The Mexican Congress is currently discussing an initiative to reform constitutional articles 25, 27, and 28 which aims to place the Federal Electricity Commission (CFE) at the center of country’s electricity industry.
The Mexican Congress is currently discussing an initiative to reform constitutional articles 25, 27, and 28 which aims to place the Federal Electricity Commission (CFE) at the center of country’s electricity industry. Important aspects of this proposal to nationalize Mexico’s electricity sector include:
Uncertainty for Current Investments
The reform does not respect the regulatory and contractual schemes under which long-term investments have been made. It has caused a lot of uncertainty, especially around the effects that it will have on clean energy investments that are currently operating. There are more than 50 projects with investments that total over US$6 billion, though the electricity reform puts into question as to what incentives there may be for companies to invest in this field in the future.
Resultantly, it will reduce the diversity of electricity supply options and putting the national electricity supply in risks of shortages and cost increases for national energy consumption.
Lithium: Effects on the National Mining Industry
The mining industry is another target of the reform, as it proposes for the federal government to have complete control of the exploitation of lithium. Lithium is especially used in the electromobility sector, electronic equipment batteries, energy storage systems, antidepressant, and even in the nuclear industry. According to the Government of Chile, a regional leader in lithium production, global demand for lithium will grow 80% by 2030.
Three years , the Anglo-Canadian company Bacanora Minerals found the world's largest lithium deposit in the town of Bacadéhuachi, Sonora, in the north of the country. The concession (equivalent to 100,000 soccer fields) contains an estimated 243 million tons of mineral reserves. Bacanora Minerals was given a 50-year concession and was recently bought by its majority partner, Gangfeng, a Chinese lithium giant and one of the largest manufacturers of electric batteries in the world.
An important point is that all contracts that have been signed before the reform is passed will be respected in the terms in which they were agreed to. All future exploitation will be done by the Mexican State, and the government will stop granting new concessions. There are currently 36 concessions for private companies to exploit lithium in Mexico, of which only 27 are active, controlled by three foreign companies. The Sonora deposit is the most advanced project in the country. Bacanora is expected to begin operating in 2023, with production reaching 17,000 tons in the first and 35,000 tons in the following years.
Legislators sponsoring the proposal have not been able to say whether the State would focus on the production of lithium or on the development of batteries for the electric vehicle industry. Some have gone as far as to say that Pemex and the CFE could develop the entire lithium industry. It is also not clear yet whether the law would oblige private companies to sell the lithium they extract to the State, or if it could be exported.
The USMCA Effect
The USMCA provides some level of hope that current and future investments will be protected. By eliminating coordinated energy regulatory bodies, disappearing the wholesale electricity market, imposing market quotas and canceling private contracts, the proposal is in clear violation of the USMCA. Furthermore, there is a list of which productive sectors are reserved for each individual State to exploit in the annexes of the USMCA, and lithium is not included.
As a result, it moves Mexico’s energy transition towards a single generator with limited clean generation capacities, preventing the country from achieving its international commitments in the Paris Agreement, the Agreement on Environmental Cooperation between Mexico, the United States and Canada (contemplated within the USMCA), and the United Nations’ 2030 Agenda Sustainable Development Goals.
In order for the reform to pass Congress and make it to AMLO’s desk for his signature, it must first obtain two-thirds majority support. Morena (the President’s party and majority in Congress), Partido Verde Ecológico de México (PVEM), and Partido de Trabajo (PT) have 277 votes, and lack 57 to reach the qualified majority of 334 votes (two-thirds of the 500 ). As a result, there is increased pressure on the Partido Revolucionario Institucional (PRI) party’s 71 votes, given that the other parties have already rejected the proposal.
It is expected that the PRI and Morena and its allies will come to some compromise, allowing for the reform to likely pass by the end of 2021 or beginning of 2022.