How can Mexican Energy Reform ensure universal electricity access to its citizens?

The Constitutional Reform on energy and its secondary legislation represents a vital step towards consolidating a modern and competitive energy sector in Mexico. Through these initiatives, the ownership of the nation over the subsoil resources is maintained, while opening opportunities for these resources to become an engine of economic growth and social development for the Mexicans of today and tomorrow.

The debate and media attention surrounding the Energy Reform have focused on the hydrocarbon sector. However, this energy reform also involves major changes to the national electricity sector.

The approval and promulgation of the legislation marked the beginning of a new chapter in the history of both the electricity sector and Comision Federal de Electricidad (CFE, Federal Electricity Commission). This is a new era of responsibility, transparency, and sustainable growth for the benefit of the Mexican people.

With the reform of Articles 25, 27 and 28 of the Constitution of the United Mexican States, the Nation’s ownership of subsurface resources is reaffirmed and the planning and control of the National Electric System (SEN, its acronym in Spanish), as well as the transmission and distribution of electricity, remain under the State’s responsibility. At the same time, these legal provisions propose opening up the sector to private participation in the generation and commercialization of electricity, as well as the ability to enter into contracts to build transmission and distribution infrastructure.

In addition, the Mexican Congress enacted nine new secondary laws on energy and amended 12 more. Four of the new laws address the electricity sector directly: the Electricity Industry Law, the Geothermal Energy Act, Comision Federal de Electricidad Law, and the Coordinated Regulators on Energy Law.

With this legal framework, a new electricity model with multiple generators, universal access, and more efficient operation of transmission and distribution grids is established.

The electricity value chain in Mexico, as elsewhere in the world, is made up of at least five stages. The first is the generation of electrical energy from fuels or renewable sources to meet industrial, commercial, and domestic demand. The second stage is the dispatch of electricity. This is done through a computerized ordering centre where electrical energy supply and demand are matched to meet the demands of different consumption centres, such as cities and towns.

The third stage is the transmission of electricity. This occurs when the great towers and cables that are on the roads or in the fields carry high-voltage electricity, joining the points of generation to the points of future consumption. The fourth stage is distribution. Electricity is carried through the poles and wires in cities or towns to bring energy to businesses and households. Finally, the fifth step is marketing; that is, the sale and collection of electricity that has been generated, dispatched, transmitted, and distributed. These are the five stages of the national electricity sector and the Mexican energy reforms propose changes throughout all of them.

In implementing this energy reform, entry barriers are removed and competition is strengthened. The goal is for the private and public sectors to compete with each other to generate electricity and sell it on the wholesale electricity market.

As for the electricity dispatch, the National Center for Energy Control (CENACE, its acronym in Spanish) is independent of CFE to efficiently and competitively operate the SEN as a spot market (real time). To do so implies a simple but powerful mandate: to dispatch first the lowest-cost energy. It also has a responsibility to ensure open and fair access to transmission and distribution networks for all participants. Thus, with clear and transparent rules, it should promote the generation of electrical energy at competitive prices for the benefit of users.

The processes of electricity transmission and distribution remain strategic activities of the state, but the possibility to build the necessary infrastructure through contracts with the private sector has been established. The goal is for the private, national, and international sectors to contribute with their expertise and knowledge to the modernization of transmission and distribution networks, in order to reduce costs and energy losses.

With the opening of electricity retailing to competition, which is now possible because of the Energy Reform, it is also anticipated that consumers will benefit from competitive prices. As a result, qualified users (those with a demand of more than 1 MW from August 2016) may freely agree to prices with generating companies, while the rest of the users (basic service users) will continue to receive their service from CFE, but in a competitive environment focused on reducing costs.

The Energy Regulatory Commission (CRE, its acronym in Spanish) becomes responsible for setting user fees for basic supply, thus greater efficiency will be reflected in improved electricity costs for industries, businesses, and Mexican households.

Because CFE can compete in this new model of the electricity market, the Energy Reform and its secondary legislation will provide it with the necessary tools to meet the challenges of a dynamic and increasingly complex industry. In addition, they open up opportunities for CFE’s modernization, in order for it to be a profitable, efficient, and productive enterprise for the benefit of present and future generations of Mexicans.

In this regard, CFE will continue promoting 85 infrastructure projects that represent an investment of more than 26 billion dollars. These include the construction of new gas pipelines; the conversion of power plants that currently use fuel oil, so that they can also consume natural gas; the construction of new Combined Cycle power plants; and the development of transmission and distribution projects. Sixty-two of these infrastructure projects have already been tendered to 50 different contractors, representing an investment of more than 11 billion dollars. The remaining 23 projects will be tendered during this year for a total estimated investment of more than 15 billion dollars.

In the future, one of the main challenges that the power sector in Mexico faces is to establish a natural gas market in the country. To do so, the private sector as well as Pemex and CFE should take advantage of the new legal framework brought about by the Energy Reform. This is important because supplying natural gas – a fuel that is less costly and friendlier to the environment than other alternatives, such as fuel oil and diesel– to all regions in the country will encourage industrial and economic growth in Mexico.

In summary, the full, effective and timely implementation of the Energy Reform will allow Mexicans to continue receiving a higher quality electricity service that is less costly and friendlier to the environment.

The white paper, Taking Mexico to Full Potential, is available here.
Find out more about the initiative, Shaping the Future of Electricity