Clean Energy Cost-Savings: A Study of Mexico’s Federal Electricity Commission (CFE)

Foreword

We are pleased to present “Clean Energy Cost-Savings: A Study of Mexico’s Federal Electricity Commission (CFE) „ a timely report and analysis by Francisco Xavier Salazar and Francisco Barnes, Mexican electricity market and regulatory experts. Francisco Salazar, a Non-Resident Fellow at the Institute of the Americas is former Chairman of Mexico’s Energy Regulatory Commission (CRE). Francisco Barnes is a former CRE Commissioner, Deputy Secretary of Energy in Mexico and former President of the National Autonomous University of Mexico (UNAM). Since the Lopez Obrador administration took office in December 2018, there have been a series of decrees and interventions in Mexico’s energy sector. Perhaps most pronounced have been efforts aimed at the country’s liberalized power market and clean energy deployment. The administration has set forth specific criticisms of the prevailing market structure, particularly with regards to Mexico’s Federal Electricity Commission (Comisión Federal de Electricidad or CFE). Specifically, the Lopez Obrador administration and the director general of CFE argue that the 2013 energy reform and electric sector industry law and its power market elements have obligated CFE to acquire clean energy and the corresponding renewable energy credits (CELs in the parlance of the Mexican market). This structure and the market- based mechanism of long-term auctions, in their view, have caused CFE to incur additional losses. Amendments to Mexico’s Electric Power Industry Act, signed into law on March 9, 2021, resulted in judicial proceedings surrounding the constitutionality of the legislation. Legal challenges have been set forth by both industry and legislators of the opposition. The debate of the law’s constitutionality has in turn led to a new proposal from the government. In September, the administration sent an initiative to Congress aimed at amending the constitution and completely restructuring the electric sector and market. Beyond the constitutional and legal debate, we believe it is important to fully comprehend the underlying economic premise for restructuring the electric sector and redefining the role and obligations of CFE. Moreover, as the world meets in Glasgow for the COP26 United Nations Climate Summit, it is also crucial to understand emission and climate impacts. We commend our authors for their rigorous analysis in the following pages. The report contains a fact-based economic study of current policies and regulations and provides an assessment of the impacts both in terms of CFE’s financial outlook and emissions profile. The report also offers a series of clear-cut conclusions and recommendations. As the report details, the purchase of clean energy through the auctions in order to obtain the corresponding CEL certificates has allowed CFE to avoid incurring variable generation costs at its thermoelectric plants, which would have been far higher than the cost of purchasing the clean energy. Indeed, the amount saved can be estimated based on fossil fuel use avoided and cost of the emissions that would have been generated, as we review in detail. This is a particularly contentious moment for the world in terms of energy security, managing climate action, but also defining the most appropriate and sustainable course as a country for its citizens. Those are clearly sovereign debates and decisions. But we also strongly believe that the debate deserves to be an informed one and thus demands fact- based analysis of these critical topics. We believe this paper meets that objective and will serve to enhance the discourse in Mexico, but also more broadly, in North America.

Richard Kiy President & CEO

Jeremy M. Martin Vice President, Energy & Sustainability

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