Mexican Electricity Sector Reform: A Retrospective
Since the early 1980s, many Latin American countries have implemented reforms in the electricity sector with mixed levels of success.
Chile: For example, Chile allowed private investment in electricity, which improved the performance of the system, but still allowed high levels of market concentration. Consumer prices declined, but not as much as wholesale prices.
Argentina: Argentina deregulated, increasing the number of generating companies by approximately 60%. Prices declined along with profit margins as older, less-efficient facilities were phased out thanks to open access to the grid and cost-based dispatch.
Brazil: Partial reforms in Brazil were modified by a severe drought that impacted their hydropower-reliant economy. The aim was to attract more thermal power investment, but dispatch rules enshrining hydro dominance have caused thermal supply to lag behind demand increasing instability.
The Mexico Example
The first attempts at Mexican electricity sector reform began in the early 1980s by allowing some private ownership and operation of generation. A decade later, independent power producers (IPPs) began coming online, accounting for over twenty percent of current installed capacity. The Federal Electricity Commission (CFE) continued to be the sole authorized provider of electrical power under these reforms, purchasing all of the electricity generated by IPPs under the auspices of long-term contracts.
However, prices were not adequately reduced as a result of that level of Mexican electricity reform. This eventually prompted the enactment of the wide and sweeping reforms were passed in 2013 that ended the state monopoly, opened access for private power producers to transmission and distribution systems, and established an independent operator for the administration of the wholesale market.
The example of the Mexican electricity reform, and those of other Latin American countries show that ending monopoly in the electricity generation sector is not sufficient for lowering prices. Such an act must also be coupled with the application of reasonable and strategic regulation. Furthermore, it is imperative that the regulatory framework must be fully established before the new system begins operation in order to prevent consolidation of incumbent market power.
Secondary legislation related to Mexican electricity reform is still being decided upon in by the nation’s Congress, but it seems that authority has been decentralized and divided among several agencies, ensuring open access for transmission and distribution. The regulatory commission (CRE) will most likely share in the bulk of future regulatory responsibilities from accepting/rejecting bids from generators to overseeing that transmission and distribution companies fulfill connection requests.
The Future of Mexico’s Electricity Sector
There is a challenge to improving the competitiveness of industrial electricity rates without increasing residential prices. What is needed is cheaper generation entering the market that displaces more expensive, units without reducing industrial prices to the level of non-profitability. If this goal is reached, increased investment in the power generation sector is inevitable. And many elements of Mexico’s current reform seem conducive to such an outcome. Some of the provisions of Mexican electricity sector reform include:
- Wholesale market run by an independent operator
- Unrestricted access to transmission and distribution networks
- Open participation of private investors in electricity generation