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Friday, 06/26/2020 11:27:46 AM

Friday, June 26, 2020 11:27:46 AM

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This article was highlighted on Bloomberg today, I think it speaks to how mirage is positioned. ALMO wants the cfe and pemex in charge and we have deals with them. He has no plans to go green and wants to maximize oil and gas.

Mexican Standoff: No Winners in AMLO's
Clean Energy Feud
Mexico President Andres Manuel Lopez Obrador (AMLO) has intensified efforts
to block renewable power development through regulations that confirm his
government’s support for the state-owned utility over privately-backed wind and
solar developers. Unwilling to encourage much-needed private investment and
unable to reverse fully previous market reforms, AMLO’s zero-sum approach
has propped up the utility and created a conflict with no obvious potential offramps or winners.
• AMLO aims to block the growth of renewables, Mexico’s cheapest and cleanest sources of
power, while maximizing use of state-owned utility Comisión Federal de Electricidad’s (CFE)
aging, inefficient thermal fleet. Policy changes unveiled by the government subvert the
crowning achievement of prior reforms: a competitive, cost-based power market.
• The government’s latest regulation asserts intermittent sources of generation (wind/solar,
primarily) pose a threat to the overall reliability of Mexico’s power grid. It gives the country’s
market operator expanded powers to block renewables from participating in the system.
• The new changes are open to challenge under Mexican laws. The latest may also need to be
validated with an amendment to the Constitution. The government has signaled it will
vigorously defend the measures, likely setting up a prolonged, mutually damaging conflict.
• Even with a recent court injunction to suspend implementation, the latest policies have
gravely undermined investor confidence in the Mexico clean energy market. Projects are now
being delayed or perhaps shelved entirely as the legal conflict plays out.
• CFE lacks a plan or mandate to revamp its uncompetitive fleet of power plants. Greater CFE
generation will mean higher electricity costs. Mexican citizens will ultimately be forced to carry
these, either through bigger electricity bills or higher taxes to cover further subsidies for CFE.
• The impasse resembles a Mexican standoff, a classic cinematic trope in which everyone is
poised to lose. A way out could involve coordinated efforts to boost system flexibility, increase
transmission capacity and modernize CFE in concert with the private sector and under the
prevailing legal framework. Little suggests any of this is underway.
Figure 1: Growing regulatory risk: the top 15 wind/solar project owners in Mexico
Source: BloombergNEF
-
500
1,000
1,500
2,000
MW
Project online Project financed / under construction
Mexican Standoff: No Winners in AMLO's Clean Energy Feud
June 26, 2020
Contents
1. Confrontation with
renewables escalates 2
2. Legal and constitutional
challenges 4
3. What’s next? 6
About us 10
4.5GW
Wind and solar capacity,
financed or under
construction in Mexico
5.1GW
Commissioned CFE oil-fired
power generating capacity
54%
CFE’s market share of
Mexico’s power-generating
capacity
James Ellis
jellis98@bloomberg.net
This document is being provided for the exclusive use of MICHAEL CIANO at HARTREE PARTNERS LP.
Mexican Standoff: No Winners in AMLO's Clean Energy Feud
June 26, 2020
© Bloomberg Finance L.P.2020
No portion of this document may be reproduced, scanned into an electronic system, distributed, publicly
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1. Confrontation with renewables escalates
Since taking office in late 2018, AMLO has advanced a number of policies aimed at strengthening
the role of state-owned utility CFE, generally at the expense of privately-operated companies.
Given that Mexico’s wind and solar industry is dominated by private firms, including business
units or wholly-owned subsidiaries of international utilities, this has been consistently bad for
clean energy. AMLO has essentially sought to dismantle the pro clean energy policy frameworks
established by his predecessors.
Before taking office, AMLO staunchly opposed liberalizing the power sector. Since assuming the
presidency, he has made it his express goal to revitalize public sector involvement in energy (see
AMLO Aims at Mexico's Private Sector, Hits Clean Energy (web | Terminal)). His administration
has in the past two years:
– Cancelled Mexico’s renewable energy auctions;
– Diluted the country’s market for renewable energy credits (CELs);
– Sidelined national clean energy targets; and
– Eliminated benefits wind and solar plants received under previously established policies.
1.1. The Cenace resolution
Most recently, the AMLO administration has used the Covid-19 pandemic to justify unwinding
elements of earlier governments’ energy reforms in the name of stabilizing the grid. On April 29,
market operator the National Energy Control Center (Centro Nacional de Control de Energía, or
Cenace) issued a resolution that indefinitely suspended preoperative tests for renewable plants,
denied authorization for future tests and subordinated dispatch of wind and solar plants to CFE’s
firm capacity during the current crisis.
1 The resolution cited efforts to safeguard the reliability of
the national electrical system against interruptions clean intermittent energy projects could cause.
It gave Cenace oversight over potential curtailment of operations of these plants and effectively
barred any new projects from connecting to the grid (see Bloomberg News, Mexico Indefinitely
Halts New Clean-Energy Plans, Blaming Virus (web | Terminal)).
Trade groups say the resolution affected 44 wind and solar power plants in construction and
commissioning, representing 5.3GW of capacity and $6.4 billion in investment.2 BloombergNEF
has identified 4.5GW of utility-scale wind and solar under development in Mexico and a further
10.8GW of commissioned utility-scale wind and solar capacity. Plants that are already operating
may be subject to discretionary curtailment, directly affecting the ability of generators to meet the
terms of power purchase agreements (PPAs). These rules were adopted over the objections of
Mexico’s antitrust regulator, the Federal Commission of Economic Competition (Comisión Federal
de Competencia Económica, Cofece), which argued that they would hurt competition and boost
electricity prices (see Bloomberg News, Mexico Antitrust Body Says Renewable Rules May Hurt
Competition (web | Terminal)).
Federal courts have since granted definitive suspensions of the measure halting preoperative
testing, temporarily exempting companies from the ruling and allowing many new clean energy
plants to proceed with testing and interconnection (see Bloomberg News, Clean Energy Scores
Big Win in Fight Against Mexico Crackdown (web | Terminal); Mexican Renewables Win Court

1 Resolution to Guarantee the Efficiency, Quality, Reliability, Continuity and Stability of the National Electrical
Grid of Mexico during the SARS-CoV2 Virus (COVID-19) Epidemic, Cenace, 29/4/2020.
2
“Informe CENACE,” AMDEE, May 7, 2020. “En riesgo inversiones por US$ 6,400 millones en renovables:
ASOLMEX, AMDEE,” Energía a Debate, 7/5/2020.
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Mexican Standoff: No Winners in AMLO's Clean Energy Feud
June 26, 2020
© Bloomberg Finance L.P.2020
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Fight Against Energy Ministry Rules (web | Terminal)). Mexico’s Ministry of Energy (Secretaría de
Energía, Sener) has said it will challenge the court rulings, arguing the Constitution grants the
government exclusive authority to plan and control the grid.
1.2. The Sener policy
In the most profound challenge yet to Mexico's previous market reforms, on May 15 Sener
published in the Federal Official Gazette a policy asserting intermittent sources of generation
(wind/solar, primarily) pose a threat to the overall reliability of Mexico’s power system.
3 While the
Cenace resolution sought to delay the interconnection of new wind and solar to the grid based on
fluctuating demand resulting from the pandemic, Sener’s move is intended to be permanent. The
policy effectively implements a CFE “wish list” given to Sener and to Mexico’s Comisión
Reguladora de Energía (CRE) that leaked to the press in December 2019.
4
The Sener policy significantly increases the power of the CFE with respect to Cenace and CRE
and expands its role in planning of the grid. This undermines energy reforms that previously
unbundled the sector, splitting some of CFE’s responsibilities and placing them with the newly
created independent market operator. The policy also raises barriers to issuance of new
generation permits, seeks to limit interconnection of new renewable projects, and enables priority
dispatch of CFE power plants. Among the key measures:
• Interconnection requests: The policy regulates award of generation permits and
interconnection agreements, and grants Cenace and CRE authority to deny permits and
reject interconnection requests for clean intermittent energy on reliability grounds.
5
Unspecified “interconnection improvements” will be enforced via an early termination clause
that all interconnection agreements must have, raising the prospect of large, unplanned
capital investments at the project level.
• Designating priority projects: It allows CFE to recommend to Sener “strategic projects” that
“further the public service” and are needed to comply with the government’s energy policy.6
These will have priority for interconnection. Sener is expected to prioritize CFE power plants
over private ones and conventional sources, including those supplied with national oil
company Petróleos Mexicanos (Pemex) products, over clean intermittent sources.
• Security of dispatch: The policy gives Cenace permanent authority to prioritize dispatch
based on reliability rather than cost, ensuring zero marginal cost renewables do not undercut
and eventually displace CFE plants, many of which are aging, thermal generators.7
• New ancillary services: The policy authorizes new ancillary services aimed at promoting
system reliability and gives authority to Cenace to dispatch power plants out of merit at any
time for the provision of ancillary services.8 The policy implies that renewable plants that

3 Policy for the Reliability, Safety, Continuity and Quality of the National Electric System. Diario Oficial de la
Federación (DOF) 15/05/2020
4 Pliego Petitorio
5 10.2 Incorporación de Energías Limpias Intermitentes. DOF 15/05/2020.
6 5.4 Planeación. DOF 15/05/2020.
7 7.1 Seguridad de Despacho. DOF 15/05/2020.
8 8.4 Nuevos Servicios Conexos. ACUERDO por el que se emite la Política de Confiabilidad, Seguridad,
Continuidad y Calidad en el Sistema Eléctrico Nacional. DOF 15/05/2020.
This document is being provided for the exclusive use of MICHAEL CIANO at HARTREE PARTNERS LP.
Mexican Standoff: No Winners in AMLO's Clean Energy Feud
June 26, 2020
© Bloomberg Finance L.P.2020
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create the need for such services will bear the cost for them. These services are likely to be
provided by conventional (probably CFE-owned) plants.
• Capacity market changes: The policy removes the ability of wind and solar plants to offer
capacity (potencia). Generators are credited with this based on their availability on the basis
of an annual calculation of the 100 critical hours on the grid.9 This change will affect existing
PPAs as wind and solar projects have already entered into contracts to sell capacity to
offtakers, as in the energy auctions held under the last administration.
2. Legal and constitutional challenges
In implementing sweeping changes to electricity legislation, the new regulation is open to
challenges on numerous legal, constitutional and procedural grounds. On June 24, a federal court
issued a preliminary injunction to block implementation of some portions of the rules, pending the
outcome of other, ongoing litigation.
2.1. Conflicts with existing law
The policy is expected to be disputed primarily on the basis of conflict with the set of laws that
implemented the energy reforms and were legislated by Mexico’s Congress. These opened up
the industry to private participation in generation, transmission, distribution and power marketing
activities and sought to increase the participation of clean energy in the generation mix. The most
important of these are the Electric Industry Law and the Energy Transition Law, passed in 2014
and 2015, respectively.
10
The Electric Industry Law lays out the criteria for dispatch of power plants according to principles
of security of dispatch and economic efficiency, without defining a preference on the criteria.11
However, within the structure of a competitive, cost-based power market, the law allows for the
dispatch of the cheapest energy first. The new policy modifies the dispatch criteria to give priority
to security of dispatch over economic efficiency.
The same law also clearly states that benefits that existing clean energy projects enjoy will remain
in place. These include discounted transmission charges (“postage stamp” rates), the “energy
bank” (ability to deposit renewable energy into the grid and withdraw it at a later time), and backup power from the CFE for intermittent sources.
12
The Energy Transition Law seeks to reduce emissions and move Mexico away from its current,
heavy reliance on fossil fuels. It lays out the goal of achieving 35% generation from clean sources
by 2024.
13 Lawsuits probably taking the form of amparos (Constitutional injunctions) challenging
the Sener policy now appear very likely. These may suspend implementation of the policy on a
provisional or permanent basis.
Antitrust agency Cofece has said it will take Sener to the Supreme Court over the new rules
based on principles of due process, prohibition on monopolies and monopoly practices, and the

9 10.8 Incorporación de Energías Limpias Intermitentes. DOF 15/05/2020.
10 Ley de la Industria Eléctrica, 11/08/2014; Ley de Transición Energética, 24/12/2015.
11 Artículo 101, Ley de la Industria Eléctrica, 11/08/2014
12 Transitorio Décimo Segundo, Ley de la Industria Eléctrica, 11/08/2014
13 Transitorio Tercero, Ley de Transición Energética, 24/12/2015.
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Mexican Standoff: No Winners in AMLO's Clean Energy Feud
June 26, 2020
© Bloomberg Finance L.P.2020
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supremacy clause, or articles 16, 28 and 133, respectively (see Bloomberg News, AMLO
Renewables Move Faces Court Test From Mexico Antitrust Body (web | Terminal)).
Sener’s new regulation is also thought to violate constitutional principles of separation of powers
and the supremacy clause, which establishes that regulations and policies issued by
administrative authorities cannot contravene laws enacted by Congress. This means that parts of
the policy should have been enacted as amendments requiring Congressional approval.14
2.2. Constitutional contraventions
The new Sener policies may not be legally binding without being enshrined through an
amendment to Mexico’s Constitution. The original 2013 reforms that ended state control of the
country's oil, gas and power sectors involved changing the Constitution. In theory then, undoing
the reforms should require similar action.
The reforms unbundled the CFE, established the independent market operator and created
Mexico’s wholesale market (Mercado Electrico Mayorista) based on principles of open and
competitive markets, including private sector participation, efficient operation, and nondiscriminatory access. The Constitution establishes obligations for the electrical industry around
clean energy and reducing polluting emissions, creating environmental protections for the
population.
Figure 2: Political party representation in Mexico
Source: Government of Mexico. Note: Mexico has 128 senators, 500 deputies and 32 governors.
Allied parties are the Labor Party (PT), Green Ecological Party of Mexico (PVEM), and Social
Encounter Party (PES). AMLO is a member of the Morena Party.
Constitutional changes require two-thirds majorities in the Senate and the Chamber of Deputies,
plus the support of half of state governors. The party AMLO founded, the National Regeneration

14 Norton Rose Fulbright, “New policy in Mexico puts dagger in private sector participation in the electricity
sector”, May 18, 2020.
47% 51%
19%
13%
16%
3%
19%
16%
31%
11% 9%
38%
10% 9% 9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Senate Chamber of Deputies Governors
Others
PRI
PAN
Allied parties
Morena
This document is being provided for the exclusive use of MICHAEL CIANO at HARTREE PARTNERS LP.
Mexican Standoff: No Winners in AMLO's Clean Energy Feud
June 26, 2020
© Bloomberg Finance L.P.2020
No portion of this document may be reproduced, scanned into an electronic system, distributed, publicly
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L.P. For more information on terms of use, please contact sales.bnef@bloomberg.net. Copyright and
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Movement (Morena) leads a large coalition in Congress, though it falls short of the two-thirds
Congressional super-majority needed to overturn reform.
Along with allied parties, Morena could potentially muster a simple majority in the Senate with
60%, or 77 seats of the 128 total, short of the two thirds needed to pass Constitutional reform. In
Mexico’s lower house, the Chamber of Deputies, Morena and allies could potentially meet the two
thirds threshold with 333 of 500 seats. However, at the state level, they control just 22% of
Mexico’s 32 governorships. Support from incumbent parties that previously supported reforms is
unlikely. Mid-term elections in mid-2021 will see all 500 seats of the Chamber of Deputies turn
over, as well as elections for nearly half of the state governorships (15), raising the prospect of a
major reshuffling.
2.3. Procedural red flags
Finally, the enactment of the Sener policy violated technical requirements on how regulatory
changes can be implemented, legal experts say. Such changes require a period of public
consultation and analysis of regulatory impact led by the National Regulatory Improvement
Commission (Comisión Nacional de Mejora Regulatoria, or Conamer). Proposed regulations are
supposed to be submitted to Conamer at least 30 days in advance of enactment. Sener
requested that the policy be exempt from the mandatory analysis. Conamer initially blocked
publication of the change in the official gazette. It then relented, but only after the head of the
agency resigned.
3. What’s next?
The current campaign to limit private generation in Mexico’s electricity sector is restricting much
needed, new lower cost capacity, while presenting no alternatives. Unwilling to encourage muchneeded private investment, but unable to fully reverse the market reforms of the past government,
AMLO’s zero-sum approach to propping up the utility will have unavoidable negative
consequences. Favoring state-owned plants via blunt regulation guarantees lengthy legal battles,
lower investment and higher-priced energy for Mexicans. It will also result in a dirtier, higher CO2
emitting system overall.
In short, the current conflict is unlikely to produce any winners – other than high-priced attorneys
billing by the hour. By creating a confrontation in which no party can prevail, AMLO’s impasse
resembles the classic cinematic trope, the Mexican standoff.
3.1. Lengthy legal conflict
The AMLO administration’s approach leaves little room for constructive engagement with the
private sector. Recent measures strongly indicate policy is being driven by the CFE and that the
government is hostile to private investment in the power sector, no matter how badly it is needed.
AMLO is unlikely to secure the votes required to overturn the principles of market reform and
support for clean energy enshrined in the Constitution, leaving the administration unable to
reverse them entirely.
Meanwhile, as discussed above, the new regulation is open to broad challenges on multiple
grounds. Thus far, clean energy advocates have scored key victories in the courts and these
could well continue. Prolonged legal and regulatory conflict will be costly, however.
This document is being provided for the exclusive use of MICHAEL CIANO at HARTREE PARTNERS LP.
Mexican Standoff: No Winners in AMLO's Clean Energy Feud
June 26, 2020
© Bloomberg Finance L.P.2020
No portion of this document may be reproduced, scanned into an electronic system, distributed, publicly
displayed or used as the basis of derivative works without the prior written consent of Bloomberg Finance
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3.2. Lower investment, both public and private
Not long ago, Mexico was regarded as one of the world’s most exciting new markets for clean
energy development. What a difference a new president and two years makes. Much needed
investment into the country’s power-generating infrastructure has now been delayed indefinitely
as the legal paperwork gets filed.
It is not just private sector players that stand to be hurt by the current standoff. CFE is also to
some degree caught in stasis as it awaits the court rulings. Moreover, it continues to lack a plan
or mandate to tackle the difficult steps it would need to take to revamp its uncompetitive fleet and
modernize Mexico’s grid. CFE remains plagued by high generation costs, inadequate
infrastructure, bill nonpayment and theft of electricity and materials. The government’s official
auditing body has diagnosed deficient planning, maintenance and modernization practices at the
root of its uncompetitive fleet. Over one third of its power plants were found to be unprofitable due
to poor planning and underinvestment in plant modernization and new infrastructure. AMLO’s
recent steps explicitly aim at defending the utility’s share of Mexico’s generation capacity market,
drawing a public line in the sand at its current, 54% market share. But CFE has no project pipeline
of its own, which means that the government will strenuously resist all private sector net additions.
3.3. Rising costs to be borne by consumers
Blocking growth of renewable energy, Mexico’s cheapest and cleanest sources, while maximizing
use of CFE’s aging, inefficient thermal fleet implies potentially higher costs for Mexicans. The
pass-through could come in the form of bigger electricity bills or more generous state subsidies to
CFE. Mexican taxpayers would ultimately have to pay for these as well.
Currently, the utility absorbs the heavy universal subsidy Mexico offers residential consumers,
who in turn enjoy low power prices. In each of the past two years, the CFE has received around
$4 billion in cash from the government to compensate for end-user tariffs. AMLO is unlikely to
allow residential electricity prices to climb steeply, marking out a clear path to subsidizing
consumption of increasingly expensive fossil fuel fired power. Public health costs associated with
higher pollution levels and rising electricity prices for commercial and industrial consumers may
also result.
3.4. Higher-cost generation
CFE plants generally sit higher in the Mexico power system’s “merit order”, the supply curve
determining which plants are most economic and should be dispatched first, based on their shortrun marginal costs (see Figure 3). Prioritizing these costly units would essentially mark a return to
Mexico’s pre-reform power market. Mexico’s wholesale market came into existence in 2016 with
an independent market operator established two years earlier. Prior to reform, CFE dispatched
power, allegedly running out-of-the-money units to generate power using oil sourced from national
oil company Pemex. Since the market’s inception, both declining natural gas prices and growing
renewable capacity have cut generation costs, displacing fossil-fired generation and reducing
prices (see Mexico Power Market Outlook, Price Forecast: End of an Era (web | Terminal)).
This document is being provided for the exclusive use of MICHAEL CIANO at HARTREE PARTNERS LP.
Mexican Standoff: No Winners in AMLO's Clean Energy Feud
June 26, 2020
© Bloomberg Finance L.P.2020
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displayed or used as the basis of derivative works without the prior written consent of Bloomberg Finance
L.P. For more information on terms of use, please contact sales.bnef@bloomberg.net. Copyright and
Disclaimer notice on page 10 applies throughout. 8
Figure 3: Mexico generators ranked by short-run marginal costs of generation, May 2020
Source: BloombergNEF Mexico Merit Order Maker
3.5. Barriers to new wind and solar capacity
Despite successful injunctions against the Cenace resolution halting preoperative testing, recent
efforts to bar new projects from connecting to the grid are ominous. There is little to suggest the
ban initiated by government was technically motivated. Even with heightened operability issues
tied to fluctuations in demand from Covid-19, such risks are considered manageable for grid
operators with existing strategies.
The Sener policy raises additional barriers by granting Cenace and CRE new discretionary
regulatory powers, specifically the authority to deny permits and reject interconnection requests
for clean intermittent energy on reliability grounds. This criteria may be broadly interpreted. It
creates a new requirement for developers to secure a generation permit and developers will have
to request an interconnection feasibility opinion from Cenace prior to that. Cenace can grant or
deny this opinion based on a wide variety of factors that allow discrimination against renewable
plants. And Cenace may reject such requests if the zone or region in question has transmission
congestion on the basis of sufficiency, dispatch stability and economic efficiency.
Finally, the ability of CFE to designate “strategic projects” that will have priority for interconnection
can reasonably be expected to lead to prioritizing CFE power plants over private ones and
conventional over clean, intermittent sources. In Mexico’s increasingly congested grid, this
violation of the principle of open access represents another potential avenue for limiting wind and
solar additions.
CFE owned
Oil and
diesel
Large
hydro
Coal
Privately-owned
wind and solar
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Mexican Standoff: No Winners in AMLO's Clean Energy Feud
June 26, 2020
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3.6. Sliding project economics
The economics of renewable projects will be adversely affected in several important ways. Large,
primarily European developers with sizable commissioned portfolios, as well as assets under
development such as Enel, Iberdrola, Acciona and Actis face growing exposure to these
regulatory risks. Stricter rules governing interconnection agreements raise the prospect of
unspecified “interconnection improvements” to be enforced by an early termination clause that all
interconnection agreements must have, potentially resulting in large, unplanned capital
investments.
The new ancillary services policy that gives authority to Cenace to dispatch power plants out of
merit implies that renewable plants that create the need for such services will bear the cost for
them. These services are likely to be provided by conventional (and probably CFE-owned) plants.
Changes to the capacity market that remove the ability of wind and solar plants to offer capacity
(potencia) erase a revenue stream and will affect existing PPAs, including those awarded in the
country’s energy auctions.
New, higher transmission rates published by CFE on June 10 affect plants holding legacy
interconnection agreements.
15 The new rates raise transmission costs as much as 700-800% for
some companies. Rates to transport power on high voltage transmission lines increased by over
450% from around 0.05 to 0.2785 pesos/kWh, rates for medium voltage lines increased by over
400% from around 0.05 to 0.2586 pesos/kWh, and rates for low voltage lines surged by around
800% from around 0.1 to 0.8928 pesos/kWh. The hike in costs is expected to be significant
enough to potentially shut some capacity down.
Cancellation of the transmission benefits (known as "postage stamp" rates) that legacy
renewables projects enjoyed mostly impacts wind. Over 60% of Mexico's 7GW of commissioned,
financed and under construction wind capacity holds self-supply permits, meaning 4.5GW of wind
is affected by this change. Wind projects that came online as recently as last year hold this type of
pre-reform permit. Solar is much less affected, with just 6% of Mexico's 8GW of PV being selfsupply, or 500MW.