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How Mexico Flipped the Switch on Self-Supply Power Generation Plants

The government of Andrés Manuel López Obrador is trying to renegotiate the business model with private companies following the Supreme Court’s ruling that validates the electricity reform

How Mexico Flipped the Switch on Self-Supply Generation Plants
May 20, 2022 | 12:31 pm

Mexico City — Mexico has 347 self-supply electric power generation plants currently operating, but the electricity generation model, which is widely used by private companies and their partners, is being targeted by President Andrés Manuel López Obrador’s government, which aims to renegotiate their current contract conditions in a bid to achieve more favorable terms for state-owned utility Comisión Federal de Electricidad (CFE).

The country issued a total of 468 self-supply permits between 1994 and 2019, 72% of which are in operation, while 20% correspond to plants still under construction or about to break ground, and 5.8% to plants with terminated, revoked or inactive permits, according to a report by the country’s antitrust institution (Instituto Mexicano para la Competitividad, IMCO), with data from the energy sector regulator (Comisión Reguladora de Energía, CRE) published this month.

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The government and the CFE argue that 110 of the self-supply plants are illegal, and which have more than 77,000 off-takers, a situation they have described as a “black market”, and one of their main arguments against the self-supply model is that the generation companies transport the electricity to their clients with lower tariffs compared with those of other electricity generation models.

The authorities also argue that solar- and wind-powered self-supply generation plants require a back-up with conventional power generation technology that the private companies do not pay for.

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“If they want to have the backup of the grid, companies have to pay for that, and that is the crux of the issue,” the CEO of energy company Baorgg said in an interview.

López Obrador’s stance has been backed up by the Supreme Court, which has validated his Electricity Industry Law, and which includes the revocation of permits granted for self-supply, and which follows two years of administrative and legal battles, which included his failed attempt to reform the Constitution in April, with the rejection of the reform bill by Congress.

When Did the Self-Supply Model Emerge?

The self-supply model was introduced during the 1988-1994 government of Carlos Salinas de Gortari, who modified a regulation in force since 1992, with the aim that large steel, cement and automotive industries in Mexico could generate their own electricity and use the CFE’s transmission networks to take it to their consumption points.

The model grew, led by companies such as Iberdrola, Naturgy, Mitsui and Saavy Energy, and which had as partners such as beverage bottling and distribution giant Femsa, bakery confectioner Bimbo, retail giant Walmart and the cement giant Cemex, until 2013, when the energy reform introduced by the government of former president Enrique Peña Nieto prohibited the model, but allowed the permits already issued to run until their expiration date.

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However, this did not prevent the CRE from issuing more self-supply permits, because multiple applicants had initiated procedures before the energy reform came into force.

But the private sector is not the only one using the self-supply model, as there are also 38 public sector permit holders, such as state oil company Pemex, federal public administration agencies and entities, and local governments, and which have invested some $26.8 billion in the construction of power plants that operate under this model, according to the IMCO.

The CFE has accused private equity funds such as BlackRock, Vanguard and Blackstone of being behind electricity giants such as Iberdrola, and on May 11, López Obrador met with the president of BlackRock, the world’s largest private equity fund, Larry Fink, after informing that the Interior Ministry will enter into dialogue with such companies.