Mexico uses Covid-19 to punish wind investors

Pressure doesn’t create character. It reveals it.

I know this is one of those quotes you may have on a fridge magnet. It’s a cliché. But when it comes to governments, there’s truth in those words.

We see it every day now as governments respond to both the Covid-19 crisis and Black Lives Matter protests. We see how the policies of our leaders either reveal their humanity or their lack of it.

And renewables investors in Mexico are seeing how political leaders are using Covid-19 as cover to bring in policies that will damage that market for years. The crisis has sped up the rollback of landmark reforms introduced in 2014.

It’s hard to overstate the importance of energy reforms in Mexico six years ago. These changes opened up the energy market to private investors for the first time, and brought in competition for the state energy companies Federal Electricity Commission (CFE) and Petroleos Mexicanos. This led to growth in wind capacity from 2.1GW at the start of 2014 to 6.6GW this year.

These reforms made Mexico one of the world’s most exciting new wind markets, with investors including AES, Cubico, EDF, Enel and Zuma Energia.

But warning signs started to flash in December 2018 when Andres Obrador became president. His policies included strengthening CFE and PM at the expense of private companies.

Since then, his government has chipped away at support for renewables by ending large renewables auctions and redirecting credits for new projects to old state-run renewables schemes. This led to a legal challenge in late 2019.

We can’t claim Covid-19 started Mexican government hostility to renewable energy investors – but the crisis has given it cover to do more damage.

Covid consternation

The last six weeks have been tumultuous for investors in Mexico. Last month, the government’s National Energy Control Center (Cenace) introduced tough restrictions on connecting new wind and solar farms to the electricity grid.

This move was based on regulations published on 29th April, to indefinitely suspend the addition of all new renewables to the grid and change grid access rules. This latter policy reduced access for privately-owned renewable plants already in operation.

Cenace said this was needed to protect grid stability. But critics blasted it as a move based on politics rather than any solid technical or legal basis.

The energy ministry followed this on 16th May by putting in place more blocks on the issue of power generation permits to wind and solar farms, and other restrictions. We know how much financial damage these retrospective changes can do to projects, and investors have shown they won't quietly accept it.

On 18th May, the Mexican courts gave a temporary stay of execution from the rules for 17 firms developing 23 renewable energy plants in the country.

On 23rd May, it ordered Cenace to start preoperative tests on 23 suspended projects so that they can be registered and connect to the grid.

And this week, the industry won a court case against the government, which gives these 23 suspended projects a reprieve from the new rules. It's good for investors to see they have the law on their side – at least for now. We don’t expect this to be the end of the battle with the Mexican government though, and the prospects for future private investment in renewables look bleak.

Mexico’s leaders have shown how far they will go to roll back the 2014 reforms. The renewables industry can no longer expect a level playing field in a country that wants to limit competition for state utilities.

The government’s justifications are all too familiar. It claims wind and solar are too expensive and too unreliable, even though plenty of nations have seen in this crisis that wind and solar can be a reliable backbone of the electricity grid.

And that’s the moral. It's easy to focus on how wind and solar have done well in the crisis, but we must also remember the countries that will use Covid-19 as cover to harm renewables investors. That damage will last for years.

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