Electricity sector in Mexico

Installed capacity Installed electricity capacity in 2008 was 58 GW. Of the installed capacity, 75.3% is thermal, 19% hydro, 2.4% nuclear (the single nuclear power plant Laguna Verde) and 3.3% renewable other than hydro. Gross generation was 234 TWh that same year (not including cogeneration and autogeneration), with 79.2% coming from conventional thermal sources, 16.6% from hydroelectricity, 4.2% from nuclear power and 3% from geothermal sources. The expansion program contemplated by SENER for the period 2008-2017 includes the addition of 14,794 MW by the public service: 14,033 MW by CFE and 761 MW by LFC (Luz y Fuerza del Centro). Self-supply and cogeneration will add another 2,490 MW in new capacity. Total public installed capacity in 2017 is estimated at 61,074 MW, 40% and 21% of which would be combined-cycles and hydroelectric plants respectively. Effective Energy Generation Source: Secretaría de Energía with data from Comisión Federal de Electricidad and Luz y Fuerza del Centro 1 Thermoelectric power plants (residual fuel oil, natural gas and diesel) 2 Installed capacity of Independent Power Producers. 3 Dual power plants can operate with coal or fuel oil P Preliminary Imports and exports The external electricity trade is carried out through nine interconnections between the United States and Mexico and one interconnection with Belize. These connections have primarily been used to import and export electricity during emergencies. CFE is not a part of the North American Electric Reliability Corporation, though its transmission system in northern Baja California is part of the Western Electricity Coordinating Council, and it also has a few other interconnections across the border with the United States. Demand Consumption of electricity in 2008 was 184 TWh, which corresponds to 1,655 kWh per capita. Consumption share by sector was as follows: • Residential: 26% • Industrial: 59% (38% for mid-sized industry and 21% for large industry) • Commercial: 7% • Agriculture: 4% • Services: 4% Demand and supply projections Electricity demand has grown steadily in the last decade and the Energy Secretariat (SENER) forecasts that consumption will grow by 3.3% a year for the next ten years, reaching 281.5 TWh in 2017. Demand growth forecasts have been revised down, from an estimated 4.8% a year in the projections from 2006, due to the expected effects of the economic crisis on energy demand. Reserve margin In 2008, the installed reserve margin (RM) in the National Interconnected System (SIN) was 45.8%, while the operating reserve margin (ORM) was 21.3%. It is estimated that both reserve margins will remain high during the 2009-2013 period. However, from 2014, the RM is expected to decrease to 29.2%, with the ORM reaching an 8.3%. Those values would be about 25% and 6% respectively in 2017. The commissioning of the Agua Prieta II, Norte II, Norte III, Noreste and Valle de Mexico II and III is essential to avoid power deficits in the northern and central parts of the country. However, irrespective of the reserve margins in the SIN, there are restrictions in transmission capacity that generate bottlenecks or the need to import power. == Access to electricity ==

Total electricity coverage in Mexico is 98.7% (2015). With 99.7% coverage in urban areas with more than 100,000 inhabitants; 99.3% in locales with 15,000-99,999 inhabitants; 98.8% in areas with 2,500-14,999 inhabitants and 96.1% in locales with fewer than 2,500 inhabitants. == Service Quality ==

Interruption frequency and duration In 2008, the average number of interruptions per subscriber was 2.3 for CFE and 4.2 for LFC. Duration of interruptions per subscriber was 2.2 hours for CFE and 3 for LFC. Total losses Total electricity losses in 2008 were 11% for CFE and as high as 32% for LFC. == Responsibilities in the Electricity Sector ==

Policy and Regulation The Energy Secretariat (SENER) is in charge of defining the energy policy of the country within the framework defined by the Constitution. The Energy Regulatory Commission (CRE) is, since 1995, the main regulatory agency of the electricity and gas sector. Transmission and Distribution CFE holds a monopoly on electricity transmission and distribution in the country. CFE operates the national transmission grid, composed of of high voltage lines, of medium voltage lines, and of low voltage distribution lines, through one of its departments, the Centro Nacional de Control de la Energía (CENACE). == Renewable Energy Resources ==

The two main government agencies in charge of developing renewable energy resources are SEMARNAT and SENER. The Environment and Natural Resources Secretariat (SEMARNAT) is responsible for environmental policy and the preservation of renewable and non-renewable resources, while SENER defines the national energy policy. CONAE, the National Commission for Energy Savings, is responsible for promoting energy savings and energy efficiency. Finally, SEDESOL, the National Secretariat for Social Development, includes the promotion and use of renewable energy in some of their projects. The country has an important mini-hydro potential, estimated at 3,250 MW In 2009, there were 22 private mini-hydro installations (12 in operation, 2 inactive and 8 under construction), adding up to a total of 83.5 MW in operation, with 105 MW under development. Wind Wind power production is still very limited in Mexico, although the country's potential is estimated to be very high. Three main areas for wind generation have been identified: the Isthmus of Tehuantepec, in the state of Oaxaca; La Rumorosa, in the state of Baja California; The area of the Gulf of California, which includes Baja California, Baja California Sur, Sonora and Sinaloa, the Yucatán Peninsula, Source: SENER 2009, Programa especial para el aprovechamiento de energías renovables Source: SENER 2009, Programa especial para el aprovechamiento de energías renovables Geothermal Mexico has a large geothermal potential due to its intense tectonic and volcanic activity. This potential has been estimated at 1,395 MW by CFE, although this figure is likely to be much higher. It ranks third in geothermal power production worldwide. In 2009, geothermal installed capacity was 964.5 MW and total production was 7.1 TWh. There are four geothermal fields under exploitation: Cerro Prieto, Los Azufres, Los Humeros and Las Tres Vírgenes. Source: SENER 2009, Programa especial para el aprovechamiento de energías renovables Biomass Mexico also has a large potential to produce energy from biomass. It is estimated that, taking into account agricultural and forest waste with energy potential and solid urban waste from the ten main cities, the country has a potential capacity of 803 MW and could generate 4,507 MWh per year. In the sugarcane industry, the estimated power generation protential from bagasse is over 3,000 MWh per year. == History of the electricity sector ==

20th Century The first overhead power line was built from Necaxa to Mexico City and El Oro de Hidalgo in 1905, when the hydroelectric plant in Necaxa opened. This 60 kV power line also was the world's longest power line in 1905. Despite the age, parts of the power line are still in service. Around 1930, central Mexico already had an interconnected grid. The electricity sector in Mexico underwent its first serious process of reorganizations during the 1930s, under the mandate of the Institutional Revolutionary Party (PRI). The National Electricity Code was created and the Federal Electricity Commission (CFE), a newly create state-owned and state-financed enterprise, came to dominate all investment in new capacity. In 1960, a constitutional amendment nationalized the electricity industry and formally gave the government exclusive "responsibility" for generating, transmitting, transforming, and distributing electricity. During this decade, the government also created Compañía de la Luz y Fuerza del Centro (LFC) to supply electricity to Mexico City and the neighboring states. During the 1960s and the 1970s, Mexico alienated private investment and decided to prevent market forces from entering the power system. In addition, the surge in oil prices of the 1970s provided a windfall to oil-rich Mexico, which allowed the country to maintain substantial subsidies for electricity generation. Only during the late 1980s and the early 1990s, the Mexican government implemented market reforms in several economic sectors, including electricity. The Energy Regulatory Commission (CRE) was created in 1993 as an autonomous agency in charge of regulating the natural gas and electricity industries. The Renewable Energy Development and Energy Transition Financing Law (LAERFTE) mandated the Secretary of Energy (SENER) to produce a Special Program for Development of Renewable Energy (PEAER), and a National Strategy for Energy Transition and Sustainable Energy Use (ENTEASE), to be updated yearly. The main objective of the law is to regulate the use of renewable energy resources and clean technology, as well as to establish financing instruments to allow Mexico to scale-up electricity generation based on renewable resources. SENER and the Energy Regulatory Commission (CRE) are responsible for defining those mechanisms and establishing legal instruments. The following functions are the responsibility of SENER, among others: According to the government, spending at the company was increasingly outpacing sales. Reforms from 2013 onwards and President Enrique Peña Nieto celebrating the promulgation of the Energy reform. The energy sector in Mexico was reformed by an initiative that president Enrique Peña Nieto presented to the Congress of the Union on 12 August 2013. The reform was approved by the Senate on 11 December of that year, and by the Chamber of Deputies one day later. On 18 December the reform was declared constitutional, and it was signed into effect on 20 December by its publication in the Official Journal of the Federation. On 8 September 2015 the SENER published the first Rules for the Electricity Market establishing the new rights and obligations for the generators, resellers, and qualified users of the market, to be overseen by the CRE and the CENACE. The wholesale electric market officially commenced operations on 1 January 2016. It also establishes ambitious plans for having 35% of renewable energy by 2024, from 28% in 2015 (which includes 18% of hydroelectric energy). The Supreme Court of Justice of the Nation (SCJN) ruled that a May 2020 order by the Secretariat of Energy (SENER) limiting connections to the CFE distribution by private renewable energy producers was unconstitutional. On 1 February 2021, President Andrés Manuel López Obrador (AMLO) sent an initiative to reform the Electricity Industry Law to the Congress of the Union. The proposal, which must be approved in 30 days, would reverse the energy reform approved under former president Enrique Peña Nieto. There are four priorities: 1) hydroelectric energy, 2) other energy produced by CFE (nuclear, geothermal, thermoelectric, and combined cycle gas turbines), 3) wind and solar energy produced by individuals, and 4) other. AMLO insists that previous reforms were made with the intention of privatizing the energy sector and will require either massive subsidies or huge price increases for consumers. == Tariffs, Cost Recovery and Subsidies ==

Tariffs During the last decade, average electricity tariffs in Mexico have been held below cost with the aim of maintaining macroeconomic and social stability. For all tariffs, an interagency group composed of CFE (Federal Electricity Commission, or Comisión Federal de Electricidad), LFC (Central Light and Power, or Luz y Fuerza del Centro), SHCP (Ministry of Finance and Public Credit, or Secretaria de Hacienda y Crédito Público), SENER (Ministry of Energy, or Secretaria de Energia), CRE (Regulatory Commission of Energy, or Comisión Reguladora de la Energía), and CNA (National Water Commission, or Comisión Nacional del Agua) meet regularly and once a year they prepare a tariff proposal for the subsequent year. Tariffs are approved by SHCP and not by the energy sector regulator. Except for the tariff set for the agricultural sector, average electricity prices have followed an upward trend since the year 2002. In 2008, average tariffs for the different sectors were: • Residential: US$0.106/kWh • Commercial: US$0.255/kWh • Services: US$0.172/kWh • Agriculture: US$0.051/kWh • Industrial: medium industry US$0.153/kWh, large industry US$0.118/kWh The average tariff, US$0.137/kWh, was 16.5% higher in 2008 when compared to 2007. Subsidies For the industrial and commercial sectors, electricity supply is priced on a rational cost basis for large firms. As a result, they receive no government subsidy, while subsidies for small firms are relatively small. On the other hand, agricultural and residential customers have traditionally received large subsidies since the electricity they consume is significantly underpriced. Extensive subsidies have contributed to a rapid growth in demand. In 2000, the average residential tariff covered only 43% of the costs, while the average tariff for agricultural use covered 31%. Total subsidies amounted to 46% of total electricity sales. In addition, residential subsidies were mostly captured by medium and high income classes as the amount of the subsidy raised with consumption. In 2002, a restructuring of residential tariffs significantly raised the infra-marginal tariffs paid by middle and especially high consumers of electricity. Currently, billing schedules vary by temperature, season and consumption level. In spite of this reform, price/cost ratio was still under 40% in 2002, even after the 21% increase in price due to the reform. In addition, the share of subsidies going to the non-poor population remained high, estimated at 64%. Agricultural tariffs were also modified in 2003, when a fixed price per kWh was fixed. These new tariffs sought charging higher prices for excess energy use. The low tariffs, together with LFC's inefficiencies, absorb a large amount of fiscal resources. For 2008, it was estimated that the subsidies paid through electricity tariffs to final CFE and LFC consumers by the Federal Government amounted to US$10 billion (close to 1% of GDP). == Investment and Financing ==

Investment by sub-sector Necessary investment to carry out the 2008-2017 expansion plan amounts to MXN 629,106 million (US$47 billion). The breakdown of the investment is: 41.2% for generation, 21.2% for transmission, 23.9% for distribution, 11.8% for maintenance and 1.9% for other needs. Pidiregas have been extended and have also grown in amount (PEMEX uses them for as much as four times the amount of CFE), although the original motivation for their existence is gone. Following a project finance scheme, for a project to be executed under Pidiregas, the resources that it generates from the sale of goods and services have to be enough to cover the incurred financial obligations. Projects are paid with the revenues generated during their operation and require the signature of a contract in which a product or work is involved. The State assumes the risk since PEMEX or CFE sign the contract as guarantee, while the investors recover their investment in the agreed time. As a result, Pidiregas cannot be considered as true private investment since, under true private sector participation, firms would make investment decisions and bear the full risk. The viability of the program has been questioned as its effect in the public budget is similar to the emission of public debt. Furthermore, until 2006, the Pidigeras scheme resulted in losses. Grid extension Since 1995, states and municipalities hold the responsibility for the planning and financing of grid extension and off-grid supply. A large part of the investment is financed through FAIS (Fund to Support Social Infrastructure). The National Commission for Indigenous People and SEDESOL (Secretariat for Social Development) also finance an important share of grid extension. Once a particular system has been constructed, its assets and operational and financial responsibility are transferred to CFE. Recent studies have concluded that interconnecting Baja California with the National Interconnected System (SIN) would be both a technically and economically sound decision. This interconnection would allow to serve peak demand in the Baja California system with generation resources from the SIN. Conversely, in period of low demand in Baja California, surplus electricity and base load (i.e. geothermal and combined cycles) could be exported to the SIN. As a result, there would be a reduction of investment costs in generation infrastructure and of total production costs. In addition, the interconnection would open new opportunities for electricity exchanges with power utilities in Western United States through the existing transmission links with California. It is expected that the interconnection will be commissioned in 2013. Renewable energy The Renewable Energy Law creates a Fund for the Energy Transition and the Sustainable Use of Energy. This fund will assure the financing of projects evaluated and approved by the Technical Committee, chaired by SENER. The fund will begin with US$200 million for each year between 2009 and 2011. == Summary of private participation in the electricity sector ==

As required by the Constitution, the electricity sector in Mexico remains federally owned, with the Comisión Federal de Electricidad (CFE) essentially controlling the whole sector. Although generation was opened to private participation in 1992, CFE is still the dominant player, with two-thirds of installed capacity. == Electricity and the environment ==

Responsibility for the environment The Secretariat of Environment and Natural Resources (SEMARNAT), created in 2000 from the previous Secretariat of Environment, Natural Resources and Fishing (SEMARNAP) holds the responsibilities for the environment in Mexico. SEMARNAT was one of the government agencies within the Intersectoral Commission for Climate Change that elaborated Mexico's Climate Change Strategy. Greenhouse gas emissions According to Mexico's Third National Communication to the UNFCCC, the country emitted 643 million tons of carbon dioxide equivalent (Mt e) in 2002, of which almost 400 Mt e resulted from the combustion of fossil fuels (over 60 percent of total emissions). The sources of Mexico's GHG emissions are energy generation (24%), transport (18%), forests and land-use change (14%), waste management (10%), manufacturing and construction (8%), industrial processes (8%), agriculture (7%), fugitive emissions (6%), and other uses (5%). Climate change mitigation Although the Kyoto Protocol does not require Mexico to reduce its GHG emissions, the country has committed to reduce its emissions voluntarily. In May 2007, President Calderón announced the National Climate Change Strategy that provides an accounting of emissions by sector, creates a framework for monitoring improvements and establishes a legally binding blueprint for emission reduction initiatives, sector by sector. The PECC sets out a four pillar program that includes (i) a long-term vision for government action; (ii) sectoral plans for GHG mitigation; (iii) plans for adaptation; and (iv) cross-cutting policy initiatives. Carbon Capture and storage CDM projects in electricity In September 2009, there are 47 energy-related registered CDM projects in Mexico with a total emission reduction potential of about 3.5 million tons of equivalent. The table below presents the number of projects by type: Source: United Nations Framework Convention on Climate Change == External assistance ==

World Bank Currently, the World Bank is contributing funds and assistance through several projects related to the energy sector in Mexico. • A Rural Electrification Project with a US$15 million grant from GEF and a US$15 million World Bank loan is currently in the pipeline. This US$110 million project is focused in the design and implementation of sustainable energy models for areas without access to the electricity network. The project includes 50,000 households in Oaxaca, Guerrero and Veracruz. • In October 2006, GEF financing was approved for the US$49.35 million Agua Prieta Hybrid Solar Thermal Power Plant. This project, located in the northern state of Sonora, will contribute to reduce GHG emissions through the installation of an Integrated Solar Combined Cycle System (ISCCS) using solar parabolic technology. • A Large-Scale Renewable Energy Development Project was approved in June 2006. This two-phase project will receive a US$25.35 million grant from GEF, while the remaining $US 125 million will be financed by local and private sources. The project seeks to assist Mexico in developing initial experience in commercially based, grid-connected renewable energy applications. It will do so by supporting the construction of an approximately 101 megawatt independent power producer (IPP) wind farm, designated as "La Venta III". • The Prototype Carbon Fund approved in December 2006 a US$12.29 million investment loan for a Wind Umbrella Project . • A US$5.8 million GEF grant was approved in October 2002 for the Introduction of Climate Friendly Measures in Transport. The project, with a total budget of US$12.2 million, has will contribute to the establishment of policies that will assist towards a long-term modal shift in a climate-friendly, more efficient and less polluting, less carbon-intensive transport for the Mexico City Metropolitan Area (MCMA). IDB Currently, four IDB financed energy activities are under implementation in Mexico. • In August 2009, a US$1 million non-reimbursable technical cooperation support to the National Program for Sustainable Energy Use • In September 2008, a US$749,000 non-reimbursable technical cooperation was approved to support the implementation of a pilot initiative to use alternative energy sources and implement energy efficiency measures. This technical cooperation is still awaiting implementation. • In May 2007, US$200,000 was approved to finance a project that aims at providing Assistance to CFE on Environmental and Social Aspects of Hydroelectric Projects. This US$1,168,000 project aims to assess CFE performance and management capability in dealing with environmental and social impacts of large hydroelectric projects. • Financing for the Support for the Energy Secretariat on the Feasibility of Bio-Ethanol as Fuel was approved in August 2005. The US$146,000 provided by the IDB are complemented with US$30,000 from the country. The broad objective of the project is assessing the competitiveness of ethanol as a fuel. == Sources ==