Status of the Energy Transition

In 2014, the energy legal framework was amended, not only to expand the activities in which private investment is allowed, but also to introduce concepts related to energy transition, efficiency, decrease in greenhouse emissions, reduction of carbon footprint and use of clean energy sources. The reform included, among others, the enactment of the Energy Transition Law (Ley de Transición Energética) setting forth the legal grounds towards a long-term sustainable energy model.

Most of the renewable energy projects in Mexico were developed under this legal framework; however, from 2018, when a new administration took office, the energy transition was considerably slowed down as the public policy shifted towards fossil-fuel projects, effectively limiting the participation of private investment and halting bidding processes called by the National Center for Energy Control (Centro Nacional de Control de Energía, CENACE) for the purchase of green power.

Although the Development Program of the National Electric System for 2024 (Programa de Desarrollo del Sistema Eléctrico Nacional, PRODESEN 2024) mentions that Mexico has and continues to implement measures to integrate clean energies, substitute the use of fuels with a high content of carbon for natural gas, and decrease energy losses in the grid, there is no express strategy to phase out fossil fuels in Mexico. Instead, subsidies for fossil fuels increased in 2021 and 2022, the current government strengthened the state-owned oil company and bought a refinery in Texas (Deer Park) while building another one (Dos Bocas). All these actions resulted in a decline in public and private investment in the development of clean energy sources.

International Commitments and Targets

In 2016, Mexico ratified the Paris Agreement and committed to a reduction of 35% of its greenhouse gas emissions (a non-conditioned commitment increased during the United Nations Climate Change Conference (COP) 27 from the original 22%) and 51% of its carbon emissions by 2030. During COP 27, Mexico also reaffirmed its commitment to zero greenhouse emissions by 2050, pledged to eliminate routine flaring and venting across oil and gas operations (including at the national oil company) and confirmed the intention to deploy more than 30 additional gigawatts of combined wind, solar, geothermal, and hydroelectricity capacity by 2030. Further to Mexico’s initial commitment, during COP 28, Mexico signed an initiative to triple the capacity of renewable energies and double energy efficiency rates by 2030. As of the date of writing, it is unlikely that Mexico will meet such targets.

The Ministry of Energy (Secretaría de Energía, SENER) progress report for 2024 (“SENER Report 2024”) shows a constant increase since 2019 in the total net generation of clean energy and a decrease in the gap between Mexico’s targets and the real percentage of total net generation of clean energy. However, Mexico still ranks 38th out of 67th countries in the Climate Change Performance Index for 2024, dropping seven places from the 2023 index. The index also classifies Mexico as a low-performing country, highlighting its position as one of the world’s largest producers of oil, gas, and coal.

According to the Mexico Climate Initiative, due to the regressive policies implemented by the current administration (further detailed in 1.3 Renewable Energy Market and Recent Developments), Mexico missed the opportunity to install an additional 10-15 GW of renewable energy capacity over the past six years. To comply with its international commitments, Mexico must increase its solar and wind capacity from the current 12 GW to a minimum of 44 GW by 2030.

According to the PRODESEN 2024, total energy generated during 2023 was 351,695 GWh, which represented an increase from the total generation of 340,712.7 GWh reported for 2022 according to the SENER Report 2024. However, during 2023 only 24.32% was generated through clean energies against a 31.2% generated during 2022 (please note that figures for 2023 from the SENER Report 2024 were not used since such information is up to June 2023).

According to the SENER Report 2024, during the first half of 2023, photovoltaic, hydroelectric and wind energy sources accounted for the bulk of clean energy generated in Mexico, representing 32.8% (12,115.4 GWh), 29.4% (10,840.6 GWh) and 27.6% (10,195 GWh), respectively.

Mexico has considerable potential to grow clean generation sources. According to the Mexican Association of Solar Energy, 85% of the territory is suitable for the development of solar energy projects. Furthermore, according to the Mexican Wind Energy Association, Mexico has the potential to install a capacity of more than 50,000 MW from wind power. To put this in perspective, only an additional 17,000 MW generated from these sources would be required to reach the 35% of clean energy production goal set forth in the Energy Transition Law.

Other Technologies

As mentioned above, photovoltaic, hydroelectric and wind energy represent almost 90% of the energy produced through clean energy sources; however, our legal framework is being amended to contemplate the development of other generation technologies.

Hydrogen

Green hydrogen is not yet being produced in Mexico at a large scale, however, we are witnessing a growing appetite in the sector. According to H2V2, a company that has developed hydrogen projects in different jurisdictions and has commenced operations in Mexico, the country could become a strategic global hub for the production of green hydrogen due to its large-scale potential in renewables. As of April 2024, approximately 15 new projects were being developed with a total investment of USD20 billion. The Mexican government has also publicly supported a USD10 billion investment by a Danish fund in a green hydrogen project in the south of Mexico.

On 11 March 2024, SENER issued the clean hydrogen guidelines (Lineamientos en Materia de Hidógeno) to promote, develop and use clean hydrogen. Together with the Mexican government, private and professional associations, such as the Mexican Association of Hydrogen, are making significant efforts to develop more comprehensive regulation.

If the new administration continues to promote the development of this technology, by 2025, large-scale hydrogen projects could be operational. Furthermore, the PRODESEN contemplates converting 5,789 MW of combined cycle capacity into clean production between 2033-2036 by operating existing facilities with a blend of 75% natural gas and 25% green hydrogen, and an additional 1,829 MW production to be generated by new facilities operating with such a blend.

Important challenges include adjustments required to existing infrastructure or new investments to transport green hydrogen.

Bioenergy and Geothermal

During the first half of 2023, bioenergy only generated 1,525.1 GWh and geothermal sources 2,238 GWh, representing 4.1% and 6.1% of the total net clean energy generation, respectively. Although a legal framework is in place (Law for the Promotion and Development of Bioenergy and Geothermal Energy Law), there is no active national strategy to promote their development, including to increase financing and investigation.

Mexico has considerable potential for geothermal energy, both onshore and offshore, with proven reserves of 286 MW, probable reserves of 5,730 MW and possible reserves of 7,422 MW as of 2015, which could represent an annual generation of 47,561.65 GWh. However, according to the updated Transition Strategy to Promote the Use of Cleaner Technologies and Fuels published by SENER in January 2024 (the “2024 Clean Technologies National Strategy”), between 2021 and 2022 installed capacity of this technology did not change and generation increased only by 170 MW.

Although the amount of energy generated through bioenergetics has been erratic since 2019, Mexico has a strong foundation for its development through the utilisation of urban solid waste. Several technical rules have been issued to regulate the use of water and soil for these purposes. There are public programmes already in place, such as the Sustainable City Program of the Mexico City Government 2019-2024 which finances a trust for the operation of the Mexico City market (Central de Abastos) whereby, among others, a biodiesel production plant was developed to transform used vegetable oil into diesel, with a capacity to produce up to 3000 litres per day. A mix of this biodiesel and regular diesel is being used to operate two lines of the Mexico City tram, with the expectation of expanding the blend to the rest of the tram system. Additionally, there are financing programmes in place which support bio-digestion projects that use the waste of cattle and aquaculture to obtain biogas for small and medium-sized agricultural producers.

Broadly, the 2024 Clean Technologies National Strategy promotes the generation of electricity through various bioenergy sources (ie, hydraulic, biomass, biogas, solid waste, thermic, among others). The strategy also includes the use of ocean energy, which has enormous potential given the extensive coastline of Mexico. According to the National Inventory of Clean Energy, locations identified as viable for producing energy through waves are the northern zone of Baja California and the coastal zone of Oaxaca, where there is sufficient power density (densidad de potencia) of 15 kW/m.

Overall Market

According to the SENER Report 2024, percentages of power generated from clean sources from 2022 to June 2023 were as follows:

• hydroelectric generation dropped from 42.9% to 29.4%;
• wind energy generation increased from 24.7% to 27.6%;
• photovoltaic production increased from 24.5% to 32.8%;
• geothermal production increased from 5.3% to 6.1%; and
• bioenergetics production increased from 2.6% to 4.1%.

Please note that these figures are current up to June 2023.

Significant Judgments

The legal framework created in 2013 was challenged by the current administration, including through a reform to the Electric Industry Law (Ley de la Industria Eléctrica, LIE) and an attempted constitutional reform in 2021-2022, which included, among others, a modification to the dispatch order to prioritise energy produced from hydroelectric, thermoelectric and combined cycles plants owned by the Federal Electricity Commission (Comisión Federal de Electricidad, CFE), instead of dispatching the cheaper energy first (generally produced by renewable sources) as provided originally by the reform of 2013. Different legal proceedings were used to block those reforms from becoming effective. Amparos (constitutional proceedings) were filed by affected companies and unconstitutional actions (acciones de inconstitucionalidad) were presented by the Mexican Antitrust Commission, members of the Senate and the Congress of Colima. 

The Supreme Court of Justice recently issued a favourable ruling in the amparo proceedings, benefitting six affected companies. The ruling allows for such companies to definitively resume operations according to the original provisions of the law, including a dispatch order based on low cost. The ruling also extended protection to all impacted participants, acknowledging the market distortions caused by the 2021 reforms to the electricity sector. The Supreme Court’s decision plays a key role in making power generation projects feasible again.

In May 2023, the Energy Regulatory Commission (Comisión Reguladora de Energía, CRE) approved adjustments to the criteria to calculate the efficiency of cogeneration systems, particularly in combined cycles plants, so that cogeneration systems became eligible to receive clean energy certificates (Certificado de Energía Limpia, CELs). As in other countries, the CELs were introduced as a mechanism to accelerate the incorporation of clean energy into the sector. Each CEL evidences production or consumption of 1 MWh of clean energy. This mechanism enables both suppliers and users to meet their annual legal obligations for clean energy consumption, while also providing an economic incentive to those who generate clean energy.

The adjustments were heavily criticised, including by the Wind Energy Mexican Association and the Solar Energy Mexican Association, for seeking to artificially inflate the amount of clean energy reported in the system given the CFE’s heavy reliance on combined cycle power plants (as of 2023, it operated 44 combined cycle power plants generating approximately 57% of the energy in Mexico). Several amparos were filed by parties claiming to be affected by this new interpretation. Erga omnes suspensions of the new criteria were granted by three different judges, thereby rendering it ineffective. 

In Mexico, a comprehensive legal framework regulates all activities throughout the power sector. The Mexican constitution sets forth the legal principles for the development of the sector, while supplementary federal laws provide the foundations for its organisation and operation, as well as the path for Mexico’s transition to a sustainable energy model. Several secondary regulations, guidelines, interpretation criteria and technical norms further regulate activities and procedures throughout the sector, including the wholesale electricity market (Mercado Eléctrico Mayorista, MEM) and its participants, permits, interconnection to the grid, dispatching and curtailment, tariffs, alternative supply mechanisms and capacity of the grid.

Renewable and clean energy sources, while clearly identified, are not individually regulated in detail, but rather integrated into this general framework, while specific components, treatments or incentives thereof, are regulated through secondary rules. For example, the general rules for the granting of permits or interconnection to the grid apply generally in the same terms to all plants regardless of the power sources.

Although there is speculation on potential amendments to the regulation in effect, it is too early to identify and confirm specific changes. As of today, there are only amendments proposed at a constitutional level aimed to eliminate the CRE as an autonomous entity and reincorporate its responsibilities to SENER. The elected president has also indicated the intention of altering the nature of state productive enterprises (CFE and PEMEX) and, among others, reiterate the state monopoly on transmission and distribution activities. More information regarding changes in legislation will become publicly available after Congress convenes, and the newly elected president takes office, in September and October, respectively.

SENER is responsible for defining, co-ordinating and evaluating the energy national strategy. SENER is also responsible for the PRODESEN and progress reports of the sector, performing consultation processes, approving social impact evaluations, regulating the acquisition and issuance of CELs and developing programmes for the decommissioning of power plants.

The CRE is an entity of the federal public administration responsible for issuing regulations, implementing the energy national strategy, including the general conditions for transmission, distribution and supply services (including tariffs), granting permits, issuing the market rules (“MEM Rules”), surveying the operation of the MEM, instructing CENACE to correct parameters for power plants, authorising the model contract to be executed with MEM participants and issuing the interconnection model contract, granting CELs, issuing efficiency criteria for the definition of clean energies, and authorising CENACE bidding processes.

CENACE is a decentralised public entity responsible for the operational control of the national electric system (Sistema Eléctrico Nacional, SEN) and the MEM. CENACE also safeguards impartial access to the transmission and distribution grids. It has sufficient authority to determine the acts to guarantee safety of dispatch, reliability, quality and continuity of the SEN. Being independent from the federal government provides CENACE with greater autonomy to take decisions and to manage its resources.

The CRE and CENACE have comprehensive powers to enforce compliance with regulations, including by performing inspections, investigating complaints, ensuring the safety and reliability of infrastructure, and imposing fines.

Although not a regulator by nature, CFE Transmission is responsible for transmission across the national grid, including maintenance and expansion of transmission infrastructure. As a result, it may conduct inspections, issue technical requirements, and enforce compliance with grid connection and transmission standards. Similarly, CFE Distribution is responsible for distributing electricity, supervising distribution infrastructure, ensuring delivery of electric supply, and handling the operational aspects of distribution, such as metering, maintenance, and service quality. For example, interconnection or connection agreements will be executed with either of these CFE subsidiaries.

Certain activities in the sector are performed exclusively by the Mexican government, including planning and control of the SEN, the public service of transmission and distribution of electricity, and generation of nuclear energy. Excluding such activities, the current legal framework regulates all aspects of the power industry, including the participation of the private sector in the generation and commercialisation of energy, as detailed below.

Generation

Generation in Mexico is carried out under a regime of free competition. As a rule, and regardless of the generation technology being used, all power plants with a generation capacity equal to or over 0.5 MW require a generation permit issued by the CRE (“Power Generation Permit”). Generators with a lower capacity are exempt from such requirement (“Exempt Generators”) and are not allowed to sell surpluses or buy shortages to or from the MEM without the intervention of a supplier. Generators are entitled to commercialise in the MEM the energy and associated products directly produced, including power and CELs.

Power Generation Permits authorise the financing, installation, maintenance, management, operation, expansion, modernisation, surveillance and conservation of the private networks necessary to deliver production to transmission and distribution grids or for isolated supply purposes.

Renewable energy generators (solar, wind, geothermic, nuclear and biomass) will be entitled to receive 1 CEL per 1 MWh of renewable generation, while clean generators (hydroelectric, efficient cogeneration, conventional thermal, hydrogen and distributed energy) will receive a percentage of CEL based on their generation free from fuels. According to applicable law, suppliers and users are bound to acquire CELs equivalent to a percentage of their total consumption as such percentage is determined by SENER each year, and they can do so through the MEM or direct negotiation with generators. CEL’s price will vary depending on supply and demand.

Transportation and Distribution

In Mexico, the transmission and distribution of electricity is a strategic activity of the state. This means that the federal government holds exclusive rights to provide these essential services. However, the government has the right to subcontract private entities to carry out these activities within the boundaries set by applicable laws. Due to this restriction, current transporters and distributors are productive enterprises of the state (CFE Transmission and CFE Distribution). The state (directly or through transporters and distributors) may partner with private parties to finance, install, maintain, administer, operate and expand the infrastructure required to render these services, and such partners will share joint and several liability, commensurate with their level of participation in these projects.

The CRE is responsible for issuing the general terms and conditions to render these public services, including tariffs, interconnection requirements and guidelines for quality, reliability, continuity, safety and sustainability of the electric system. 

Transmission and distribution services are rendered through the SEN, comprised of the national transmission network which transports electricity to the distribution grid and the general distribution network which is a grid of medium and low voltage that distributes energy to the public. Transporters and distributors, who are responsible for these grids (including their expansion and modernisation), shall follow CENACE’s instructions, and may not agree to terms and conditions different from those approved by the CRE, unless expressly identified as negotiable, in which case such conditions will have to be offered to users in equal circumstances.

Transporters and distributors must interconnect power plants and load centres upon request from their owners or operators, when technically feasible, within the timeframes of the LIE and always observe the open access provisions. CENACE will instruct transporters and distributors to execute the interconnection agreement based on the models approved by the CRE and SENER.

The existing transmission and distribution infrastructure was developed and is owned by the CFE. Mexico is currently facing a significant challenge due to insufficient transmission and distribution capacity. According to S&P Global, as of 2023, Mexico’s installed capacity for transmission was roughly 90 GW, out of which only about 60 GW were dispatched, and with a peak demand that reached 57 GW during that summer. Between 2022 and 2023, peak demand increased by 10.2% according to PRODESEN 2024, while transmission capacity only increased by 0.12% between 2021 and 2022. An annual investment of USD9 million dollars is required to expand and upgrade transmission and distribution infrastructure.

The new administration has announced important investments in the coming years to upgrade transmission and distribution grids, as current infrastructure is insufficient to satisfy the existing demand and to guarantee the increasing demand, particularly the major increase expected due to nearshoring.

Mexico is considered one of the countries with greater potential for nearshoring; however, the government has not developed a specific plan to address the needs of foreign companies seeking to relocate to Mexico. To date, no official data is available identifying the potential demand increase that Mexico could be facing because of the nearshoring phenomenon. 

Commercialisation

Commercialisation activities include (i) providing electric supply; (ii) representation of Exempt Generators in the MEM; (iii) transactions in the MEM; (iv) execution of agreements between generators, marketers, and qualified users of the MEM; (v) acquisition of transmission and distribution services at regulated tariffs; and (vi) purchase and sale of associated services (servicios conexos). A supply permit is required for items (i) and (ii).

There are three types of supply:

• Basic Supply, which is provided to any party upon request, except for Qualified Users (ie, those final users with demand equal to or greater than 1 MW or equal to or greater than 5 MW, registered with the CRE to acquire supply directly in the MEM);
• Qualified Supply, which is provided pursuant to a free competition regime to Qualified Users; and
• Last Resource Supply, which is provided to Qualified Users for a limited period of time at capped prices to secure continuity when the Qualified Supply is not available; isolated supply (abasto aislado) is not considered energy supply.

Supply in any modality requires a permit from the CRE, registration before the MEM and execution of a market participant agreement. Basic Supply and Qualified Supply also require the execution of a supply agreement, and this agreement must be registered with the Federal Consumer Protection Agency in the case of Basic Supply. Last Resource Supply is regulated in the relevant Qualified Service agreement and market participant agreement. If a specific type of supply would need to change to a different modality, the issuance of a new permit would be required.

The CRE issues the general guidelines regarding prices and tariffs for basic supply, last resource supply, and associated products not included in the MEM, which represent maximums; however, generators, transporters, distributors and regulated suppliers may agree to discounts which must be applicable on a general and non-discriminatory basis, and such agreements will have to be registered with the CRE. Prices and tariffs must include all concepts and charges. 

The following activities are not considered commercialisation, and thus, do not require a permit or registry: (i) the sale of electricity from an end user to a third party, provided it is used within the end user’s facilities, and (ii) the sale of electricity from a third party to an end user, provided that it is generated from Distributed Generation (see 3.5 Local and Domestic Production) within the end user’s facilities.

As mentioned in 2.3 Regulated Activities, private parties are restricted from participating in transmission and distribution, except when partnering with the state as permitted by law.

Power Generation Permits and authorisations for import and export may be transferred only upon joint request by the assignor and the assignee and authorisation from the CRE. For such purposes, the CRE will evaluate, inter alia, the technical and financial capacity of the assignee.

Market participant and interconnection agreements are not transferable without the consent of CENACE or CFE Transmission, except for collection rights pursuant to the market participant agreements, which may be assigned upon notice to CENACE.

In our experience, power purchase agreements (PPAs) awarded by the CFE pursuant to the biddings called by CENACE, include restrictions related to change of control and change in the corporate structure of the seller, assignment of contract and to sell, transfer or lease the relevant power plant.

Concessions for the exploitation of geothermal deposits may be assigned only to entities that meet the same requirements fulfilled by the original assignee and upon prior authorisation from SENER. If assignment is within the same corporate group as the original holder, a written notification to SENER will be sufficient.

When acquiring or transferring energy assets with a certain value or market significance, it may also be necessary to obtain authorisations from or provide notifications to the Federal Antitrust Commission.

As mentioned in 2.3 Regulated Activities, the state has exclusive rights over certain activities.

A favourable resolution of the Foreign Investment National Commission is required if foreign investment intends to participate, directly or indirectly, in more than 49% of the capital stock of a company, whenever the total value of the assets of the company at the time of submitting the acquisition application exceeds the amount determined annually by such commission (currently approximately USD1.4 billion).

Please refer to 2.3 Regulated Activities on the generation of electricity in Mexico, including Power Generation Permits, if required. Specific technical requirements applicable to different technologies may be further regulated under Mexican Official Standards, environmental regulation and the MEM Rules. 

Please refer to 2.3 Regulated Activities on the generation of electricity, including Power Generation Permits, if required. Specific requirements for bioenergy are included in the Law for Promotion and Development of Bioenergy, its regulation and the guidelines to grant permits for production, storage, transportation and commercialisation of anhydrous ethanol and biodiesel.

In contrast to generation through other technologies, the development and implementation of bioenergy is a co-ordinated effort between SENER, the Ministry of Agriculture, the Ministry of Environment and Natural Resources (Secretaría del Medio Ambiente y Recursos Naturales, SEMARNAT), the Ministry of Economy and the Ministry of Finance and Public Credit. For example, the Ministry of Agriculture is responsible for the permits to use corn in the production of bioenergy, while SENER is responsible for permits related to production, storage, commercialisation, transportation and distribution through pipelines.

Please refer to 2.3 Regulated Activities on the generation of electricity, including Power Generation Permits, if required. Development of this technology is regulated in detail through different legal provisions, including the Mexican Constitution, the Geothermal Energy Law and the National Waters Law.

Additionally, ownership of the subsoil waters is retained by the Mexican state, and thus its exploitation by third parties requires a concession granted by the federal government. Concessions grant the right to exploit a surface, use its resources, and for the continuous and exclusive exploitation of a geothermal deposit.

As mentioned in 1.2 Renewable Energy Technologies, the utilisation of hydrogen for electricity generation in Mexico, including the establishment of a dedicated legal framework, remains in its nascent stages. 2.3 Regulated Activities details electricity generation in Mexico, including Power Generation Permits, while 3.2 Gas outlines the relevant features of bioenergy production.

Distributed Generation

Small-scale production in Mexico, such as rooftop solar PV for domestic use, is currently implemented through distributed generation, which is electricity generated by an Exempt Generator and produced in a power plant interconnected to a distribution circuit with a high concentration of load centres (“Distributed Generation”). It is contemplated within the general framework, but specifically regulated in administrative guidelines and the interconnection manual applicable to power plants with a capacity below 0.5 MW.

The price for the electricity delivered to the distribution grid will be contractually agreed among the Exempt Generator and the supplier, opting for any of the following:

• net metering, which considers the exchange of energy flows with the distribution grid, offsetting the energy delivered by the Exempt Generator with the energy received by the end users in the corresponding period;
• net billing, which considers the flows of energy received and delivered to and from the distribution grid, and assigns a value that may vary on purchase and sale; or
• total energy sale, which considers the flow of energy delivered to the distribution grid, and assigns a sale value.

A draft of the general administrative provisions on power plants with net installed capacity of less than 0.5 MW, Distributed Generation and Distributed Clean Generation is currently under discussion with the CRE, and when issued it will imply relevant changes,  including the elimination of the net metering option for medium-voltage systems.

The Mexican Energy Council has urged expanding the limit to 5 MW given the increase in demand due to nearshoring and small and medium-sized commercial and industrial use, and also to achieve Mexico’s sustainability goals, since it is one of the most promising solutions to improve the efficiency and resilience of the energy sector. One of the main obstacles to increasing this restriction relates to the adjustments required by existing infrastructure to allow injection of Distributed Generation without compromising the distribution grids.

Isolated Supply

Isolated supply is the generation or import of energy to meet own needs or for export, without transmitting such energy through the transmission and distribution grids.

The CRE's interpretation of “own needs”, as amended on 31 December 2021, defines this as the generation or import of energy consumed by load centres belonging to the same entity or a group of entities within the same economic interest group. According to this interpretation, an economic interest group exists when certain conditions are met, primarily involving control or participation within a group of entities.

This definition poses a significant challenge for implementing isolated supply, as it requires the generator and consumer to be the same entity, or related through subsidiaries or affiliates, making it difficult to supply entities outside this group. Despite this, isolated supply remains a crucial tool for meeting the energy demands of large consumers, such as data centres and manufacturers.

Power plants under isolated supply may interconnect to the transmission and distribution grids to sell surpluses or acquire shortages. Exempted Generators may adopt this scheme while observing the 0.5 MW restriction. A permit is required to import or export energy.

Transportation is detailed in 2.3 Regulated Activities.

Storage

As of the date of writing, there is no detailed storage regulation in place in Mexico, except for a few provisions applicable to Distributed Generation. The CRE is currently reviewing a draft of the general guidelines to integrate storage facilities into the system.

These draft guidelines contemplate, inter alia, generation permits for storage, integration of storage systems without increasing the authorised generation capacity of a power plant, compensation for the energy stored, and incorporation of storage systems upon instruction from CENACE. Based on the transitory provisions of the draft guidelines, CENACE is expected to issue secondary regulation to implement such guidelines within two years after their publication.

The urgency surrounding the issuance of comprehensive storage regulations stems from the pressing need to balance supply and demand, in order to stabilise the grid during peak hours. Furthermore, the intermittent nature of renewable energy sources necessitates effective storage solutions to ensure a stable and reliable power supply. As energy demand continues to outstrip the capacity of the current system, the role of energy storage in balancing the grid and facilitating the integration of renewable energy sources becomes increasingly critical.

CENACE instructs the operation of the SEN and the MEM based on principles of reliability and continuity. This entity analyses demand and determines the amount of energy that may be injected into the grid without putting the system at risk, and then dispatches based on economic efficiency. CENACE is responsible for ensuring that supply is guaranteed, including from clean energy and renewables, but also from non-intermittent sources and flexible sources that can increase and decrease generation rapidly, to stabilise the system when necessary (for example, combined cycles).

Due to the order of dispatch under the current legal framework, curtailment of renewables is relatively low given the amount of generation from such sources; however, this could be put at risk if proper investments in transmission grids are not made, which could lead to congestion if Mexico intends to considerably increase renewable generation to reach clean energy targets.

In the event of an unforeseen event or force majeure that jeopardises the integrity of  the SEN, CENACE may suspend the operation of the MEM in accordance with the MEM Rules and may also issue extraordinary instructions to recover its regular operating status. These instructions shall prevail over any criteria set forth in the applicable regulation and must be complied with by transporters, distributors, market participants and other users of the SEN. In any case, the suspension must be exceptional and CENACE will remunerate affected generators for the estimated production costs of its plants in accordance with the parameters of reference established for each of the said plants.

As discussed in 4.1 Electricity, Mexico is actively developing regulatory frameworks for energy storage systems. This is a crucial step towards mitigating the challenges posed by the intermittent nature of renewable energy sources. Furthermore, off-grid solutions like isolated supply and Distributed Generation are available. However, as discussed in 4.1 Electricity, these options face certain limitations that hinder their widespread and efficient implementation.

The transportation and storage of gas from renewable sources are regulated pursuant to the general framework discussed in 3.2 Gas.

There is no specific regulation for injection of gas from renewable sources into the public grid. However, we understand that adjustment of transportation infrastructure will be a relevant challenge, as further discussed in 4.5 Hydrogen and Other Biofuels and Renewables.

The main features of the sector for transportation are detailed in 2.3 Regulated Activities and for storage in 4.1 Electricity. As of the date of this writing, there is no specific regulation for transportation or storage of heat from renewable sources.

The main features of the storage sector in Mexico are detailed in 4.1 Electricity; to date, there are no specific provisions applicable to storage of hydrogen.

Similarly, there is no specific regulation in place for transportation of hydrogen; however, according to the PRODESEN, the initial proposal to transport green hydrogen as gas entails the adaptation of the current natural gas transportation infrastructure, including the northeast network of pipelines (Sonora, Sinaloa and Tamaulipas), the Tehuantepec Isthmus, Baja California and the Yucatán Peninsula.

The MEM was created in 2013 with the aim of delivering energy at competitive prices and providing diverse options for energy supply in Mexico. It is operated by CENACE based on the MEM Rules for participants to sell and buy electricity, power, CELs and other associated products required for the operation of the SEN. The MEM is comprised of a short-term energy market, the market for capacity (potencia), the CELs market, auctions of financial transmission rights, and medium- and long-term auctions for the acquisition of energy.

Generators inject electricity into the MEM and consumers acquire energy according to their needs, thus prices are shaped in response to supply and demand. CENACE will calculate a local marginal price for each hour of the day for each node and the price in distributed nodes (average prices in each loading zone) for the real-time market and its components: energy factor (which is the same across the SEN), congestion at substations and losses. 

Offer prices are determined by variable costs, so generation with lower variable costs is dispatched first. CENACE oversees these dispatch instructions, ensuring system reliability is maintained.

Aside from generators, market participants include Qualified Suppliers (Suministradores Calificados), who obtain energy directly from generators and sell it to Qualified Users (Usuarios Calificados) under arm’s length conditions, as opposed to basic supply which is provided at regulated tariffs from a basic service supplier such as CFE Suministrador de Servicios Basicos. Qualified Users are large consumers whose energy demand is equal to or greater than 1 MW and are registered in the Registry of Qualified Users of the CRE.

Qualified Suppliers thus play a key role in the MEM. They allow Qualified Users to purchase their energy directly from the MEM and access more competitive rates while opting for specific energy generation sources.

A Qualified User may also become a market participant to acquire energy directly from generators. This requires an aggregate demand of at least 5 MW and an annual consumption of 20 GWh.

The MEM Rules and applicable manuals regulate market participants. An entity must complete a registration process with CENACE to determine whether it complies with the requirements to execute a market participant agreement, including but not limited to, a minimum capital stock (for example, MXN2,000,000 for generators). Once registered, the entity must complete an accreditation process with CENACE before commencing operations in the MEM. This process involves CENACE confirming the submission of a performance guarantee, amounting to MXN1,000,000, within 120 days of executing the market participant agreement. Additionally, the participant’s personnel must demonstrate adequate knowledge, and its equipment must be sufficient for interacting in the MEM. The process also includes registering bank accounts and ensuring the reliability of communication mechanisms with CENACE.

As of the date of writing, there is no specific regulation or structure for the trade and supply of gas from renewable sources.

As of the date of writing, there is no specific regulation or structure for the trade and supply of heat from renewable sources.

As of the date of writing, there is no specific regulation or structure for the trade and supply of hydrogen from renewable sources.

In the first quarter of each calendar year, the SENER will determine the CEL requirements to be met during the following three years (or additional subsequent years) by suppliers, qualified market participants, and end users supplied through isolated supply, as well as holders of legacy interconnection contracts (legados). CEL requirements once published for a specific year may not be reduced.

The CRE will grant the corresponding CELs and issue the regulation to validate its ownership and verify compliance with CEL obligations.

CELs are negotiable through the MEM and instruments from other markets may be admitted as agreed by SENER. For example, applicable regulations allow for the coexistence of CELs and International Renewable Energy Certificates (I-RECs), which are certificates issued exclusively by international issuers with the purpose of securing renewable energy generation at a global level. Such certificates are recognised by the RE 100, an international initiative created to collaborate with the Carbon Disclosure Project, which surveys progress in targets and practices of some of the most important companies in the world in connection with the use of renewable energy.

Pursuant to the MEM Rules, CENACE will operate a spot CEL market at least once a year so market participants who are legally bound to acquire CELs may do so from generators offering such CELs at a price that will be determined by existing supply and demand. CELs may also be acquired outside of the market through hedge agreements negotiated bilaterally in free market conditions with generators.

Compliance with CEL obligations promotes the execution of long-term electricity hedge contracts that include CELs, allows the transfer of surplus or missing CELs between periods while determining charges for such transfer to promote price stability, and is one of the most important mechanisms implemented by the Mexican government to reach targets of clean generation and air emissions reductions.

PPAs

PPAs are customary in Mexico to commercialise electricity either with the CFE or among private parties.

MEM participants, except for Basic Service Suppliers, may execute PPAs to purchase and sell electricity and other associated products (including CELs and power (potencia)) among them, based on the principle of freedom to contract. Basic Services Suppliers may only execute PPAs awarded by CENACE through a bidding process and using the contract forms approved for such purposes by the same entity. 

Mexican PPAs generally include bankable conditions, very similar to those found in other jurisdictions. They are usually granted for periods of up to 15 to 20 years; however, such periods are now being reduced due to current market conditions that make energy prices very volatile, including high transmission costs. Moreover, energy supply shortages represent a high risk to sellers, making it harder for them to commit to longer periods. Market settlement and take-or-pay are acceptable structures, and generators will generally bear the gains or losses arising from the difference between the market price and the contracted price.

Location

In Mexico, developers may secure land through direct acquisition, lease, usufruct or easements, among others. Negotiations are undertaken directly with the owner, unless when dealing with agrarian land. The LIE includes specific provisions regulating the use and exploitation of land (civil or agrarian) for activities related to the electricity sector, intended to protect the owners of such land by establishing formalities and minimum requirements for contracts, including land valuation and the involvement of relevant authorities to ensure fairness. These provisions also apply to easements that are essential for developing projects of national interest.

In connection with agrarian land, these contracts require approval from the agrarian assembly (simple or special depending on the use to be given to the land). Furthermore, transfer of a parcel to a third party outside the ejido requires a change of regime from agrarian property to private property, which requires approval from a special assembly.

During development, it is customary for contractors to assist the communities being impacted by the relevant project. This often involves constructing social infrastructure, such as schools or bridges, as identified in the social impact assessment submitted to SENER. 

Construction and Operation

These phases are implemented and co-ordinated through a standard structure of project contracts that include EPC and O&M agreements, among others, customary for the development of this kind of project (ie, asset management agreements, interphase agreements, offtake agreements). All of these are generally negotiated between private parties. The use of international models such as the FIDIC is common practice.

Contractors are usually Mexican entities for tax purposes. Particular attention must be paid to labour provisions as outsourcing structures are permitted exclusively for specialised services or works that fall outside of the corporate purpose or main economic activity of the contracting party.

Different permits at federal, state and/or municipal level are required depending on the project’s location, size, development stage (ie, greenfield, brownfield), water requirements, activities to be performed, among others. However, generally, power generating projects will require a Power Generation Permit, an interconnection agreement and a MEM participation agreement as detailed in 2.3 Regulated Activities, social impact assessments, environmental impact authorisation, use of land permits, construction and operation licenses, water concessions and approvals from the National Institute of Anthropology and History.

While it is generally acknowledged that obtaining permits in Mexico can be a time-consuming process, delays can be particularly significant when it comes to obtaining permits from the CRE and the National Water Commission (CONAGUA). These agencies are grappling with a significant backlog, leading to delays that often exceed the legally mandated timeframes for processing applications.

It is worth noting that, in general, permits in Mexico are non-transferable and cannot be subject to liens. However, there are exceptions to this rule. Certain permits, including Power Generation Permits, can be transferred to security trusts established for the benefit of senior lenders. However, any subsequent transfer of these permits in the event of foreclosure would still necessitate authorisation from the CRE. 

Key Parties

Similarly to international practices, development of these projects is generally undertaken through a special purpose vehicle (SPV) to ring-fence the asset for bankability and other purposes. This SPV plays a central role as party to the project contracts and holder of permits. Other key parties include independent engineers, environmental and insurance advisors, tax advisers, trustees, public notaries, communities being affected by the projects (who are legally entitled to be involved in the project), and several authorities depending on the project to be developed (ie, CRE, CENACE, SENER, CFE, SEMARNAT, CONAGUA, federal or local courts, public registries, etc).

The development of offshore projects is similar to the process described in 6.1 Onshore Project Development, except for the acquisition of land. Since these projects will be located either very close to the seashore or directly in the territorial sea, contiguous area or economic exclusive zone, specific permits or concessions may be required in order to occupy and exploit such areas. Furthermore, the intervention of additional authorities, such as the Ministry of the Navy or the Ministry of Communications, Infrastructure and Transport, may be required.

It is important to recognise that, at present, offshore projects in Mexico primarily pertain to the hydrocarbons sector. However, the CFE recently announced the development of a floating solar plant, the first project of its kind in Mexico, which will be financed through the French Development Agency.

Renewable energy assets in Mexico are generally financed through a standard project finance structure comprising a loan agreement (Mexican or subject to foreign law) granted by national and/or foreign financial institutions, secured through a collateral package that conveys all the assets of the SPV to a security trust for the benefit of the lenders. It is accompanied by an equity component and generally negotiated in parallel with a facility to finance the value added tax.

In addition to what was discussed in 6.1 Onshore Project Development, the following legal considerations are relevant when financing renewable projects in Mexico: 

• Bankability of renewable projects usually requires a PPA. Although a merchant portion is not uncommon, fully merchant projects are not usual.
• As mentioned in 6.1 Onshore Project Development, securing land in Mexico is time-consuming and capital-intensive for developers. This represents a particular hurdle for solar and wind plants, since they require large land surfaces.
• Mexico has the environmental conditions to produce renewable energy at very low costs, resulting in lower profit margins for investors. Furthermore, the current lack of storage and transmission infrastructure makes these projects subject to curtailment risks that may increase in the near future with the development of renewable and clean energy sources.   
• Storage regulation currently being developed may require new projects to be developed jointly with storage systems, thus financial models must start considering these additional costs.
• The revenue that generators obtain per CEL will not be factored into the modelling for financing, unless such CELs are contractually committed to a party.
• Lack of a detailed legal framework for certain technologies may complicate their implementation.
• The potential absorption of the CRE by SENER as detailed in 7.1 Renewable Energy Policy Developments, may result in relevant administrative problems, resulting in increasing delays on the resolutions of procedures.
• Under the current administration, we have experienced increased uncertainty from investors regarding protection provided by the existing legal framework to renewable projects, which has resulted in longer negotiations and extensive and stricter conditions for such financings.

Accelerated Tax Depreciation on Machinery and Equipment for Renewable Energy Generation or High-Efficiency Electricity Cogeneration Systems

For purposes of determining corporate income tax (CIT), the Mexican Income Tax Law (MITL) allows taxpayers to deduct 100% of the cost of machinery and equipment investments used for renewable energy generation or high-efficiency electricity cogeneration systems in a single fiscal year. Taxpayers would be entitled to this benefit to the extent that the machinery and equipment are operational for at least five consecutive years following the tax year in which the deduction is made.

Net Profit After Tax Account derived from Renewable Energy Investments (“Green CUFIN”)

Under the MITL, all taxpayers are required to maintain a Net Profit After Tax Account (Cuenta de Utilidad Fiscal Neta, CUFIN). This account is used to determine whether a dividend paid by a taxpayer derives from profits that have already been taxed. If the profits have not been taxed, the dividend will be subject to CIT. In this regard, the MITL allows taxpayers to deduct the cost of machinery and equipment for renewable energy generation or high-efficiency electricity cogeneration systems from their taxable income when calculating the net profit after tax for the relevant fiscal year. The objective is to increase the net profit after tax for the fiscal year, which is used for the distribution of dividends without incurring additional CIT.

Corporate Income Tax Credit for Electric Vehicle Charging Equipment

A tax incentive is available for taxpayers who invest in electric vehicle charging equipment installed in public places. This incentive consists of a tax credit equal to 30% of the investment amount, which can be applied against the CIT for the fiscal year in which the investment is made. If the credit exceeds the taxpayer’s payable income tax, the remaining balance can be carried forward for up to ten years.

Local Taxes

Most states in Mexico offer exemptions or reductions on local taxes for taxpayers whose corporate purpose, main activity, or investment is focused on renewable energy projects. For instance, Mexico City provides a 30% reduction in property tax, a 55% reduction in payroll tax, and an 80% reduction in the tax on real property acquisitions for newly incorporated businesses dedicated to the innovation and development of goods and services related to renewable energy. In contrast, the State of Mexico offers a tax credit equal to 30% of the investment in renewable energy, which can be applied against the local tax on gas emissions.

Federal Tax for New Vehicles Exemption

Electric and hybrid vehicles powered with (i) electric batteries and (ii) a combustion engine or a hydrogen-powered motor are exempt from paying the Federal Tax for New Vehicles.

State Vehicle Tax

Most States in Mexico offer exemptions or reductions on the annual vehicle ownership tax regarding electric or hybrid vehicles. For instance, Mexico City exempts these vehicles from the vehicle tax, while the State of Mexico provides an exemption for the first five years, followed by a 50% reduction in the tax thereafter.

As mentioned in 1.1 Energy Transition, although regulation requires an annual plan for decommissioning, the PRODESEN 2024 does not include any specifics in this regard.

A constitutional reform is currently being considered by Congress. The proposal includes the merger or elimination of 17 autonomous decentralised bodies, which include the CRE. If the reform is approved, the responsibilities of the CRE will be transferred to SENER, which will then become responsible for granting, modifying, and updating permits related to the energy sector, among other functions.

Furthermore, the newly elected president recently announced her intention to alter the nature of the CFE and PEMEX, aiming to modernise their operational structures to enhance efficiency and profitability.