The Mexican power industry, similar to in other jurisdictions, is comprised of generation, transmission, distribution, commercialisation and supply activities, as well as the planning and control of the National Electric System (Sistema Eléctrico Nacional) and the administration and operation of the Wholesale Electricity Market (Mercado Eléctrico Mayorista).

The main laws that govern the Mexican power industry are the following:

• Articles 25, 27 and 28 of the Mexican (Federal) Constitution (Constitución Política de los Estados Unidos Mexicanos) as well as the transitory articles of the Energy Constitutional Reform enacted in December 2013;
• the Power Industry Law (Ley de la Industria Eléctrica) and its Regulations (Reglamento de la Ley de la Industria Eléctrica);
• the Market Rules (Reglas del Mercado); and
• general administrative provisions issued by the Energy Regulatory Commission (Comisión Reguladora de Energía, CRE) and the Ministry of Energy (Secretaría de Energía, SENER).
• the Federal Electricity Commission Law (Ley de la Comisión Federal de Electricidad)
• the CENACE decree.

According to applicable law, the generation, commercialisation and supply of power is open to private investment and subject to a free competition regime. In that context, state-owned utilities still own a significant number of power generation assets and serve a substantial portion of the load across Mexico. On the other hand, planning and control of the National Electric System and transmission and distribution activities are considered public services and “strategic areas” reserved to the State. Private companies are not allowed to participate in such reserved activities, but may be contracted or may associate with governmental entities to finance, construct and operate transmission and distribution infrastructure.

The power industry structure is established in the Mexican Constitution, which defines the functions and roles of the main industry agencies, regulators and operators. 

The CRE is the autonomous regulator of the power industry (although it is co-ordinated by the Ministry of Energy (Secretaría de Energía, SENER) which, in turn, is the governmental agency responsible for energy policy.

The SENER is an agency of the executive power in charge of defining and implementing the energy policy which must, at all times, respect the constitutional principles that govern the energy sector.

The National Centre of Energy Control (Centro Nacional de Control de Energía, CENACE) is a decentralised governmental entity in charge of the planning and control of the National Electric System as well as the administration and operation of the Wholesale Electricity Market.

The principal state-owned entity in the Mexican power industry is the Comisión Federal de Electricidad (CFE). The CFE’s generation subsidiaries own the majority of the power plants in Mexico, whereas the CFE Suministrador de Servicios Básicos (a power supply subsidiary of the CFE) is the main load-serving entity in the country, especially for domestic end users. The CFE Transmisión and CFE Distribución (which are also wholly owned subsidiaries of the CFE) own the transmission and distribution infrastructure required for providing the transmission and distribution public services. Even though the CFE is a key player in the Mexican power industry, there are also multiple private power generation and supply companies that participate in the market. Among others, Iberdrola, Enel, EDF, Mitsui, Acciona and Ammper have become major stakeholders within the power sector.

Pursuant to applicable laws and regulations, foreign investment is allowed to participate in power generation, commercialisation and supply activities with no restrictions. As a result, there are no power-industry-specific foreign investment review processes or limit thresholds.

If certain foreign investment protection standards are breached by the Mexican government, foreign investors may validly file claims under investment arbitration proceedings to demand damages and losses from the Mexican government in accordance with international treaties entered into by Mexico. While foreign investors also have access to domestic courts, it is more common for their Mexican subsidiaries to exercise legal actions in local courts against private third parties (for example, civil/commercial lawsuits under commercial agreements) or governmental authorities (especially constitutional challenges named juicios de amparo).

The Federal Economic Competition Commission (Comisión Federal de Competencia Económica, COFECE) is the constitutional autonomous entity responsible for the oversight of free competition in markets such as power generation and supply.

The Federal Economic Competition Law (Ley Federal de Competencia Económica) is the main law in connection with free competition and antitrust-related matters. Pursuant to this law, mergers and acquisitions (including in the context of the power industry) are subject to the filing of a notice with the COFECE in the event that the relevant transaction exceeds at least one of certain statutory thresholds set forth by law, regardless of whether such a transaction presents a competitive concern or not.

As a result, the information required to determine whether a transaction is notifiable consists of:

• the value of assets and updated capital stock of the target according to the financial statements of the last fiscal year and the most updated financial statements available;
• the value of target sales originating in Mexico according to the financial statements of the last fiscal year and the most updated financial statements available;
• confirmation of the total value of the transaction;
• the total value of assets and consolidated sales of the buyer and seller according to the financial statements of the last fiscal year and the most updated financial statements available.

It is important to consider that the fact that a transaction is not notifiable under the above criteria does not limit the COFECE’s power to investigate and analyse such a transaction. If the COFECE considers that the concentration under investigation is contrary to the provisions of the Federal Economic Competition Law, it may order the partial or total disinvestment of the concentrated assets, as well as the imposition of other sanctions.

If the relevant merger or acquisition does not affect or change the characteristics of the generation assets or activities, which are regulated by the energy laws and are the subject matter of a permit, the approval of the energy regulator is not required.

As explained in 1.2 Principal State-Owned or Investor-Owned Entities, the CENACE is responsible for the planning and control of the National Electric System – which includes the power and responsibility to ensure the reliability, sustainability, continuity, quality and safety of the grid in order to adequately cover power demand. The CENACE also participates in the preparation of grid expansion and modernisation plans together with the SENER, CRE and CFE.

The executive submitted an initiative to amend the Constitution to reinstate a state monopoly in the power sector. According to the President’s proposal, the CFE would be the centre of the power industry and be in charge of all of the activities in the sector, leaving private generators a limited participation of up to 49% of the required supply. The initiative was rejected by Congress last April and did not come into effect.

On a separate action, the Mexican Supreme Court resolved a constitutional recourse (acción de inconstitucionalidad) submitted by certain members of the Mexican Senate against the reform to the Power Industry Law enacted in March 2021 (the “LIE reform”) which was considered unconstitutional as it intended to increase, without justification, the participation of the CFE in power generation activities and, among other changes, eliminated the obligation of the CFE to purchase power under competitive processes, and changed the dispatch order cancelling the economic merit principle, giving priority to the CFE’s plants, regardless of their higher cost or technology. These changes breached anti-monopolistic and free competition principles established in the Mexican Constitution. The Supreme Court did not reach the required majority (8 out of 11 votes) to declare the LIE reform unconstitutional; thus, the recourse was dismissed. However, there are hundreds of amparo lawsuits submitted by the affected sector participants that are still pending resolution by Mexican lower courts. Their resolutions will determine the ultimate outcome of the LIE reform.

Additionally, the CRE has recently issued two controversial regulations regarding:

• isolated power supply (abasto aislado, that is, power generation and supply that is not interconnected to the National Transmission Grid (Red Nacional de Transmisión) or to the General Distribution Grids (Redes Generales de Distribución)) (Resolution A/037/2021); and
• the granting of new generation permits (Resolution A/006/2022).

Consistent with prior actions that intend to limit private participation in the sector, both of these new regulations seem to establish additional burdens and restrictions for new power generation projects.

The current policy of the Mexican government has not changed since the beginning of its term in 2018. Strengthening the CFE, as the publicly owned utility service, and reducing the participation of private investment in the power sector has been the main focus of the Mexican government’s energy policy, and is expected to continue that way for the remainder of the administration.

Considering that utility-scale power generation projects have been subject to multiple regulatory restrictions and de facto boycotts for the purposes of their development, construction and commissioning, distributed generation has become a legally, technically and financially feasible alternative for end users to both reduce their power bills and contribute to the fight against climate change. This alternative has not been challenged by the power authorities and the federal government.

The Wholesale Electricity Market is administered and operated by the CENACE as the independent system operator. The Wholesale Electricity Market is essentially comprised of a Short-Term Energy Market (where energy and ancillary services are sold/purchased) and a Capacity Market. Energy and capacity may also be transferred and acquired by means of bilateral hedging agreements between market participants, provided that such products are still settled through the Wholesale Electricity Market in terms of Financial Bilateral Transactions (Transacciones Bilaterales Financieras) or Bilateral Capacity Transactions (Transacciones Bilaterales de Potencia), as applicable, pursuant to the Market Rules. Clean Energy Certificates (Certificados de Energía Limpia, CELs) are also traded via bilateral arrangements – between power generators, suppliers and certain end users registered with the CRE.

Generators, traders, suppliers and qualified end users that participate directly in the market make sales and purchase energy through offers in the Short-Term Energy Market. Sale offers from power plants must be made in accordance with their production (variable) costs (although this is not exempt from controversy as a result of the LIE reform, which provides for total unit costs, that is, fixed and variable costs). Theoretically, the more cost-efficient power plants are dispatched by the CENACE and receive as payment the local marginal price, which corresponds to the (marginal) cost of the last (marginal) power plant to be dispatched.

Additionally, within the context of the Wholesale Electricity Market, mid and long-term auctions were called by the CENACE in 2015, 2016 and 2017 in order for load-serving entities to hedge their portfolios of energy, capacity and CELs. While the long-term auctions were a success, the current Mexican government decided to halt them as of 2018 in order to redirect energy policy for the purposes of strengthening the CFE.

Imports and exports of electricity from/to other jurisdictions are permitted under applicable laws and regulations. The major transmission interconnections are ERCOT (Texas) and CAISO (California) in the northern border of Mexico. There are also interconnections with the transmission systems of Guatemala and Belize.

Imports of energy are made through sale offers in the Wholesale Electricity Market, whereas exports are made by means of purchase offers. Both of these offers are settled at the local marginal price of the price node associated with the Mexico-foreign country interconnection.

Likewise, imports or exports of electricity may also be carried out on an isolated supply basis (ie, independent of the Wholesale Electricity Market when the assets are not interconnected to the National Electric System).

During 2021, gross statistics indicate that around 55% of the power supply in Mexico comes from combined cycle power plants, and 15% from other conventional (thermal) power sources. Clean energy output from hydro, wind and solar photovoltaic assets accounted for approximately 9%, 8% and 7%, respectively. The remaining 6%, in aggregate, was produced from other sources such as nuclear and cogeneration.

There are no specific concentration limits for power generation or commercialisation activities. The Federal Economic Competition Law establishes the terms and conditions for the oversight, by the COFECE, of free competition in the context of power generation and supply activities for the purposes of avoiding monopolistic practices of industry participants.

If the COFECE considers that there is a concentration contrary to the provisions of the Federal Economic Competition Law, it may order the partial or total deconcentration of the concentrated assets, as well as the imposition of other sanctions.

Additionally, the CRE (the regulator) and the SENER (the policymaker) have certain oversight authorities regarding the power industry. The CRE is responsible for the oversight of the Wholesale Electricity Market, including, for instance, verifying that sale offers from power plants comply with certain cost parameters set forth by the Market Rules. Moreover, the CRE also has the authority to order accounting, operational or functional separation of power industry participants for the purposes of the adequate performance of the industry. On the other hand, the SENER may order the legal separation of entities (both public and private) in order to promote open access to the grid and the efficient operation of the power sector.

Mexico has signed international agreements/treaties such as the Kyoto Protocol and the Paris Agreement in order to establish commitments to reducing greenhouse gas emissions. Consistent with such international agreements/treaties, the main law regarding climate change is the General Climate Change Law (Ley General de Cambio Climático) enacted in June 2012, and which is still in force. The carbon market (sistema de comercio de emisiones) set forth by the General Climate Change Law is a foundational piece of Mexico’s environmental policy going forward.

In the context of the power industry, the main law associated with energy transition is the Energy Transition Law (Ley de Transición Energética) which regulates the sustainable use of energy and promotes the development of clean energy sources.

There are no specific programmes to encourage the early retirement of carbon-based generation, or compensation mechanisms in the event coal-fired generation facilities are retired. As a matter of fact, the current policy of the Mexican government is to avoid the retirement of power plants owned by the CFE. The CFE is the owner of the vast majority of carbon-based (particularly, coal-fired) power plants in Mexico.

The Energy Transition Law establishes that, by 2024, 35% of power production in Mexico must come from clean energy sources. In fact, CELs were created pursuant to the Power Industry Law as a mechanism to develop new clean energy projects to comply with this clean energy target.

Furthermore, long-term auctions were originally designed to incentivise the procurement by load-serving entities, especially the CFE Suministrador de Servicios Básicos, of power generation from new clean power plants. Nonetheless, as mentioned previously, the Mexican government has decided not to continue with the long-term auctions programme until further notice.

From a tax standpoint, investments in the purchase of machinery and equipment for energy production from renewable resources (eg, wind turbines, solar panels, trackers and inverters) are subject to a 100% income tax deduction. Furthermore, the Income Tax Law (Ley del Impuesto sobre la Renta) also establishes certain tax benefits vis-à-vis the payment of dividends by renewable generators through the CUFIN Verde instrument.

Additionally, equipment and facilities to be installed for the purposes of renewable energy generation assets may be subject to certain benefits with respect to the payment of import duties, as per applicable Mexican laws and free trade agreements signed by the Mexican government. Likewise, the Electricity Sectorial Program (PROSEC) issued by the Mexican Ministry of Economy (Secretaría de Economía) grants certain benefits to renewable energy developers and sponsors with respect to exemptions or reductions of import duties (for example, regarding the import of solar panels and other equipment associated with solar energy projects, such as inverters).

The Power Industry Law, the Market Rules and the general administrative provisions issued by the CRE (including the Grid Code (Código de Red) which establishes certain technical requirements and obligations – for example, in terms of voltage, frequency response and reliability-related curtailments – for the interconnection and operation of power plants) are the principal laws and regulations that govern the construction and operation of power generation facilities in Mexico.

Power plants with an installed capacity equal to or greater than 0.5 MW need to obtain a power generation permit from the CRE. In order for the CRE to issue such permits, the relevant applicant must provide evidence about its legal, technical and financial capacity as well as the description of its power generation project.

As a result of the recent LIE reform (which, as mentioned in 1.6 Recent Material Changes in Law or Regulation, has been challenged by hundreds of participants and whose entry into force has been suspended by Mexican courts), new power generation permits may be subject to the power sector planning criteria of the SENER, though it is still unknown if and how these planning criteria would be implemented vis-à-vis the issuance of such new power generation permits. Power generation projects should be issued by the CRE within a timeframe of six to eight months. However, for the last three years, the CRE has either exceeded these statutory timeframes or has simply not responded to permit applications.

In addition to the CRE power generation permit, generation projects are also required to obtain other governmental authorisations such as interconnection studies and agreements, resolution of a social impact assessment (EVIS), environmental permits and construction and operation licences from various federal, state and municipal authorities.

The typical terms and conditions of power generation permits include:

• a description of the power plant associated with the power generation permit (eg, technology, capacity, estimated energy output and location);
• a works schedule and scheduled commercial operation date;
• standard obligations to comply with applicable laws and regulations;
• delivery of periodic energy output reports;
• payment of annual supervision fees to the CRE; and
• exclusively for grandfathered projects under self-supply (autoabastecimiento) and cogeneration schemes, the change of associated shareholders/partners and their load points who can benefit from the energy produced by these kinds of projects.

In order to obtain an amendment of a term/condition under a power generation permit, the approval of the CRE board of commissioners is required. Amendment of power generation permits should take between six to eight months. However, for the last three years, the CRE has gone well beyond these statutory timeframes or has simply not responded to the amendment requests.

As a general rule, construction and operation of power generation facilities does not grant eminent domain, condemnation or expropriation rights.

Nevertheless, for power plants that “require a specific location”, legal easements may be created for the construction, installation and maintenance of such assets. According to the CRE, the only technologies that “require a specific location” are geothermal and hydro power plants. Developers of these types of power generation facilities must, prior to filing for a legal easement, follow a burdensome process with the corresponding landowners and competent authorities in order to obtain the real estate rights necessary for the construction, operation and maintenance of their projects. This process includes notices to the landowners, negotiation periods, appraisals and compensation determined in accordance with parameters set forth by a governmental agency, and “validation” by local courts. Complying with all of these requirements has become an administrative nightmare and has resulted in significant delays in the commercial operation date of the relevant projects.

The Power Industry Law and the Market Rules establish certain requirements in order for a power plant to be decommissioned. These requirements include filing of certain information with the CENACE, and as a general rule, the power plant owner must notify the CENACE of the decommissioning of the asset at least one year in advance. Prior to authorising the decommissioning of a power plant, the CENACE must assess whether the power plant intended to be decommissioned is required for maintaining the reliability of the National Electric System.

There is no specific obligation set forth by power-industry-related laws or regulations to fund decommissioning of a power plant beyond the physical life of the facility or at the end of its physical or economic life. Other conditions for the decommissioning of a power plant contained in environmental authorisations may apply.