Energy policies in relation to climate change mitigation commitments

Brief analysis of recent energy policies implemented by the Government of Mexico in relation to national and international legal commitments on emissions reduction as part of climate change mitigation actions

1. Background

Mexico signed the United Nations Framework Convention on Climate Change (UNFCCC) in 1992, being approved in that same year by the Senate of the Republic and ratified before the United Nations Organization (“UN”) in 1993. Its promulgation Decree was published in the Official Gazette of the Federation (“DOF”) on June 7, 1993 and entered into force on March 21, 1994. Its objective was set out in Article 2, in order to “Achieve stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. This level should be achieved within a timeframe sufficient to allow ecosystems to adapt naturally to climate change, ensure that food production is not threatened, and allow economic development to proceed in a sustainable manner.” 

1. Legal framework

Following the commitments to implement actions to mitigate the harmful effects of climate change, on June 6, 2012, the General Law on Climate Change (“LGCC”) was published in the DOF, which establishes the “provisions to address the adverse effects of climate change"and regulates the issues established in the Political Constitution of the United Mexican States ("CPEUM") related to environmental protection, sustainable development, as well as the preservation and restoration of ecological balance.

As part of the commitments assumed by Mexico at the Conference of the Parties, COP 21 of the UNFCCC (analyzed below), various provisions of said Law were reformed in 2018, incorporating the concept of Nationally Determined Contributions (“NDCs”), as transcribed below:

“Article 3. For the purposes of this Law, the following definitions apply:

[...]

X. Nationally determined contributions: set of objectives and goals, assumed by Mexico, within the framework of the Paris Agreement, on mitigation and adaptation to climate change to meet the long-term objectives of the United Nations Framework Convention on Climate Change.

XI. […]"

For its part, Article 31 of the LGCC provides that the national climate change mitigation policy includes “plans, programs, actions, economic, policy and regulatory instruments” for the gradual reduction of specific emissions, in accordance with the CDNN, in order to comply with the “objectives of the Paris Agreement and any other international treaty signed by Mexico on climate change.

In this regard, it is important to highlight that Article 33 of said Law, in its sections I and III, establishes that the objectives of public policies for the mitigation of climate change must be aimed at protecting the environment and guaranteeing the right to a healthy environment and sustainable development through the mitigation of emissions, as well as implementing the substitution of the use and consumption of fossil fuels and the generation of electrical energy through renewable energy sources.

Finally, in its Second Transitory Article it was established, on the one hand, “indicative objectives or aspirational goal ( "Conditional Goal”) a 2020% reduction in emissions by 30 compared to the baseline and a 50% reduction by 2050 compared to emissions in 2000, and an Unconditional Target of 22% of greenhouse gas (“GHG”) emissions and 50% of black carbon emissions by 2030 compared to the baseline. This last objective constitutes the NDC, which would imply reaching the maximum peak of national emissions in 2026.

In the case of the Energy Sector, the Third Transitory Provision established that the Ministry of Energy (“SENER”), in coordination with the Federal Electricity Commission (“CFE”) and the Energy Regulatory Commission (“CRE”), should promote compliance with the Conditional Goal to generate electric energy through the use of clean energy sources and reach at least 35% by 2024.

Energy Transition Law

The Energy Transition Law (“LTE”), published in the DOF on December 24, 2015, aims to “regulate the sustainable use of energy as well as obligations regarding Clean Energy and the reduction of polluting emissions from the Electricity Industry, maintaining the competitiveness of the productive sectors.”

Articles 4 and 6 establish the obligations of members of the Electric Industry (“IE”) and participants in the Wholesale Electricity Market, both public and private, to comply with the Clean Energy Goals, and the obligation of SENER to promote the generation of electric energy from clean energy sources, in order to achieve the goals established in the LGCC in relation to the IE.

Finally, its Third Transitory Article establishes that SENER must set a minimum participation goal of clean energy in the generation of electric energy of 25% for 2018, 30% for 2021 and 35% for 2024.

National Climate Change Strategy

Published in the DOF on June 3, 2013, it establishes the following main milestones in terms of emissions reduction and generation of electric energy from clean sources in periods of 10, 20 and 40 years:

Paris Agreement

The Mexican State agreed to comply with the so-called "Paris Agreement", signed between the contracting countries at COP 21 held in Paris, France, on December 12, 2015, signing ad referendum on April 12, 2016. Its instrument of ratification was deposited with the UN on September 21, 2016, and its promulgation decree was published in the DOF on November 4, 2016, entering into force on that same date.

Its purpose is “Strengthen the global response to the threat of climate change, in the context of sustainable development and efforts to eradicate poverty”, in order to “keep the increase in global average temperature well below 2°C above pre-industrial levels, and pursue efforts to limit the increase in global average temperature to 1,5°C above pre-industrial levels”, and thus significantly reduce the risks and effects of climate change.

For its part, Article 6, point 8 of said Agreement establishes the following: 

“1. […]

8. The Parties recognize the importance of have integrated, holistic and balanced non-market approaches that help them implement their nationally determined contributions, in the context of sustainable development and poverty eradication in a coordinated and effective manner, including through mitigation, adaptation, financing, technology transfer and capacity-building, as appropriate. These approaches will aim to:

a)   Promoting mitigation ambition and adaptation;

b)   Increase public and private sector participation in the implementation of nationally determined contributions, and

c) Provide opportunities for coordination of relevant instruments and institutional arrangements.

9. […]”.

(Emphasis added)

This implies the obligation assumed by the Parties to the Paris Agreement to implement integrated, holistic and balanced strategies to comply with the NDCs, regardless of the achievement of purely economic ends. This is in keeping with the fact that these objectives are closely linked to sustainable development and compliance with climate change mitigation policies.

1. Analysis of recent policies issued by SENER

On April 29, 2020, the National Energy Control Center (“CENACE”) published in its Market Information System, the “Agreement to guarantee the efficiency, quality, reliability, continuity and security of the National Electric System, due to the recognition of the SARS-CoV2 (COVID-19) virus disease epidemic” (“CENACE Agreement”). In its Sole Technical Annex, it was indicated that due to various issues of low energy demand due to the aforementioned health contingency, failures in transitory lines of various stations and electrical substations, electromechanical oscillations were generated that could have negative effects.in the reliability and integrity of the National Interconnected System”, claiming that they were generated during the testing period prior to the commercial operation of photovoltaic power plants located in the Northeast of Mexico (indicating the date of April 15, 2020).

Therefore, CENACE considered that the intermittent generation of wind and photovoltaic power plants affects the Reliability of the National Electric System in its sufficiency, quality and reliability for the Electric Supply and that they do not contribute to the "primary regulation of frequency quality control”, nor to “Physical inertia for SEN stability”. For this reason, CENACE determined that, as of May 3, 2020, pre-operational testing of wind and photovoltaic power plants that were in the process of starting operations, as well as those that had previously started commercial operations, would be suspended, arguing that there has been a considerable reduction in the consumption of electrical energy by end users due to the health contingency that the country is going through.

In addition to the above, CENACE determined that the operating limits of the electric transmission corridors will be subject to the availability of resources for generating electric energy, in order to avoid the implementation of the so-called "Remedial Action Schemes" ("EAR"), which imply the disbursement of additional economic expenses and the responsibility of the Mexican State. The above is clearly contrary to point 8 of Article 6 of the Paris Agreement transcribed above, since said SENER department prioritizes economic and market issues over real actions to mitigate climate change, such as the generation of electric energy from clean energy sources, such as wind and photovoltaic.

By giving preference to the dispatch of energy generated by conventional sources, that is, through the use of fossil fuels, compliance with the commitments assumed by Mexico regarding the reduction of emissions is prevented and, ultimately, to the detriment of the right to a healthy environment provided for in Article 4 of the CPEUM.

For information purposes, it is important to note that the legal entities called Desarrollos Eólicos Mexicanos de Oaxaca 1, SAPI de CV, and Desarrollos Eólicos Mexicanos de Oaxaca 2, SAPI de CV, filed separate indirect amparo lawsuits against the CENACE Agreement, filing them with the Second District Court for Administrative Matters, Specialized in Economic Competition; Broadcasting and Telecommunications, with residence in Mexico City and jurisdiction throughout the Republic under number 128/2020, being resolved by means of the issuance of a final judgment on October 23, 2020, published on the 26th of the same month and year, in which protection was granted to the aforementioned complainants, without the summary published by said Court on the electronic portal of the Federal Judiciary Council reflecting the analysis of the concepts of violation or the substantive meaning of said judgment. However, it should be noted that the effects of the same were granted with general character, in order not to grant them “a competitive advantage over other participants in the wholesale electricity market, but could also cause distortions in said market, affecting competition and the development of the sector, in violation of the provisions of Article 28 of the Constitution.”  The core of the judgment is transcribed below for practical purposes:

"(...)

In this regard, it should be noted that the rights to free competition recognized by Article 28 of the General Constitution must not only be analyzed from the perspective of the legal interest of the participants in the electricity market who come to request constitutional protection, but from a collective dimension, in this case, of all the participants in said market and the end users who will be affected by the measures implemented in the challenged Agreement, since by limiting the participation of new companies in the wholesale electricity market and the operation of existing wind and photovoltaic plants, the necessary conditions are prevented to improve the quality of the basic supply service and reduce the rates that must be paid for said service. For this reason, it is considered that this amparo ruling must have general effects, in order to avoid an adverse effect not only for the complainants, but also for other participants in the wholesale electricity market, avoiding distortions in said market, affecting competition and the development of the sector and, mainly, end users and the population in general; without this necessarily contravening the principle of relativity of rulings established in article 107, section II, of the General Constitution, since, as the Supreme Court of Justice of the Nation itself has recognized, it admits certain modulations. In this case, if it is considered that both the rights to free competition, in their individual and collective dimension, as well as the principle of relativity of sentences, are expressly recognized in the Political Constitution of the United Mexican States, their interaction must be harmonious, so the relativity of the sentences cannot constitute an obstacle to the effective safeguarding of those rights. Hence, in the event that the challenged Agreement ceases to apply solely to the complainants, it is considered that the principle of relativity of the judgments must be modulated in the specific case, so that all market participants can benefit from the non-existence of said Agreement and comply with the ultimate objective of the Constitution, that is, to allow greater participation of economic agents in order to achieve the efficient and competitive development of the markets, for the benefit of end users and the population in general. Especially since, in the opinion of this judge, the principle of relativity of sentences could in no way justify that the acts challenged, for that reason alone, escape an analysis of constitutional regularity, since this would contravene the right of access to jurisdiction recognized by article 17 of the Constitution and 25 of the American Convention on Human Rights. In this regard, in order to preserve these principles, it is emphasized that the effects of this judgment include not only the complainants, but also all participants in the wholesale electricity market to whom the provisions contained in the challenged Agreement apply. In these terms, the constitutional protection granted is to render the Agreement to guarantee the efficiency, quality, reliability, continuity and security of the National Electric System, due to the recognition of the SARS-CoV2 (Covid-19) virus disease epidemic, dated April XNUMX, XNUMX, as well as its sole Annex, void.

(…) ”

Likewise, SENER published in the DOF, on May 15, 2020, the “Agreement issuing the Policy of Reliability, Security, Continuity and Quality in the National Electric System” (“SENER Agreement”), which violates economic competition in the sector with discriminatory treatment between participants in the Wholesale Electricity Market, favoring and strengthening CFE to continue generating electricity from polluting energy sources, while preventing compliance with the LGCC, LTE and the Paris Agreement, with respect to the objectives of the CDNN and ultimately affects the right of Mexicans to a healthy environment, in addition to the affectation of free competition rights provided for in the same way in laws and international treaties of which Mexico is a party.

The specific sections on environmental matters of said Agreement are transcribed and analyzed below:

Section 10. “Incorporation of Intermittent Clean Energy.”

10.1 The integration of installed capacity of Power Plants with Intermittent Clean Energy in the SEN will be maintained for all Power Plants that have reached the Interconnection Contract one day before the publication of this Policy in the DOF. If for any Power Plant with Intermittent Clean Energy, wind or photovoltaic, its Interconnection Contract or Generation Permit is cancelled, CENACE will evaluate the applications so that, based on the entry and progress position on its platform called "SIASIC", the Interconnection point of the Application and the regional hosting capacity of Intermittent Clean Generation Considering the Reliability of the System, the feasibility of accepting the Study request and continuing the process will be determined.

(Emphasis added)

The above shows the intention on the part of SENER to, under a distorted concept of Reliability^[1], granting priority for the supply of electrical energy through conventional sources, repeatedly preventing the national and international commitments made for a sustainable energy transition and through the generation of electricity from clean sources. The above considering that the new wind and photovoltaic power plants will not have the opportunity to enter the system until there is capacity in the system and SENER will determine the feasibility of accepting the study request, it is insisted, applying a distorted interpretation of the Reliability figure by preventing the sustainable and efficient development of the energy sector, favoring CFE to the detriment of the incursion of clean energy sources, disregarding that these operate by definition in a more efficient and environmentally friendly way.

10.2 If any Power Plant with Intermittent Clean Energy, wind or photovoltaic, requests a Study at an Interconnection point, zone, region or System in which there are already congested transmission and transformation elements, due to a lack of generation resources to compensate for the intermittency and to maintain control of the frequency, voltage and reliability and selectivity of the protection schemes. CENACE, based on criteria of sufficiency, Dispatch Security and economic efficiency, may reject said requests. In due time, SENER will determine the date of reopening of the reception of Requests and the follow-up to the Requests in process.

The above section once again prioritizes avoiding the expenditure of generation resources due to the intermittency of clean energy sources, contravening the aforementioned environmental commitments to mitigate climate change, to the detriment of access to a healthy environment by the population of Mexico, avoiding the implementation of comprehensive, holistic and balanced strategies, as stipulated in the aforementioned Paris Agreement. Likewise, SENER does not have the power to determine the reopening of the reception of applications, neither to receive them initially nor to reject them. Applications for the operation of Power Plants with Clean Energy are submitted through individuals interested in obtaining a permit to generate from clean energy, so said authority is awarded regulatory powers that do not fall within its jurisdiction.

Similar to the case of the challenge to the CENACE Agreement, for information purposes it is noted that the organization called Defensa Colectiva, AC filed an indirect amparo claim against the SENER Agreement, which was filed with the First District Court for Administrative Matters, Specialized in Economic Competition, Broadcasting and Telecommunications, with residence in Mexico City and jurisdiction throughout the Republic under number 115/2020. In its claim, said complainant requests the suspension of the SENER Agreement in order that wind and photovoltaic plants are not generally considered to be unreliable and, by agreement of June 4, 2020, said judicial authority granted the provisional suspension of the act claimed in favor of the complainant.

Aspects of economic competition

In May 2021, the Federal Economic Competition Commission (“COFECE”) published the economic study entitled “Transition towards competitive energy markets: Clean Energy Certificates in the Mexican electricity industry”^[2], in which, among others, he expressed his concern about Mexico's potential failure to meet the goal committed to in terms of the Paris Agreements for the generation of at least 35% clean energy by 2024.

Clean Energy Certificates (“CEL”) are one of the mechanisms used by the Mexican Government to promote the installation of generation projects based on clean sources that are lacking to achieve the goals committed by Mexico in international agreements and in national legislation, so the effectiveness of said mechanism and its application, as well as the regulations that surround them, can be evaluated in light of the fulfillment of said goals.

COFECE used a model based on statistical data on clean energy generation projects and their effective dates to analyze the effectiveness of the CEL mechanism in meeting the minimum goals for clean energy participation in the generation of electric energy committed by the country through the Paris Agreement in two scenarios: (i) an “expected” one in which all the projects scheduled in the planning instruments of the electric energy generation sector come into operation as specified; and (ii) a “realistic” one in which delays and cancellations of projects are estimated as a result of the policies and regulations recently implemented by SENER that have generated uncertainty and hindered competition in the electric industry. Through this model it is possible to conclude that:

1. In the “realistic” scenario, in 2022 and 2023 there would barely be enough CELs to cover the requirements, however, in 2024 there would be a shortage of 12 million CELs;
2. The Federal Electricity Commission, Basic Services Supplier (“CFE SSB”) would be short 10 million CELs in 2022 to meet its obligations in the “expected” scenario and 11 million in the “realistic” one; by 2024 it would be short 16 million in the first scenario and 20 million in the second; and
3. In 2022, Mexico would meet its clean energy goals in the “expected” scenario; however, in the “realistic” scenario, it would fail to meet them with a 0.8% shortfall in clean generation. In 2023, the shortfall would be 0.55% in the “expected” scenario and 2.9% in the “realistic” scenario, while in 2024 there would be a shortfall of 5.2 percentage points to reach the committed goal of 35% clean energy generation.

That is, in light of the changes implemented and projected in the regulations relating to the electricity sector and its application, COFECE concludes that Mexico will not meet the committed goal of clean generation for 2024.

It is worth highlighting that COFECE's analysis does not consider the potential impact that the entry into force of the Reform to the Electricity Industry Law ("Reform to the LIE"), published in the DOF on March 9, 2021 and which is under review by the Judiciary, would have on the industry, among others, in the gap of non-compliance with our commitments as a country in the generation of clean energy.