Mexico - AMLO's energy counter-reform

A proposed constitutional change by the president would undo the reforms made under Peña Nieto and likely weaken Mexico's electricity sector.

My mind is on Mexico this week, so here are a few thoughts on AMLO’s proposed energy reform.  Among other things, the proposed reform would strengthen the market share of the Comisión Federal de Electricidad (CFE) to 54 percent, reduce the role of independent regulators and nationalize future investments into the lithium industry. 

This reform punishes private sector actors who entered Mexico after the Peña Nieto reforms. Lopez Obrador was already using regulations to benefit state actors (Pemex and the CFE) at the expense of private sector competitors that can operate more efficiently. This reform would strengthen and solidify those regulatory shifts for years to come by codifying them in the constitution.

Mexico’s electricity demand is on pace to outstrip its supply and AMLO’s proposed reforms make that situation worse. Even without these reforms passing, Mexico faced the potential of rising power bills and maybe even some limited brownouts on a few days per year. By holding back private sector electricity generation projects, AMLO is setting Mexico up for more significant shortfalls that will likely hit in the coming two to three years.

If it comes to pass, this is a situation that will take years to repair. New solar, wind and natural gas electricity generation doesn’t come online with a finger snap. Even if the reforms are reversed by a future administration, private sector actors, having been burned by changes in government policy, will hesitate to return without significant economic incentives.

Although this reform favors Pemex and the CFE, that doesn’t mean AMLO has plans that will successfully fix state actors. Pemex oil exploration and production remains behind the curve. AMLO’s investments in the country’s refineries are barely keeping them maintained at current levels, not improving their operations. It’s not clear how Pemex will become profitable enough to repay its debt.

AMLO is terrible for the environment. Rolling back renewable energy projects and cleaner natural gas electricity generation in favor of burning dirty fuel oil so Pemex can keep drilling is a disaster for the globe. Mexico is going to miss its Paris targets by a significant amount. Pollution in Mexico’s largest cities is near its highest levels in decades.

Don’t underestimate the chances that AMLO can pass this reform. Following this year’s midterm elections, AMLO does not have a coalition that can get a two-thirds majority to pass constitutional reforms. Yet, it would be a mistake to underestimate the president, his political capital and skills on this front. The PRI are not ideologically committed to energy reform and many could be convinced to support a reversal of their party’s own reform agenda in exchange for other benefits.

AMLO can also implement many regulations even if he can’t pass the bill. The lack of a constitutional reform hasn’t stopped AMLO from already greatly reshaping the energy sector and he’s likely to continue to do so whether or not this reform passes.