Mexico’s utility reform
Investment opportunities in an emerging market
With the adoption of secondary energy reform legislation, the Mexican government offers a clearer picture of how it will implement electricity reforms. The reforms create a path to electricity market competition, generating opportunities for investors who understand the challenges that come with them. While key frameworks are in place, significant uncertainty as to the timing and details of the market transition exists. Authorities are expected to release additional rules and details during 2015 to address many of these uncertainties.
On August 11, 2014, Mexico President Enrique Peña Nieto signed the secondary legislation opening both the oil and gas, and electricity sectors to private investment. This legislation provides additional clarity to the original energy reforms passed in December 2013 and creates the structure for industry reform by further defining the roles of the Secretary of Energy, Federal Commission of Electricity (CFE), Energy Regulatory Commission (CRE), and the National Center for Energy Control (CENACE).
Original reform objectives:
- Reduce average generating costs, resulting in more competitive rates
- Increase renewable generating capacity to 35 percent by 2024
- Create a functioning competitive wholesale market
- Transform CFE into a productive enterprise with the clear objective of creating economic value
- Disaggregate and stand-up CENACE as the independent system operator managing non-discriminatory access to the electric grid
- Attract investment to boost the development of the Mexican energy sector
Secondary law objectives:
- Clarify the roles of CFE, CENACE and CFE
- Set deadlines for adopting the new rules
- Inform the private sector about participating in the electricity market
Deloitte provided insights on the implications of the original electricity reforms in May 2014. With the secondary legislation, investors can begin considering the types, magnitude and timing of market opportunities.
Risks and opportunities
These changes can create risks and opportunities. The changes will start in the wholesale and large account markets, which will represent the greatest investment opportunities. The retail market and the transmission and distribution system will also create opportunities for investors, though at a slower pace.
Thoughts for investors
Mexico’s move toward a more market-oriented electricity system can create significant investment opportunities across the industry. Most outside investment will likely focus on the energy supply markets, while the attractiveness of the distribution and retail sectors will need further analysis.
The development of the market will be a long journey from the existing regulated system to the market model envisioned in the reform legislation. To take advantage of the opportunity, investors should keep four things in mind:
- First, they should monitor how initial competition is encouraged in the generation sector. This may take the form of incentives and support for investment in natural gas infrastructure or the mandatory divestment of CFE’s generation to mitigate market power.
- Second, they should monitor the development of the wholesale market and the evolution of CENACE. In particular, they should pay attention to the relationship between CRE and CENACE on system planning, timing, market development, and pricing mechanisms.
- Third, they should follow activity in the commercial and industrial competitive supply market and the contractual terms of early deals.
- Finally, investors should monitor the actions of the President and the Secretary of Energy in their resolve to see that CFE becomes a productive enterprise. The stronger the resolve, the greater the opportunity for the private sector to provide support to CFE in modernizing its generation fleet, upgrading its grid infrastructure and improving everything from customer services to back office operations.
Meet the authors
Practice Leader, Mexico Power & Utilities Sector Principal
Deloitte Consulting Mexico
+52 55 50806134, ext. 6134
US Power & Utilities Sector Principal
Deloitte Consulting LLP
+1 404 631 2687
US Power & Utilities Sector Director
Deloitte Consulting LLP
+1 213 688 4710