Policy Review: Mexico’s Law Initiative for the Energetic Transition

Currently, the legal framework on matters of renewable energies in Mexico is circumscribed to the Law for the Use of Renewable Energy and the Financing of the Energetic Transition (“LUREFET”). This law defines what has to be understood as renewable energies (including biofuels and efficient cogeneration of energy while excluding the hydroelectric projects that produce more than 30 MW). In the light of the limitations of the current legal framework regarding the use of renewable energies, the aspirational target of reducing the dependence on fossil fuels use in the electric industry is highlighted[1]. These percentages are intertwined with the ones established in the General Law for Climate Change (“GLCC”) that imply a reduction of up to 50% of the greenhouse gases emissions on 2050 with respect to the total of emissions generated on the year 2000.

Mexico´s Energy Reform represents a dilemma between the use of renewable energies and the opening of fossil fuels exploitation to private investment. In effect, the opening for the exploitation of new oil and gas fields appears to contradict the targets set forth within the National Policy on Climate Change and the reduction of greenhouse emissions targets provided by the LUREFET.

I. The Law for the Energetic Transition(“LET”).

This initiative forms part of the secondary legislation product of the Constitutional reform on energy matters, contained in the Decree by means of which several dispositions of the Political Constitution of the United Mexican States were added and reformed, which was passed by the Mexican Congress and published in the Official Gazette of the Federation on December 20, 2013. The LET is currently being discussed at the Senate and will abrogate the LUREFET.

Apart from the fact that the LUREFET appears to fall short in terms of the Energy Reform recently passed, its coordination with the GLCC apparently would eliminate the instruments that would eventually allow to achieve the aspirational targets for the reduction of pollutant emissions.

In effect, the LET will allow all of the components of the national electric sector to meet the reduction targets through an economical efficient scheme. In other words, this will mean: “less cost with the highest possible social welfare (…), and the reduction of the impact of the electric sector on the environment and the increase of the energetic efficiency”.[2]

II. Main Aspects of the LET.

The LET compels the Mexican government to implement the necessary policy instruments and programs to enhance the use of renewable energy resources that will eventually substitute the use of fossil fuels, guarantying that the legal, regulatory and fiscal instruments that will ease the achievement of clean energy goals and the consequent reduction of greenhouse emissions will exist. One of the primary goals is that the Ministry of Energy will aim towards a minimum participation of clean energies on the generation of electric power of 25% on 2018; 30% on 2021; 35% on 2024; 45% on 2036 and 60% on 2050. In aspects of energy efficiency, the LET pursues to ease the accomplishment of indicative targets that are established in the National Program for the Sustainable Use of Energy, as determined by the Ministry of Energy and the National Commission for the Efficient Use of Energy through a Route Map that has to be published within 260 days following the entry into force of the LET. It is also important to note that this law foresees the creation of a voluntary procedure of certification on energetic efficiency.

The LET takes into account limits of heat power in no less than 70% and of pollutant emissions in no more than 100 kg/MWh, in order to determine what other technologies could be considered as clean energies by the Ministry of Energy and the Ministry of Environment and Natural Resources in terms of the Law of the Electric Industry.

• Planning Instruments.

The LET establishes three planning instruments seeking to develop a public policy in regards to: (i) the regulation of the sustainable use of the energy; (ii) requirements of clean energies, and (iii) obligations of pollutant emissions reductions of the electrical industry.

The first planning instrument is the National Strategy for the Energetic Transition and the Sustainable Use of Energy (“Strategy”). This policy instrument shall indicate the goals of clean energies and energetic efficiency. The Strategy will establish the policy and actions that should be executed in order to achieve the referred goals, including the reduction of pollutant emissions generated by the Electric Industry under economical criterion, including the dependence on fossil fuels as a primary source of energy.

The LET also includes a Special Program for the Energetic Transition, which establishes the activities and projects derived from the Strategy that have to be executed throughout each term of the Federal Public Administration, indicating the required infrastructure works and activities in order to accomplish the targets on clean energies matters. The third planning instrument is established in the LET as the National Program for the Sustainable Use of Energy (“PRONASE” for its acronym in Spanish), which has as its primary objective to set forth the actions, projects and activities derived from the Strategy that will allow to meet the targets on matters of Energetic Efficiency contained in the LET.

• Smart Grids Program (“SGP”).

The SGP intends to support the modernization of the National Grid of Transmissions and of the General Distribution Grids, in order to keep a reliable and safe infrastructure that will assure the electric energy demand in an economical efficient and sustainable way. The conformation of these programs pursue the democratization of power distribution, as well as to opening the possibility of users to generate their own electricity and eventually obtaining a payment for its generation.

• Clean Energy Certificates

The energy reform has brought new investment opportunities, specifically the LEI foresees Clean Energy Certificates (“CELs”, for its acronym in Spanish), same which are aimed to promote investment in clean energy. Likewise, CELs have been design to achieve the targets on matters of reduction of pollutant emissions (primarily greenhouse gases). In terms of the applicable instruments, the Ministry of Energy will establish the requirements for the acquisition of CEL’s during the first trimester of every year and must be complied with during three years after their emission.

Obligated participants[3] must demonstrate that they have certain number of CEL’s to cover the total proportion of electric energy consumed during the period of 1 of January and 31 of December of each year. CEL’s can be purchased; therefore, clean energy generators will be able to transfer these, to those participants that have not complied with the corresponding requirements. This will create a new market that will have the purpose to incorporate clean energies in the generation of electric energy. At the same time, this cap and trade market will help the implementation of the economic incentives described by the GLCC, as well as to reduce the emissions of greenhouse gases.

III. Miscellaneous Matters.

The LET also creates the National Institute of Electricity and Clean Energies and the Advisory Council for the Energetic Transition. It also creates the Fund for the Energetic Transition and Sustainable Use of Energy, in order to capture and channel financial resources to implement actions for the achievement of the Energetic Efficiency and Clean Energies targets.

IV. Conclusions

• The LET establishes new schemes of energy generation from renewable sources that are aimed to achieve a reduction of up to 60% of greenhouse emissions on 2050.

• Three main planning instruments are set forth in the LET: The Strategy, the Special Program for the Energetic Transition and the National Program for the Sustainable Use of Energy.

• Under the SGP, users will now be able to generate their own electricity, opening the opportunity for them to become self-sustainable in terms of generation of energy.

• The creation of CELs will bring a new cap and trade market that will promote the investment on clean energies by establishing the economic incentives set forth by the GLCC.

[1] The percentages of reduction of pollutant emissions set forth by this law are related to a reduction on the dependence on fossil fuels for the generation of electric energy with respect to the years 2024, 2035 and 2050. For the year 2050, the aspirational target will be the use of up to 50% of renewable energies within the electric industry.

[2] CFR. Exposition of motives of the proposal of decree that issues the Law for the Energetic Transition, No. 4176-III, dated December 15, 2014. Page 2.

[3] Suppliers, qualified users participants of the market and the final users of self-generated electric energy, as well as the holders of Interconnection Legacy Contracts of Charging Points or Centers.