Iberdrola, EPF and Naturgy take fight to the Mexican government

Mexican President Andres Manuel Lopez Obrador has sparked fury with private companies that operate in the Mexican renewables sector. These include utilities EDF, Iberdrola, and Naturgy, and developer Zuma Energia.

This is a result of the bill that Obrador and his government proposed in February, which grants the publicly-owned Federal Electricity Commission (CFE)'s power plants priority in dispatching power. This is ahead of other government plants, with solar and wind farms at the back of the line.

The bill would also allow the CFE to reverse contracts with independent power producers that were signed under previous administrations.

This includes contracts with Iberdrola and ten other firms which, according to Obrador, have cost the CFE more than 300 billion pesos (£4.4bn) and should be renegotiated.

In the same month, Iberdrola CEO Ignacio Galán made clear his strong opposition to the electricity bill in an interview with Bloomberg.

The bill was approved on 23rd February by Mexico’s lower house of congress and by its Senate on 2nd March – both of which are controlled by the President’s party, the National Regeneration Movement (MORENA). In early March, a court temporarily suspended the electricity law, after injuctions from Zuma Energia, EDF and Naturgy. In response, Obrador warned that if the new law was found to be unconstitutional he would simply change the constitution.

Despite pushback from private utilities and states bodies alike, Obrador’s efforts to strengthen the standing of state utilities have endured. On 26th March, he sent a bill to congress to grant oil company Petroleos Mexicanos (PM) control over the domestic fuel market.

These moves would not come as a shock to anyone familiar with the Mexican utility landscape. Rather the laws are part of the steady undermining of private utilities, and they will make investors think twice about doing deals there.

Leading up to the law

We can trace the current clash back three years.

In 2014, the Mexican electricity system went through big changes. New policies opened the market up to private investors for the first time, thus ending 75 years of a monopoly held by state energy companies CFE and PM. The industry saw growth as wind capacity went from 2.1GW at the start of 2014 to 6.6GW in 2020.

When Obrador became president in December 2018, he promised to roll back the reforms and re-strengthen the CFE and PM at the detriment of private firms. The Covid-19 crisis has given him the perfect opportunity to do so.

And the Texas blackouts in February helped too. During that blackout, prices for imported gas spiked by 5,000% in Mexico, which bolstered Obrador’s calls for energy independence. This helped him to win support for the divisive bill.

What happens next?

The battle lines are clear. Obrador wants to reinstate a state monopoly, while Galan has made clear he believes “that everybody is going to go to court to defend against these damages”. Obrador said he would defend the change.

There is still a long way to go with this but damage to Mexico’s wind industry has already been done. For example, Iberdrola put a halt to new investments in 2020 ending the development of an almost $12bn portfolio in the country, and we’re sure other private operators would halt future investment plans too.

If the court finds in Obrador’s favour, and damages existing investments, then the impact on private investors would be far worse. It is one thing to change the rules for future projects, but changing the rules for operating projects can undermine appetite from private investors for many years. Investors in other sectors will wonder if the same thing may happen to them.

The fight has a long way to go and, for now, nobody looks like backing down.