In October 2008, Mexican Congress passed the Law for the use of Renewable Energy (Ley para el Aprovechamiento de Energías Renovables y el Financiamiento de la Transición Energética) . While Maria Galindo discussed the political difficulties to turn this law into action, I will consider the question whether this Law is in fact, unconstitutional as some Congressman like to think.
Mexico’s constitution (Article 27) places sole responsibility of electricity generation into the hands of the Federal state. Moreover, the Federal Commission for Electricity (CFE) -state-owned enterprise and responsible for two-thirds of Mexico’s energy generation and transmission, as well as the planning for energy provision-, is bound by this article to provide energy at the least-cost option. While the Ministry of Energy (SENER) could in theory specify how to interpret this clause, it has in the past adopted a very narrow definition based solely on financial variables.
This has favoured the development of conventional sources of non-renewable energy, especially gas and coal, whose use for electricity generation is expected to rise by 100% and 50% respectively by 2014, (Perspectiva del Sector Eléctrico 2005 – 2014) (Currently, gas represents about 19% of total generation and coal about 10%, while 49% of generation are produced by oil combustion.)
Private energy generation made an entry, with President Salina’s (1988-1994) highly controversial privatization and market liberalization policies. These policies provided a degree of space to self-suppliers, cogeneration and small-scale energy producers to generate and supply power into the grid. Since then, deeper and more thorough market reforms of the electricity sector such as tabled under past President Vicente Fox (2000-2006) failed due to strong resistance to open the market to private participation and threaten the least cost provision of electricity. Nevertheless, private power currently accounts for 30% of Mexican energy generation.
The increase in renewable energy generation has been hampered by a suite of systemic and institutional barriers:
- private sector power generators face prices depressed by subsidies to the state companies (CFE and Luz y Fuerza), that do not reflect costs of electricity generation. This explains the proliferation of self-suppliers to commercial and industrial entities which overall pay higher electricity prices.
- the construction of renewable energy plants involves high transaction costs, which make them largely unfeasible. These include applications for generation permits; the agreement of land or water leases from the legal owner; in many cases, the owner does not hold the deeds to his land, and thus has to go through the processes before a lease can be acquired; the political groundwork and obstacles that have already mentioned in Maria’s blog; and last but not least, charges levied by the CFE for the transmission and if necessary backup electricity which can reach up to 15 to 30% of the prices that power generation receive.
To scale up private sector participation and pave the way to meaningfully develop renewable energy supplies requires a legal basis that not only opens the market and creates greater investment security to the private sector but also re-interprets the least-cost clause to facilitate renewable energy generation by the public sector. The above mentioned Law is a step in the right direction:
Apart from setting a legal target for the share of renewable energy to be achieved, the law paves the way for an increased participation of private sector providers in Mexico’s renewable energy market: although it does not introduce an outright feed-in tariff structure, it creates a hybrid system of financial and political incentives. With respect to financial incentives it obliges the CFE not only to purchase energy supplies generated through cogeneration, self-supply or small scale production but also to pay a compensation that is not determined by the least cost prices but include the cost of the electricity generation.
The law aims to reduce transaction costs that the private sector faces, allowing SENER in conjunction with States and municipalities to simplify access to areas that are favourable to the development of renewable energy and simplify the process to obtain permits. Further, the law establishes the Green Fund to support projects that comply with the objectives of the Renewable Energy Strategy.
Does the law violate the least-cost clause of the constitution? The key to answer this question is the definition of least-cost. In the past SENER defined least-cost merely in financial terms considering costs of energy generation. Yet, the concept of least-cost can and is currently broadened by SENER to include the costs or benefits of energy diversification, and future stability of supply, environmental externalities, tax and other financial considerations for different energy types as for example carbon revenues. Thus, least cost not only has to take into consideration the actual cost of electricity generation but indirect costs and benefits associated with different types of electricity generation schemes.
Even if the Law has been approved, the actual modalities and specifications will need to be elaborated in the pertaining Programme and Strategy for Renewable Energy Provision (Programma y Estrategia Nacional para el Aprovechamiento de Energía Renovable y Transición Energética). Not just the contents but also the speed with which these will be developed will strongly determine the effectiveness and efficiency with which the law will be turned into action. In this respect, the fact that it took a whole three years until the Initiative for the Law -approved in December 2005-, was approved as law, serves as indicator for the degree of resistance that the development of the actual strategy and programme are likely to receive. This resistance is based on an incomplete and short-sighted assessment of costs and benefits of different electricity generation schemes that if not revised will severely impede Mexico’s ability to achieve electricity coverage targets while meeting social, economic and environmental goals in the future. Ultimately, sticking to conventional energy generation systems will violate the constitutional rights of least cost energy supply of future generations.