President Andrés Manuel López Obrador’s (AMLO’s) electricity reform has been introduced into Mexico’s lower house, which will have ripple effects on investment beyond the energy market. AMLO’s electricity reform is the latest effort in a pattern of targeting private investors in the energy sector to prioritize the two state-owned energy companies, PEMEX and the Federal Electricity Commission (CFE). FDI to the electricity sector has been declining since AMLO took over in December 2018. This trend has continued in 2021, declining by 24% YOY in H1.
The current electricity proposal, which the government aims to enact as a constitutional reform, consists of the following damning policies against private investors: 1) It gives 54% of the market share to the CFE and 46% to investors; 2) It eliminates regulatory agencies, such as the Regulatory Energy Commission (CRE), effectively centralizing all institutional levers under the CFE and Energy Secretariat (SENER); 3) Lithium, a key component to the thriving renewable energy sector, will only be exploited by the Mexican state; 4) It prioritizes generation and distribution of electricity from the CFE at the expense of private generators. In sum, AMLO’s electricity reform, if enacted, will severely affect firms that entered the market after its opening in 2013–2014 under the Pact for Mexico.
Firms should brace for a protracted battle inside and outside Mexico between energy companies and the López Obrador administration if the electricity reform is passed as it was introduced by AMLO’s government. Although AMLO and MORENA, Mexico’s ruling party, do not have enough votes to approve the reform with their current legislators, they are negotiating with the opposition party, Institutional Revolutionary Party (PRI), to sway votes and pass the reform. If a MORENA-PRI alliance becomes operational, firms should expect the reform to pass and a hyperpolarized political environment for 2022 and onward.
Firms will need to fine-tune their government engagement strategy, making sure to use the institutional leverages at their disposal to avoid a damning reform.
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