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If Mexican President Andrés Manuel López Obrador’s (AMLO) controversial electricity reform — which would prioritize the use of state-run carbon-based fuels over private, clean-sourced energy — passes, the federal budget could lose up to 261 billion pesos in 2022, according to the  Center for Economic and Budgetary Research (CIEP), Mexico’s top independent thinktank.

In a report published on Wednesday, Dec. 22, the CIEP said that the loss would come as a result of financial compensation, cancellations of investments, subsidy payments and operating costs for the Federal Electricity Commission (CFE), representing 0.94 percent of the country’s total Gross Domestic Product.

The report also pointed out that the reform, if passed, would cancel energy generation permits for the private sector, as well as all purchase and sale contracts, which would effect 45 gigawatts of installed operational capacity, in addition to those projects still pending approval for integration into the network and infrastructure project currently under construction.

Moreover, since the reform would constitute a unilateral modification by the Mexican government of existing contracts and generation permits, pre-existing investment protection clauses that have been signed by Mexico with other countries would lead to international arbitrations, the CIEP warned.

Given the long-term nature of these contracts, this would imply that the Mexican government would also have to disburse compensation payments equivalent to the value lost by the claimants in normal electricity auctions, with a committed investment of nearly $9 billion dollars, or roughly 182 billion pesos.

In addition, the initiative would require that the CFE increase its energy generation output to provide 54 percent of Mexico’s electricity needs.

“Assuming a structure of constant income and costs, this increase in generation would imply an extra cost of 15.877 billion pesos compared to the current scenario,” the report said.

And since the president’s proposed initiative would also cancel all current electricity generation permits, along with electricity purchase and sale contracts, as well as various private generation sources, there would be no incentives for new private-sector investments, which would represent a 47-billion-peso increase in public financing requirements to maintain the current level of electricity generation, the report said.

To avoid consumer price increases, federal subsidies would have to rise to reverse the downward trend since 2018, the CIEP report said.

As a result, by 2022 the subsidy amount would be at least 76.8 billion pesos. Notwithstanding, the government only allocated 3.869 billion pesos for energy subsidies in 2022.

Finally, the report noted the dangers of the government’s obsession with fossil fuels, warning that this will make Mexico less attractive for transnational corporation investments since most of these companies have international green-energy commitments.

“Energy in Mexico continues to be heavily skewed towards fossil fuels, with natural gas, oil and coal together accounting for 69 percent of its production capacity and 76 percent of energy generation in 2020,” the report said.

“In comparison, large hydroelectric plants accounted for just 7 percent of generation in 2020 and renewables represented 14 percent.”


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