Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
The Mexican Ministry of Energy (Secretaría de Energía or SENER) changed the operating rules for the Mexican power grid on May 16 to the detriment of private power producers, in particular wind and solar power projects.
The new rules are meant to preserve the grid’s reliability, safety and continuity. With this latest action, SENER has eliminated any doubt that power sector policy in Mexico is being driven by the state-owned utility and dominant market player, CFE (Comisión Federal de Electricidad), rather than by sound and competitive policy principles enshrined in Mexican law.
The new rules can be traced to a “wish list” from CFE to SENER and Mexico’s energy regulator, the Comisión Reguladora de Energía or CRE, that leaked in December 2019. As part of the wish list, CFE asked SENER and CRE to limit interconnection of new renewable energy projects to protect the grid, prioritize the dispatch of CFE power plants and give CFE a greater role in planning of the national grid.
The new policy implements the wish list and is in the same vein as a ruling by SENER in October 2019 modifying who is entitled to receive clean energy certificates for generating renewable energy. (For earlier coverage, see “Mexico CEL ruling roils market” in the December 2019 Project Finance NewsWire.)
The policy imposes roadblocks on issuance of new power generation permits and additional restrictions for new wind and solar power plants, and it strengthens the roles of SENER, CENACE (Centro Nacional de Control de Energía) –- the independent grid operator -- and CFE in the planning and operation of the grid. It allows CFE to propose to SENER, and SENER to define, “strategic projects” that are needed to comply with the government’s energy policy and that will have priority for interconnection to the grid. SENER is expected to favor interconnection of CFE’s power plants over private ones.
The new grid rules are in line with CENACE’s recent efforts to delay interconnection of new wind and solar power plants to the grid, ostensibly, to preserve the safety and reliability of the grid in the face of falling electricity demand caused by the COVID-19 pandemic. These measures were harshly criticized by the Federal Competition Commission (Comisión Federal de Competencia Económica or COFECE. (For earlier coverage, see “Mexican ISO prevents wind and solar projects from reaching commercial operation.”) The undertone of the SENER policy is that the intermittency of wind and solar power plants destabilizes the grid.
In contrast with CENACE’s resolution, which is meant to be in place only during the health emergency imposed by the Mexican government due to the COVID-19 pandemic, the effects of the new policy by SENER are permanent and are a change in law.
SENER’s new policy violates several constitutional principles and laws.
To begin with, the publication of the policy likely violates due process and public consultation laws. Mexican law provides for a lengthy public consultation process allowing potential stakeholders to comment on proposed regulations. The consultation process is handled by the National Commission for Regulatory Improvement (Comisión Nacional de Mejora Regulatoria or CONAMER) and the law calls for a regulatory impact assessment where regulations affect an industry. However, SENER rushed publication of the policy in the Federal Register (Diario Oficial de la Federación), arguing that these measures were urgently required because of the drop in electricity demand due to the COVID-19 pandemic. Yet, the policy does not mention the COVID-19 pandemic.
CONAMER initially blocked publication on an expedited basis. It has already collected several comments on the initial draft of the policy. However, it expedited the consultation process under political pressure and issued an ill-founded resolution justifying why the policy was exempted from the regulatory impact study and proceeded to allow for its publication. The head of CONAMER resigned moments before publication.
Adoption of the policy potentially violates constitutional principles of separation of powers and the supremacy clause. Regulations and policies issued by administrative authorities may not contravene the laws enacted by the Mexican Congress. The policy contradicts several core principles enshrined in the Electric Industry Law (Ley de la Industria Eléctrica or LIE) and ancillary regulations. Parts of the policy should have been enacted as statutory amendments requiring Congressional approval.
The policy overlaps with current laws regulating the Mexican power sector and the electricity market. It expands the authority of SENER, CENACE, the CRE and CFE under the Electricity Industry Law and ancillary regulations. The discretionary exercise of CENACE’s, CFE’s and SENER’s new powers may violate open-access and free-competition rules.
SENER interprets the non-discrimination and open-access principles in the Electric Industry Law loosely. It gives priority to grid reliability over other basic principles of open and competitive power markets that were highlighted in an opinion released by the Mexican Federal Competition Commission on May 6. (For earlier coverage, see “Mexican Competition Commissioner criticizes actions against wind and solar projects.”)
The new policy imposes a new requirement on developers to obtain a generation permit. Developers will have to request an interconnection feasibility opinion from CENACE before applying for a generation permit from CRE. This new requirement is in addition to the interconnection studies that CENACE must conduct to determine what upgrades are required to connect a project to the grid. It is a clear attempt to set roadblocks to interconnection of privately-owned power projects.
The interconnection feasibility opinion will be given –- or not -- based on vague concepts and particular conditions in each region of the grid, including energy demand, grid congestion, reliability requirements, technical limitations that result from installation of wind and solar power plants, climate conditions, wind and solar power plant location and displacement of conventional power plants by renewable technologies. Neither the new policy nor existing law defines any of these concepts. The policy explicitly mentions that CENACE may reject interconnection requests based on such concepts without violating open-access rules. Existing law generally requires interconnection of power plants to the grid on a first-come-first-served basis. The discretionary ability to favor the interconnection of some power plants over others based on type of technology and such open-ended concepts violates the very core of open-access rules.
The interconnection of wind and solar power plants with interconnection agreements in place will not be affected by these additional requirements.
CENACE, together with the electricity carriers and distributors, including CFE, will prepare the national expansion and modernization plans for the grid. Current law already allowed them a say in this, but the new policy expands the scope. The new rules say that CENACE and CFE may set limits on incorporation of wind, solar and distributed generation projects by region in any future plans for the grid. As such, CFE will assume a more proactive role in the power plant connection process of its competitors, violating existing free competition laws.
The new SENER policy suggests stricter rules that will permit generation permits and interconnection agreements to be cancelled if projects fall behind schedule. In practice, construction and commercial operation deadlines are often delayed due to circumstances beyond the control of generators, including interconnection delays caused by CFE as transmission provider and by CENACE as ISO, as well as permitting delays and social conflicts. It is unclear if new generation permits and interconnection agreements can be extended more than once as a result of events like these, which would typically qualify as force majeure.
The SENER policy also makes it harder to extend deadlines in generation permits. If CRE authorizes a transfer, assignment or a lien on a generation permit, then the permit holder will not be allowed to extend the construction and commercial operation deadlines. This will create additional concerns for buyers and creditors of power projects.
The new policy authorizes new ancillary services to preserve grid reliability and safety, such as “backup capacity for variability of intermittent renewable power plants.” These services are expected to be provided by conventional power plants, most likely CFE’s. The new rules explain how the services will be compensated. Although the costs of ancillary services are generally distributed among all market participants, the new policy suggests that renewable generators whose plants create the need for these particular ancillary services will end up bearing the cost.
Solar and wind projects will no longer be credited with capacity (potencia), a market product that generators receive based on availability during the 100 critical hours of the grid. This change will affect the obligations acquired by wind and solar projects that have entered into power purchase agreements, including to sell capacity to offtakers, such as the agreements awarded in the clean energy auctions conducted by the government between 2015 and 2018.
Distributed generation projects will also be subject to additional requirements. Interconnection studies by power distributors (namely, CFE) must be conducted to identify any upgrades required to connect a distributed generation project to the grid. The studies will inquire, among other things, into end-user and personnel safety, the distributor’s and distributed generator’s infrastructure and the concentration of load centers and power plant units in the area. Many of these concepts are not defined in the new policy or existing law and, thus, their scope is unclear. Additionally, distributed generators will be required to install smart inverters to regulate frequency and voltage and incorporate monitoring, control and communications equipment that would allow distributors and CENACE to control their generation facilities remotely.
The publication of the new policy, together with CENACE’s actions, have roiled industry participants. They deter private sector participation in the Mexican power industry.
Over the weekend, Mexico’s largest private business council, the Consejo Coordinador Empresarial, issued a strongly-worded statement calling the new SENER policy a flagrant violation of Mexican law and warning that the private sector will use all legal resources available to challenge it. In response to the criticism, Mexico’s president, Andrés Manuel López Obrador, in his morning press conference on May 18, said the federal government has broad power to impose measures it considers in the best interests of the Mexican economy and that the private sector should ask the government to forgive it for “taking over the energy sector, in particular petroleum and electricity, and conspiring to destroy PEMEX and CFE.”
The government’s disregard for open-access and economic dispatch rules will likely lead to higher pollution levels, higher electricity prices for commercial and industrial consumers and more subsidies for domestic end-users as a populist measure. It may also trigger further consequences under existing power purchase agreements with CFE.
Industry participants are positioning themselves to challenge the new policy before the courts and seek constitutional injunctions, known as amparos, against it. An amparo ruling could potentially suspend implementation of the SENER policy, first on a provisional basis and, subsequently, on a permament basis when the final ruling is issued by the court.
Complementary avenues exist to challenge the SENER policy, with different consequences. Affected parties may ask the Mexican Federal Competition Commission to launch an investigation into the barriers to competition that SENER is imposing in a sector involving the provision of essential goods and services. International investors may also consider filing claims under international investment treaties that, if successful, could require payment of indemnities by the Mexican government to the affected parties, but would not suspend or strike down the SENER policy.