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A New Power Market in Mexico
by Raquel Bierzwinsky, in New York and Mexico City, and David Jiménez and Javier Félix, in Mexico City
Mexico has enacted secondary legislation that creates a competitive power market open to private investment in almost
all areas.
As part of a package of nine new laws covering the energy
sector and amendments to 12 existing laws, a new electric
industry law (Ley de la Industria Eléctrica) came into effect
August 12, 2014.
The new set of energy laws implements changes to the
Mexican constitution that were made in December 2013 to
open the power and oil and gas sectors in Mexico to private
participation. (For earlier coverage of the constitutional
reforms, see “Mexico Opens its Energy Markets” in the
February 2014 Project Finance NewsWire starting at page 57,
and for coverage of the electric industry law bill, see “Mexico is
Set to Open its Power Sector” in the June 2014 Project Finance
NewsWire starting at page 32.)
CENACE, the independent grid operator, will enter into with
wholesale market participants.
Operational control over the national grid (Sistema Eléctrico
Nacional) and the transmission and distribution of electricity
are considered strategic areas that will remain in the hands of
the Mexican government through a state entity. However, the
private sector will be able to participate in transmission and
distribution of electricity through agreements and joint ventures with state-owned agencies.
CFE will become a fully competitive entity as a “productive
state enterprise” under the new law and will be permitted to
participate, through separate subsidiaries, in the different
market activities. CFE will continue to be the supplier of basic
retail services to residential customers and small and mediumsized commercial customers under regulated tariffs. None of
CFE’s assets will be privatized.
A Competitive Power Market
Wholesale Market Participants
The new electric industry law allows the private sector to participate freely in the generation and sale of electricity, while
maintaining the electricity grid under the operational control
of a state-owned agency.
It creates a new wholesale electricity market (Mercado
Eléctrico Mayorista) to be operated by the Centro Nacional de
Control de Energía or CENACE. CENACE is currently a unit
within the Comisión Federal de Electricidad or CFE, but will
become the independent system operator for the entire grid.
The Ministry of Energy and the Comisión Reguladora de
Energía, or CRE, will have regulatory and supervisory authority
over the wholesale power market.
The Ministry of Energy will be responsible for issuing the initial market rules, and the CRE will be responsible for issuing
permits to participate in the wholesale market as a buyer or
seller of electricity. The CRE will also be responsible for setting
tariffs for transmission, distribution and basic retail services,
setting general conditions for market participants, issuing
forms of interconnection contracts, and managing clean
energy certificates. It will also issue a form of contract that
The new electric industry law prohibits any single company
from participating in more than one of the following activities:
generation, transmission, distribution, power marketing and
supply of electricity or basic resources for the electric industry.
However, a common parent can participate in all the activities
as long as it does each through a separate subsidiary.
“Commercialization” or marketing of electricity refers to buying and selling electricity and clean energy certificates.
The law divides wholesale market participants into a number of categories: generators (Generadores), suppliers
(Suministradores), power marketers (Comercializadores), customers with aggregate load points under three megawatts
called “basic service users” (Usuarios Básicos), customers with
aggregate load points over three megawatts called “qualified
users” (Usuarios Calificados), transmission providers
(Transportistas) and distributors (Distribuidores).
Generators, suppliers and qualified users may become
direct participants in the wholesale market by entering into
the relevant agreement with CENACE and then providing a
performance bond to CENACE.
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Mexican Power Market
continued from page 1
Each such party will have to inform CENACE of each power
plant or load point it intends to use to tap into the grid.
The CRE will establish rules for qualified users and suppliers
of basic retail services and qualified services. The CFE will
remain the principal electric utility in Mexico.
Generators
The new law puts generators into one of two categories: those
authorized to generate electricity from power plants and
agents for or resellers of electricity from such power plants.
With the exception of exempt generators, all power plants
Mexican Wholesale Electricity Market
PRODUCT
PROVIDER
Transmission
CFE-Transmission
Distribution
Operational
Control
Transmission
Rights
Energy;
Capacity;
Related Services
Exempt Generator
Power Marketer
CFE-Distribution
RETAILER
Regulated
Tariffs
CENACE
CENACE
Basic Service
Supplier
Basic Service User
Qualified Supplier
Non-Registered
Qualified User
CENACE
Wholesale
Electricity
Markets
Generator
Registered
Qualified User
Power Purchase and
Hedge Agreements
with capacities of at least 0.5 megawatts or power plants of
any size represented in the wholesale market by an agent or
reseller, will require permits from the CRE to be able to sell
power into the market. Exempt generators are only allowed to
sell energy through middlemen suppliers or use the electricity
for self-consumption, meaning from an inside-the-fence project, or for export, in each case without interconnecting to the
national grid or the general distribution networks. Generators
with power plants that are used exclusively for private use
during emergencies or service interruptions do not require a
permit from the CRE.
Generators are not permitted to sell electricity at retail or to
transmit or distribute electricity for others.
Generators will be permitted to sell power directly into the
wholesale market through CENACE, to a qualified user or both.
(The concept of a “qualified user” is discussed in more detail
below.) Each generator participating in the wholesale electricity market will be able to set its price for electricity, but will
have to report to CENACE, on a daily basis, its operating costs.
CENACE will maintain a database of the operating costs of all
generators and will be able to determine whether prices are
being offered competitively.
Generators and qualified users will be permitted to enter
into private power purchase agreements (Contratos de
Cobertura Eléctrica). CENACE will act as the go-between. It
will ensure delivery of the electricity required by a qualified
user, even if the electricity needed exceeds what the generator
produces. CENACE will bill for any
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Mexican Power Market
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excess electricity at spot market prices.
End Users
End users with an aggregate consumption equal to or above
three megawatts, as well as those who before the new law
was enacted operated under the self-supply (autoabastecimiento), cogeneration and energy import schemes, are classified as “qualified users” and are permitted to purchase energy
directly from CENACE or from a generator. The three-megawatt threshold is not a set threshold, but rather it is one that
the Ministry of Energy will be able to modify from time to
time. Three megawatts will be the threshold for the period
through August 12, 2015, with the threshold dropping to a
minimum of two megawatts after August 12, 2015 and to one
megawatt a year later.
End users with an aggregate consumption below the
threshold may only buy electricity from retail service suppliers,
including the CFE.
End users may register with CENACE as qualified users for
certain load points, while remaining basic service users for
other load points.
Power Marketing
The electric industry law uses the term comercialización to
refer to a wide range of power marketing activities. They
include selling and trading electricity, clean energy certificates
and financial transmission rights, entering into power purchase agreements and power hedges, buying transmission
and distribution services, and representing generators in the
wholesale market.
Anyone planning to engage in power marketing must register with CENACE. Power marketers authorized to provide electricity supply services to end users and to represent generators
in the wholesale market are called “suppliers.” All suppliers
will require a permit from the CRE. The law provides for three
types of suppliers: basic service suppliers, qualified service
suppliers and emergency service suppliers. Suppliers enter
into contracts to buy electricity from generators or from the
grid and resell it to customers in the regions where the suppliers are authorized to operate.
Basic service suppliers will only be permitted to sell power
to basic service users under power purchase agreements. Only
CFE, through retail subsidiaries, can provide these services.
Qualified service suppliers will be able to sell electricity to
qualified users and act for exempt generators in placing their
electricity in the wholesale market.
Emergency service suppliers may only provide emergency
power services to qualified users, at the maximum regulated
price and for a limited time period, to maintain continuity in
the supply of electricity. They also may represent exempt generators in the wholesale market.
Qualified users that are registered market participants will
be permitted to do any marketing activity other than sell electricity to third parties. Power traders will be able to operate in
the market.
Transmission and Distribution
Although the distribution and transmission of electricity will
remain under the control of the state, the government will be
authorized, through “productive state enterprises” (mainly,
CFE subsidiaries), to enter into agreements or joint ventures
with private parties to finance, install, maintain, manage,
operate and expand the transmission and
distribution networks.
The CFE is expected to launch public international tenders
for the construction and operation of transmission lines, with
CFE acting as supervisor and remaining the middleman for
dealing with CENACE, registered market participants and end
users. The electric industry law imposes joint liability on private companies constructing or operating transmission lines,
but only to the extent of the scope of the services provided.
The tariffs for these services, as well as the terms of service,
will be regulated by the CRE.
The law establishes a local content requirement for anyone
constructing or operating transmission and distribution lines,
except where an international treaty or commercial agreement to which Mexico is a party provides otherwise. The local
content requirement will be set by the Ministry of Energy, but
it is not intended as a barrier to private investment. The law
also bars any transmission and distribution infrastructure that
belongs in the public domain from being granted as
collateral security.
The interconnection of power plants and load points with
the grid will be regulated by CENACE. CENACE may direct
transmission providers and distributors to interconnect to
power plants requesting interconnection under terms that are
not unduly discriminatory. The law provides for an open
access obligation, subject to technical and security requirements. Transmission providers and distributors will be obligated to enter into interconnection
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Mexican Power Market
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agreements using forms issued by the CRE within 10 days
after issuance of an order by CENACE and to perform the physical interconnection within 72 hours following an instruction
from CENACE.
Generators and end users can install interties, at their own
expense, or may ask CENACE or the transmission providers and
distributors to build such facilities as part of their network
expansion and modernization plans or may contract with
them for the construction services, at the generators’ and end
users’ own expense.
Grandfather Rights
There has been a lot of attention lately in Mexico to grandfathering development-stage and operating projects.
The electric industry law addresses the rights of permit
holders under the old legal regime. Anyone who held a permit
for self-supply, cogeneration, small production (meaning under
30 megawatts), independent power production (meaning at
least 30 megawatts) and to import or export electricity will be
able to retain the permit and continue operating under the
old rules.
However, a permit holder may choose to exchange its existing permit for a new generation permit under the new law,
but with the option of going back to its old permit and interconnection agreement at any time in the next five years. The
term of the existing permit and interconnection agreement
will remain as originally granted.
Grandfathered interconnection contracts (Contratos de
Interconexión Legados) will retain the rights under the old
rules relating to self-supplied capacity, a postage-stamp
wheeling tariff, energy banking and renewable
energy projects.
The right of existing permit holders of renewable energy
projects, in particular, to operate under old law was a very significant issue, as there was a great deal of concern and anxiety
in the run up to the enactment of the new law about whether
renewable energy projects would be hurt by the new wholesale market rules without any regulatory assistance, subsidies
or incentives.
Applications for self-supply, cogeneration, small producer,
independent power producer and import and export permits
that were pending on August 12, 2014 will be processed by the
CRE in accordance with the old rules.
Applicants that have paid the application fees and permit
holders that have yet to execute an interconnection agree-
ment may retain the right to enter into a 20-year grandfathered interconnection agreement for their projects.
However, the permit holder must notify the CRE by October
11 that it plans to continue the project. Then it has until
December 31, 2016 to arrange financing for the entire project
and enter into commitments to acquire the equipment and
pay at least 30% of the total project cost. Alternatively, a permit holder can lock in grandfather rights by being assigned
transmission capacity through an open season process and
satisfying all payment and bond requirements.
Parties to a grandfathered interconnection agreement may
register in the market all or a portion of the capacity included
in their interconnection contracts and offtakers may register
their load points in the qualified user registry. Any such registered capacity must be excluded from the grandfathered
interconnection agreement and be included in a new interconnection agreement and generation permit under the new law,
while offtaker load points registered in the qualified user registry must be excluded from the grandfathered interconnection agreement and be included in a new interconnection
agreement under the new law.
Financial Transmission Rights
and Interruptible Load
The Mexican wholesale electricity market incorporates elements from electricity markets in the United States, such as
financial and congestion transmission rights and demand
response or interruptible load.
Financial transmission rights (Derechos Financieros de
Transmisión) will be sold and traded among market participants. They will have the same tenor as the underlying interconnection agreement or useful life of the power plant,
whichever is longer.
Anyone that was a party to a grandfathered interconnection agreement or a transmission agreement on August 12,
2014 has the option, when entering into new interconnection
agreements under the new regulations, to acquire, at no cost,
firm financial transmission rights corresponding to the historic
use of the load points included in the grandfathered interconnection agreement or transmission agreement.
Turning to interruptible load (Demanda Controlable), end
users, both basic and qualified, will be subject to requirements
set by CENACE. Representatives of guaranteed interruptible
load (Demanda Controlable Garantizada) will be required to
register their capacity with CENACE.
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Mexican Power Market
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Renewable Energy and Distributed Generation
The new law has no specific provisions for renewable energy
projects, but it deals with them in a roundabout way by
addressing “clean energies,” defined as any type of energy
source and power generation process that does not exceed an
emissions or residue threshold.
The law does not differentiate among technologies, but
lists among the “clean energies” wind, solar, tidal wave, geothermal, biomass, hydroelectric, nuclear, waste-to-energy and
carbon sequestration. The Ministry of Energy will implement
a mechanism for trading clean energy certificates to promote
clean energy projects and diversify energy sources, with minimum percentage requirements that market participants must
either sell or acquire, through public tenders or direct sales.
The minimum number certificates that each market participant must buy will be tied to the total electricity consumption
at load points.
Minimum purchase requirements for clean energy certificates will be set the first quarter of each year for the following
three-year period. Clean energy certificates will be issued by
the CRE.
Offtakers with load points covered by grandfathered interconnection contracts are exempted from the need to purchase clean energy certificates to the extent that they buy
enough electricity from clean energy sources to cover their
entire electricity needs.
The existing accelerated depreciation benefit for renewable
energy projects will remain in place.
The law allows exempt generators with generating facilities
interconnected to distribution networks serving a high number of load points to operate under a distributed generation
scheme. Distributed generation will have open access to distribution networks and markets to sell its production. The
Ministry of Energy is charged with promoting credit and other
forms of financing for clean energy distributed
generation facilities.
Electricity customers will be able to engage in net metering
with their retail suppliers. The CRE will issue a form of contract to be used and decide on the payment methodology.
Other Information
The law contains a number of provisions that regulate the
social impact of power projects on local and indigenous communities. It requires that all parties interested in obtaining a
permit or authorization to generate electricity must present
the Ministry of Energy with a social impact assessment that
not only describes the potential social impacts, but also offers
mitigation measures.
The Ministry of Energy is expected to issue the initial market rules and establish a wholesale electricity market within
the next nine to 12 months. The CRE has nine months -- until
early April 2015 -- to issue the model contracts to be used in
the wholesale electricity market. Supplemental rules and regulations will need to be issued on the same timeline.
CENACE will start functioning as an independent agency of
the government by December 2014.
The CFE will operate in the future under a new law that was
enacted as part of the package of laws adopted alongside the
electric industry law,
The CFE will become “productive state enterprise” with
technical, operational and administrative autonomy. It will
perform all public service transmission and distribution activities, as well as power generation and power marketing services either directly or through subsidiaries.
It may import, export, transport, store and market gas, coal
and other fuels and, in the process, turn into a fully-integrated
energy company.
CFE may also form partnerships and strategic alliances to
provide its services and will be able to develop projects with
private sponsors under public-private partnerships. It will no
longer be subject to ordinary government procurement rules,
which will provide CFE with more flexibility and efficiency in
contracting for works and services.
Finally, the CFE will have budgetary autonomy, but subject
to budget balancing and indebtedness limitations proposed by
the Ministry of Finance and approved by the Mexican
Congress. 
September 2014
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