Constitutional Reform to the Mexican Electric Sector

On February 5 of this year, then-President Andres Manuel López Obrador sent a package of constitutional reforms to the Chamber of Deputies, including the draft decree amending Articles 25, 27 and 28 of the Political Constitution of the United Mexican States regarding strategic areas and companies.

• On October 31, 2024, the Ministry of the Interior published in the Official Gazette of the Federation the Decree amending the aforementioned articles.
• On November 6, 2024, the National Strategy for the Electric Sector was released.
• The issuance of secondary laws that give content to the reform is still pending, to be issued within a period of 180 days.

1. Public enterprises: The reform reverses the legal nature of the Federal Electricity Commission (CFE) and Petróleos Mexicanos (PEMEX) from Productive State Enterprises to return to their status as public companies, eliminating the profitability requirement and focusing on the efficiency of the system.
2. Prevalence and public service: Related to the previous point is the insertion in the reform in the sense that individuals will not be able to have precedence over CFE - whose essence lies in fulfilling its social responsibility and guaranteeing the continuity and accessibility of the public electricity service.
   • The references to the prevalence of CFE in a market open to competition in terms of generation and marketing, an openness recognized in the trade agreements to which our country is a party, as well as the reinsertion of a concept of public service, outdated more than ten years ago in a context in which open activities in terms of generation and marketing are carried out by private individuals based on permits granted by the regulatory body and not on concessions, with the legal consequences that such a distinction implies, are worrying.
3. Private sector participation:The approved reform to the constitutional text indicates that secondary laws will determine the way in which individuals can participate in activities of the electrical industry.

The reality of the country shows us the lag suffered in recent years in terms of electricity generation and the clear need to rely on the private sector (only 7.5% of new capacity was contributed by CFE in the period 2028-2023).

In this regard, it would be expected that secondary laws would include new participation mechanisms for the private sector in electricity generation and marketing activities.

On the other hand, even though the reform eliminates from the constitutional text the possibility that the State may enter into contracts with private parties in transmission and distribution activities, we do not rule out that secondary laws may include some mechanism that allows the Mexican State to rely on the private sector for the construction and maintenance of efficient transmission and distribution lines.

The backlog in electricity generation must be added to factors such as the public finance commitments faced by the current administration and the need to modernize and expand the national transmission network and general distribution networks.
The signals sent by the government to the private sector with a proactive discourse and ambitious goals in the energy field suggest that the sector will give greater room to efficient participation of the public and private sectors.

The National Electric Sector Strategy includes relevant information related to private sector participation and investment plans in the sector:

1. Public-private investment would reach 32.4 billion dollars in the next 5 years.
2. Private companies are expected to install between 6,400 and 9,550 MW with investments of between 6 and 9 billion dollars.
3. Private companies will be able to participate by: selling energy to CFE in long-term contracts, mixed production companies (public-private) and generating energy for the electricity market.
4. The threshold for operating on-site without a permit will be increased to 0.7 MW and on-site consumption without surplus to the grid will be encouraged from 0.7 to 20 MW to promote development hubs and industrial parks.
5. The administrative procedures in the sector will be simplified and digitalized.

It is recommended to be alert to these investment opportunities in the electricity sector derived from the content of the secondary laws on the subject and the details of the investment mechanisms and plans.