolated supply; and holders of legacy interconnection contracts, which includes load centres whose electricity does not come entirely from clean power plants. These participants are described in more detail below:

  1. A supplier is a marketer, or holder of a permit to offer electricity, who can represent exempt generators (i.e., small power plants with a generation capacity lower than 0.5MW) in the wholesale electricity market (MEM).
  2. A qualified user, participant of the market is an end user registered with the CRE to acquire an electricity supply as a market participant.
  3. A final user who receives electricity by isolated supply is an individual or a company that acquires an electricity supply in its load centres through the generation or importation of electricity for the satisfaction of its own needs or for export, without making use of the National Transmission Grid (RNT) or the General Distribution Grid (RGD).
  4. Legacy interconnection contracts are defined as interconnection contracts or electricity purchase agreements for small producers, entered into, or to be entered into, under the conditions valid prior to the entry into force of the LIE, including those generation projects owned and operated by the Federal Electricity Commission (CFE).

In the first quarter of each calendar year, SENER establishes the requirements for the acquisition of CELs to be fulfilled during the following three years and may establish requirements for subsequent additional years. Once the requirements for a future year are established, they will not be reduced.

The requirements for the acquisition of CELs are established as a proportion of the total electricity consumed in the load centres. Thus, SENER announced that the CELs requirement for the 2021 obligation period is10.9 per cent; and for 2022 it will be 13.9 per cent. A CEL covers the generation of 1MWh of clean electricity.

Failure to comply with the requirements for the acquisition of CELs will be penalised with a fine ranging from six to 50 Units of Measure and Update4 for each MWh of non-compliance.

SENER establishes the criteria for the granting of CELs in favour of generators that produce electricity from clean energies. To be considered a clean generator, the following requirements must be met:

  1. the generated energy must come from a source of clean energy in terms of the LIE; and
  2. the power plant must fall into one of the following categories:
    • clean power plants that came into operation after the entry into force of the LIE;
    • legacy power plants5 that generate electricity from clean energy and entered into operation before the LIE came into effect, provided they have carried out a project to increase their production of clean energy; or
    • clean power plants with capacity that has been excluded from a legacy interconnection contract to be included in an interconnection contract under the terms of the LIE during the period in which the holder of the contract had the right to include that capacity in the legacy interconnection contract.

On 28 October 2019, the SENER modified the guidelines establishing the criteria for the acquisition of CELs. However, the changes are not currently applicable because a federal court granted a suspension following claims initiated by private parties that the new regime has the potential to harm clean energy investments and the CELs secondary market; the modified guidelines are currently under judicial review by the courts.

The CRE is in charge of granting the corresponding CELs, validating and certifying their ownership and verifying compliance with the obligations for the acquisition of CELs.

Likewise, the CRE is in charge of creating and maintaining a certificate register, which must include a record of each certificate, as well as information on its date of issuance, validity and owner history. Only the most recently registered CEL holder may make use of the CEL to demonstrate compliance with CEL requirements.

The System for Clean Energy Certificate Management and Compliance with Clean Energy Obligations (S-CEL) is the platform through which the CRE carries out the management and recording of the information associated with the consumption and generation of electricity, emissions, transactions and liquidation and voluntary cancellation of CELs, as well as fulfilment of CEL obligations.

The persons obliged to register with the S-CEL are mandatory participants, clean generators who wish to be granted CELs, suppliers representing distributed clean generation6 who wish to be granted CELs and voluntary entities.7

On 4 March 2020, the CRE published the criteria to be used to calculate the total amount of available CELs to fulfil the total clean-energy obligations for each of the first two years of these obligations and the methodology used to calculate the implicit price of CELs in accordance with the LTE.

The means for carrying out transactions in CELs in Mexico are long-term auctions, bilateral contracts and the CELs secondary market organised by the National Centre of Energy Control (CENACE).

Long-term auctions

Long-term auctions are a mechanism that allows any load-centre representative to enter into contracts competitively to meet the demand for CELs, power and capacity. The term of the contracts (electricity coverage contracts) awarded through these long-term auctions will be 20 years for CELs.

To date, three long-term auctions have been carried out. In the first auction, with 17 offers from 11 companies, 5,380,911 CELs were awarded at an average price of US$47.7 per package (MWh plus CELs). In the second auction, with 29 offers from 21 companies, 9,275,534 CELs were awarded in contracts with an average price of US$33.7 per package (MWh plus CELs), 30 per cent lower than that obtained in the first auction. In the third auction, 5,762,647 CELs were awarded, and the average price obtained was US$20.57 per package (MWh plus CELs), 38.5 per cent lower than the price obtained in the second auction and recognised as one of the lowest prices in the world. The fourth auction was suspended and later cancelled by CENACE.

Bilateral contracts

A bilateral contract is an agreement the terms and conditions of which will be established freely and voluntarily by the parties to the agreement.

CELs secondary market

The secondary market in CELs allows transactions between any load-centre representative whose CELs obligations are not covered or exceeded by electricity coverage contracts, generators whose operational capacity does not allow them to meet their contractual CEL obligations, and generators with capacity surplus to their commitments.

The CELs market is currently under review by COFECE,8 the Mexican antitrust authority, to analyse competition and the effectiveness of this mechanism in promoting investment in clean-energy projects in compliance with international commitments adopted by Mexico.

Emissions trading system

On 1 October 2019, the resolution establishing the preliminary basis for Mexico's emissions trading system test programme was published in the DOF. Emissions trading aims to promote emission reductions at the lowest possible cost, in a measurable, reportable and verifiable manner, without compromising the competitiveness of the participating sectors in relation to international markets.

The emissions trading system is to be realised in two phases:

  1. the initial phase consisting of a test programme with no economic effects, which will last for 36 months, beginning on 1 January 2020 and ending on 31 December 2022; and
  2. the operational phase, which will come into effect at the end of the transition phase (1 January 2022 to 31 December 2022) of the test programme.

The details of the regulatory regime for the operational phase will be published in the DOF in 2022.

Regulatory approvals

To develop a renewable energy project within the Mexican energy regulation framework, approvals are required from the CRE and the CENACE.

The CRE is responsible for regulating and promoting the efficient development of electricity generation, public services of electricity transmission and distribution, electricity transmission and distribution that is not part of the public service, and commercialisation of electricity, whereas the CENACE is a decentralised public body whose purpose is to exercise operational control of the National Electric System (SEN) and operation of the MEM, and to guarantee impartiality in the access to the RNT and the RGD.

To develop a Mexican renewable energy project, the following approvals are required:

  1. generation permit, issued by the CRE; and
  2. interconnection application approval by the CENACE (subject to indicative, impact and facilities studies conducted by CENACE, the granting of a financial guarantee by the applicant and the execution of an interconnection agreement by and between the transporter or distributor and the applicant).

As mentioned above, these approvals are required under the regulatory framework for energy. There are, however, additional development-related requirements, such as evaluation of environmental and social impacts, and regulatory compliance regarding land use, constitution of easements or rights of way, water supply and wastewater discharge, and change of land use in forestland, among other matters, depending on the specific features of each project. In addition, those generation projects that intend to participate in the MEM must execute a market participant agreement with CENACE and comply with the requirements established in the specific market guidelines.