Regulation of electricity utilities – power generation

Authorisation to construct and operate generation facilities

What authorisations are required to construct and operate generation facilities?

The main permit required to construct and operate generation facilities is the power generation permit granted by the CRE.

In addition, power generation facilities require a federal environmental, safety and health impact authorisation granted by the Ministry of the Environment and Natural Resources (SEMARNAT) and if the use of national waters is involved, a concession or a permit granted by the National Waters Commission (hydroelectric projects with a generation capacity of 30MW or less that do not affect the flow or quality of water do not require a water concession). A critical authorisation in terms of costs and timing, when applicable, is the change of forest land use authorisation, which is granted by SEMARNAT and may be subject to the payment of governmental fees if relevant flora reallocation works are required. Land use and local environmental permits must also be obtained from the state and municipal authorities where the project is located. Likewise, in certain areas of the country, the archaeological clearance should be obtained in a timely manner in order to verify the project’s feasibility.

Moreover, the new Electricity Industry Law requires those intending to obtain a generation permit to file with the Ministry of Energy (Sener) a social impact assessment; Sener shall then evaluate such assessment and issue the corresponding resolution and recommendations. The regulations establishing details about the scope and effects of this new requirement were issued on 1 June 2018.

Grid connection policies

What are the policies with respect to connection of generation to the transmission grid?

Although power transmission and distribution services are reserved to the state, CENACE, as independent operator of the SEN, is the entity in charge of guarantying open access to the SEN. The general technical requirements to permit the interconnection of generation facilities to the SEN are issued by CENACE and approved by the CRE, who is also the authority in charge of approving the model Interconnection Agreements, approving the charges payable for the studies required to determine the specific infrastructure required to permit each interconnection and other aspects of the interconnection process, and resolving disputes concerning access to the SEN.

In turn, transporters and distributors are obligated to permit, on a non-discriminatory basis, the interconnection of all generation facilities that request such interconnection, whenever the interconnection is technically feasible. For that purpose, CENACE shall instruct the relevant transporter or distributor to enter into the required interconnection agreement, once the characteristics of the specific infrastructure have been determined. The transporter or distributor and the relevant generator shall then enter into the corresponding interconnection agreement within 10 business days following the notification of CENACE’s instructions. Upon conclusion of the required infrastructure, a verification unit authorised by the CRE shall certify that the interconnection facilities comply with the characteristics established by CENACE and all applicable standards; in that case, CENACE shall instruct the transporter or distributor to carry out the physical interconnection within the 72 hours following such instruction.

The Market Rules (which are the rules and procedures regulating the operation of the wholesale electricity market) regulate the criteria that CENACE shall use to determine the specific infrastructure requirements, the priority granted to each interconnection request and the procedures to jointly evaluate requests affecting a single region.

Instead of installing the required infrastructure at their cost (either through the execution of the relevant works or the contribution of the required funds), generators may choose to request CENACE or the distributor to include it in the expansion and modernisation programmes of the National Transmission Grid and the General Distribution Grids, as applicable, provided such infrastructure brings specific benefits to the SEN (such benefits being evaluated pursuant to the general criteria issued by the CRE). In that case, the generator may be required to guarantee the development of the proposed generation facility.

If the generator chooses to execute the necessary works or contribute the necessary funds, the generator has the option to acquire the corresponding financial transmission rights, or otherwise receive the proceeds of their sale, pursuant to the Market Rules.

Alternative energy sources

Does government policy or legislation encourage power generation based on alternative energy sources such as renewable energies or combined heat and power?

During 2017 , power in Mexico was produced from these sources in the following proportions:

  • 13 per cent conventional thermoelectric;
  • 10 per cent hydro;
  • 50.21 per cent combined cycle;
  • 7 per cent steam, turbogas and internal combustion;
  • 9 per cent coal;
  • 3 per cent nuclear;
  • 3 per cent wind;
  • 2 per cent geothermal, solar, distributed generation and others; and
  • 3 per cent bioenergy and efficient cogeneration.

For over a decade, the government encouraged combined-cycle gas-fired power plants, making this type of technology a requirement in most of the IPP projects called by the CFE, but in 2010 the CFE began undertaking international public tenders for the award of long-term contracts for renewable energy projects (particularly, wind farm projects), owing to Mexico’s climate change laws and policies. These power plants and renewable energy facilities were developed by private companies under the IPP scheme contemplated in the previous legal framework.

The IPP bids were very successful, not only because of the number and diversity of reputable power companies participating in such international tenders, but also because of the rates and competitiveness of the offers. All of the payments under the contracts awarded were financed by resources of the federal government. Key issues affecting IPPs for combined cycle power plants, however, included the lack of infrastructure to supply natural gas to the power plants under development; the increasing scarcity of natural gas in Mexico and the inconsistency between the terms of the natural gas supply services offered by Pemex and the fuel supply terms required to make these projects suitable for project finance purposes. As a result, liquefied natural gas (LNG) supply became an important part of the supply of natural gas in Mexico and the CFE included long-term supply arrangements with LNG suppliers as part of its fuel supply strategy. Likewise, the CFE anchored a large number of natural gas pipeline projects that allow the CFE to have access to several supply sources of gas imported from the United States. As a result of the energy reform, however, the IPP programme has been superseded by the power and energy auctions that CENACE has been organising periodically. Nonetheless, there are no legal restrictions impeding CFE’s marketing and supply divisions from entering into long-term contracts with generators in order to anchor large-scale generation projects under schemes that could resemble IPPs.

In 2008, the Law for the Use of Renewable Energies and the Financing of the Energy Transition (the Renewable Energies Law) was enacted, precisely to regulate and promote power generation based on renewable energy sources, and in September 2009 the implementing regulations of the Renewable Energies Law were published. Following the global need to reduce the emission of greenhouse gases and global warming, the Renewable Energies Law was aimed at strengthening the competitiveness of the Mexican energy sector, reducing the use of fossil fuels and promoting the use of renewable energy. Moreover, as part of the CFE’s programme to encourage the development of renewable energy projects in Mexico, in 2009 and 2010 it awarded four long-term power purchase agreements to private independent power producers developing wind power projects in Oaxaca, each with a generation capacity of 100MW.

The Mexican authorities developed and implemented the mechanisms necessary to allow renewable energy projects in Mexico to qualify for obtaining of certified emission reductions under the Kyoto-Bonn-Marrakesh Protocol and other similar programmes. Moreover, in June 2012, the General Climate Change Law was enacted, setting forth the basic framework to permit the creation of a domestic market for certified emissions reductions intended to survive the Kyoto Protocol or other mechanisms that may supersede such international instrument. The General Climate Change Law contemplates:

  • the creation of the National Environmental and Climate Change Institute, intended to generate and consolidate all technical information for monitoring greenhouse gas emissions and the effects of climate change;
  • a Green Fund, administered by the federal government to support and encourage initiatives towards emissions reduction;
  • the requirement of implementing economic incentives to foster the development of clean energy sourced facilities, efficient cogeneration and renewable energies;
  • the gradual development of a subsidies programme to promote the use of non-fossil fuels, energy efficiency and sustainable public transport; and
  • the promotion of electricity generation from clean energy sources, with the expectation of reaching 35 per cent by 2024.

Some of the incentives for renewables that the Mexican government had already implemented under the previous legal framework (including accelerated tax depreciation rates and financing programmes) are still in play, but not all of them have been retained in the new regime.

Instead, the new statutes provide for different incentives, mostly intended to:

  • promote open access to transmission and distribution infrastructure, and allow an adequate interaction of firm and intermittent power resources in the grid;
  • support the development of new generation capacity through clean energy auctions resulting in long-term and medium-term agreements (‘clean energy’ includes renewable energy, nuclear and efficient cogeneration); and
  • increase the involvement of offtakers in supporting clean energy projects, through the imposition of clean energy requirements reflected in a number of clean energy certificates (CELs) that load-serving entities will be required to obtain on an annual basis.

Pursuant to the Electricity Industry Law and subsequent resolutions by the Ministry of Energy, qualified offtakers and power suppliers are required to acquire CELs for at least 5 per cent of their total energy consumption during 2018, 5.8 per cent for 2019, 7.4 per cent for 2020, 10.9 per cent for 2021 and 13.9 per cent for 2022. CELs are granted to clean energy generators based on their power output, and are part of the products that may be traded in the wholesale electricity market. Moreover, the Energy Reform included a new Geothermal Energy Law, aimed at creating a new framework to develop Mexico’s vast geothermal resources, which have been underused for decades, mainly owing to the absence of adequate regulations.

Climate change

What impact will government policy on climate change have on the types of resources that are used to meet electricity demand and on the cost and amount of power that is consumed?

Government policy with respect to climate change is mainly focused on, and related to, the incorporation of renewable energy sources on a larger scale. As a result, the federal government has so far promoted the development of renewable energy projects anchored by long-term power purchase agreements awarded through public bidding processes to sell power to the CFE, which in turn is used to provide electric power utility services. The effects of the new mechanisms that are contemplated in the Electricity Industry Law (which consist mainly of requiring qualified offtakers and power suppliers to acquire a certain number of clean energy certificates) are yet to be seen. In line with the promotion activities being developed by the federal government, a number of instruments have been issued to provide developers with details and information to generally assess the availability of renewable resources in Mexico, as well as to identify potential challenges and barriers for each type of technology. Moreover, CENACE is expected to continue launching long-term auctions for the purchase of energy and CELs from renewable energy generators, as a way to further promote renewable energy sources.

Storage

Does the regulatory framework support electricity storage including research and development of storage solutions?

Although the Market Rules contain references to electricity storage, the laws and regulation do not provide yet an adequate regulatory framework to promote or support the development of storage solutions. The Ministry of Energy and the CRE are working on developing that legal framework. Specifically, the Energy Transition Strategy to Promote the Use of Clean Technologies and Fuels provides, as part of the government’s strategies, the creation of a group of entities supporting the development of new storage technologies.

Government policy

Does government policy encourage or discourage development of new nuclear power plants? How?

The generation of nuclear power is exclusively reserved to the Mexican state, through the CFE and therefore no private nuclear power plants are allowed in Mexico. Mexico has only one nuclear power plant, with an installed capacity of 1,610MW, representing 3 per cent of the aggregate installed capacity in Mexico.

While no commitments or formal announcements have been made, the Mexican government has indicated in a number of official documents that it is, at present, evaluating the possibility of increasing the generation of nuclear power as one of the strategies to reduce greenhouse gas emissions.