Implications of Policy of Reliability, Security, Continuity and Quality of the National Electric System

Photo By: Johannes Plenio

On 15 May 2020 the Ministry of Energy (SENER) published the Policy of Reliability, Security, Continuity and Quality of the National Electric System (SEN),(1) a regulation which, among other things, tacitly incorporates competition barriers for intermittent clean energy power plants in Mexico.

Background

Under the Electricity Industry Law and the Organic Law of the Federal Public Administration, SENER is responsible for establishing, conducting and coordinating the national energy policy regarding electricity.

The new reliability policy allegedly aims to:

  • maintain the quality, reliability, continuity and security of the electricity supply; and
  • minimise risks which could prevent final users’ electricity demands being met under conditions of sufficiency and security of dispatch.

However, the policy does not provide sufficient technical grounds to justify said objectives, which some experts consider could be achieved through other alternatives, so it seems to be based mainly on the government’s determination to strengthen the position of the Federal Electricity Commission (CFE). The policy grants the CFE several advantages in the market and restricts the participation of private generators, which has sparked concerns among the sector regarding the future of their investments.

Reliability policy

SENER’s reliability policy was issued in a hurry and under irregular conditions which showed the government’s intention to avoid public consultation — a mandatory requirement for regulations which may affect the general population. The policy directly affects renewable energy projects by making the following modifications to the current legislation, among others:

  • SENER, under unclear criteria, may select and define the strategic projects of power plants which will have priority to be interconnected to the SEN.
  • The National Centre for Energy Control (CENACE) will have discretionary authority to reject or suspend any interconnection application procedure or study regarding wind and photovoltaic (PV) intermittent clean energy power plants due to congestion. SENER may, at its discretion, determine the date for the continuation of said interconnection procedures.
  • Economic dispatch will be replaced with security dispatch, which will directly affect the way in which PV and wind generators can inject energy into the SEN and therefore comply with supply contracts.
  • New conditions will apply for the granting of permits and the execution of interconnection agreements.
  • Several rules will be introduced to the detriment of intermittent clean energy power plants regarding the commercialisation of power, including possible dispatch restrictions and obligations to install additional regulation equipment, causing them to increase their costs and operate below their maximum capacity to respond to frequency variations.
  • New related services have been determined, which will be detrimental to intermittent clean energy power plants as they will result in additional costs for final users and suppliers acquiring said energy.

These aspects of the reliability policy are expected to affect competition and open participation in the electricity industry for the private sector. Further, they grant the CFE numerous advantages in the Mexican electricity market, to the detriment of renewable energy projects and a healthy electricity market.

Consequences for generation projects

The reliability policy will have severe consequences for generation projects, mainly in the following areas:

  • Financing and credits –the reliability policy will severely affect the financial models for the expected returns, requiring modifications to the consideration and extension of said financing.
  • Commercial agreements — the reliability policy will affect compliance with numerous commercial obligations for the acquisition or commercialisation of energy and the possibility of executing guarantees and introduces several commercial risks regarding the development of corresponding projects.
  • Generation permits and interconnection — the reliability policy includes new and additional conditions for obtaining generation permits and interconnection agreements. It authorises CENACE to issue discretionary interconnection viability reports prior to evaluation, which violates CENACE’s open and not unduly discriminatory access obligation under the Electricity Industry Law. The policy also requires the inclusion of early termination clauses
  • Additional obligations and costs — the reliability policy includes new rules to the detriment of intermittent clean energy power plants regarding the commercialisation of power and includes new related services which directly affect their financial models and expected obligations.

Private sector defence mechanisms

Private sector participants can invoke the following defence mechanisms against the reliability policy:

  • a constitutional review procedure (amparo indirecto) before the competent administrative court, as the reliability policy directly affects or damages their rights (including the individual or collective right to a healthy environment) and imposes costs on clean energy generators for the development and commencement of operations; and
  • in case of foreign investors, investment arbitration procedures under international investment protection agreements (either bilateral or multilateral).

To date, private sector participants have initiated more than 70 amparo actions against the reliability policy.

Independently, determined governmental entities have the right to present special challenges against the policy, and some have already initiated them, as described below.

COFECE versus reliability policy

The Federal Economic Competition Commission (COFECE) is an autonomous organ whose purpose is to promote, protect and guarantee free market participation and economic competition, as well as to prevent, investigate, combat, prosecute, punish and eliminate monopolies, monopolistic practices, illicit concentrations, barriers to free concurrence and economic competition and other restrictions to the efficient operation of the markets.

In this regard, COFECE can analyse, identify and order or undertake measures to eliminate barriers to competition, including:

  • disincorporating the assets, rights, shares and equity of economic participants;
  • undertaking investigations and verification visits;
  • issuing subpoenas, including requests to submit evidence;
  • presenting criminal complaints; issuing recommendations and opinions; conducting trial-like procedures; and
  • issuing any kind of measure or administrative penalty.

On 22 June 2020 COFECE filed a constitutional procedure, requesting the Supreme Court of Justice to confirm, among other things, whether:

  • the reliability policy violates the fundamental principles of free concurrence and competition recognised in Articles 16, 28 and 133 of the Constitution, as well as the applicable electricity laws relating to the competition regime for the generation and supply of electricity; and
  • SENER’s issuance of the policy infringed on COFECE’s power.

The Supreme Court of Justice granted a suspension in COFECE’s favour, leaving the reliability policy without effect until the court has definitively resolved the constitutional procedure, which may take up to 12 months. Until then, the relevant measures in the policy do not apply to participants in the Mexican electricity market.

Greenpeace versus reliability policy

Greenpeace, along with the Mexican Centre for Environmental Law, has also filed an amparo action against the reliability policy, seeking to:

  • defend the rights of citizens;
  • ensure that sustainability in energy matters is respected;
  • promote the use of renewable energy; and
  • ensure the reduction of polluting emissions in the electricity industry, accelerating the energy transition to lessen the effects of climate change.

On 24 June 2020 Greenpeace also obtained the definitive suspension of the policy. As such, the relevant measures included in the policy do not apply until the corresponding administrative procedure, which began in May 2020, has been concluded.

For further information on this topic please contact Guadalupe Esparza Sánchez or Maria Fernanda Solis at Ramos, Ripoll & Schuster by telephone (+52 55 1518 0445) or email (lesparza@rrs.com.mx or msolis@rrs.com.mx).

The Ramos, Ripoll & Schuster website can be accessed at www.rrs.com.mx. Endnotes (1) Acuerdo por el que se emite la Política de Confiabilidad, Seguridad, Continuidad y Calidad en el Sistema Eléctrico Nacional, available here.

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