Mexico bid to end self-supply power to hit industries

Mexican industries' main argument against the government's proposed power reform has focused on costs, but a potentially more damaging element would be the elimination of companies' ability to generate their own power.

"It hits you from many angles. It is a very regressive reform," a director at a large multinational manufacturing firm in northern Mexico tells Argus .

A key point of contention is the reform's bid to take away companies' right to generate power for their own use and for sale to third parties under so-called "user clubs" that comprise 80pc of the self-supply market. If the measure passes, large manufacturing firms that have their own power plants would immediately lose their operating permits. "They are being careful to not say it is nationalisation, but it practically is," the director says.

Major factories in industries such as the steel sector depend on self-generation to keep their operations going. But the reform would oblige them to buy energy from state-owned utility CFE regardless of cost or environmental impact while cancelling all self-supply permits.

But CFE would probably not have the capacity to sell them enough electricity to maintain their activities, says Jorge Arrambide, an energy lawyer at Santos Elizondo. "They cannot substitute their energy with CFE energy right away," Arrambide says. "It is absolutely an indirect expropriation."

Companies are unclear whether the government would indemnify their plants and take over operations, whether they would be able to keep operating the plants under CFE control, or whether there would be some other scenario.

"Under what circumstances will we keep generating energy?" the director says. "Under what conditions would CFE buy from us? Who knows?"

The elimination of self-supply contracts would also raise costs for many companies. A large swath of the economy receives power through self-supply contracts, including the auto sector, food and beverage, manufacturing, chemicals, cement, paper and large retailers such as Walmart and Oxxo.

High price to pay That power is, on average, cheaper than CFE's, meaning that firms would have to use more expensive energy. That would be a major blow, especially since Mexico's industrial power costs are already significantly higher than those in the US. At one point last year, Mexico's retail industrial prices were nearly 50pc higher than equivalent values in the US, data from Mexican energy regulator CRE and the US EIA show. Mexican industrial prices were around 80pc higher than in the US west south-central region, which includes Texas.

The average cost of CFE generation is 1,400 pesos/MWh ($69/MWh), partly because much of its equipment is over three decades old, the head of industrial chamber Caintra, Rodrigo Fernandez, says. By contrast, energy from gas-fired plants costs an average of Ps800/MWh, while renewable power costs Ps400/MWh.

Consumers will also pay more for power as the reform prioritises CFE generation. "If we do what the reform proposes, the cost of energy goes up for everyone," says Fernandez, who is also chief executive of food company Sigma. That would cause a broader fallout, including losing customers on the global stage and harming the economy. Mexico could also suffer more blackouts, companies say.

Some firms are looking at legal ways of fighting the reform should it pass. They cannot file appeals known as "amparos" against a constitutional reform, but they could seek arbitration under treaties such as the US-Mexico-Canada free trade agreement. But it is unclear if the reform will even pass, as the president's party lacks the two-thirds congressional majority needed to change the constitution.

Mexican generation mix, Sep 2021

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