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Mexico is set to reshape the energy sector to benefit the country

CITY OF MEXICO – President Andres Manuel Lopez Obrador has never been criticized for his predecessor’s legacy. But he retained a special contempt for the major overhaul that opened Mexico’s tightly held energy industry to the private sector.

He called the changes a form of legalized “robbery”, a product of corruption and a major failure. He suggested that some foreign energy investors were “looting” the nation and that Mexican lawyers working for them were guilty of treason.

He is now formalizing his most aggressive attack on measures.

In the next few days, a bill that will strengthen the dominance of the state-owned electric company in Mexico is expected to become law. The measure, which was recently approved by the Mexican Congress with the strong support of Mr Lopez Obrador, will also limit the participation of private investors in the energy sector. Both effects are essential to its long-standing goal of restoring energy self-sufficiency and preserving Mexican sovereignty.

Mexico’s dependence on foreign hydrocarbons was highlighted last month when a winter storm in Texas cut off supplies of natural gas from the United States, the source of most of the natural gas used in Mexico. Mr Lopez Obrador cited subsequent eclipses as evidence of the need to reduce dependence on foreign energy.

Yet the legislation, which was quickly tracked through the Mexican Congress by Mr López Obrador’s party, has met with almost universal criticism from opposition lawmakers, environmentalists, industry analysts, Mexican and international business groups and even an anti-medical supervisor of Mexico.

Many critics see the bill as a political gamble to stir up the presidential base ahead of the June midterm elections, through which Mr Lopez Obrador hopes to turn his party’s majority in the over-majority needed to change the constitution.

Opponents of the law say it will not only not revive the energy sector or help achieve energy independence, but will also violate Mexico’s international commitments to reduce carbon emissions, disrupt trade agreements and further cool foreign investment in Mexico. just as the nation is struggling to regain economic momentum amid the pandemic.

The legislation also threatens to throw another key in relations between Mr Lopez Obrador’s administration and President Biden, which began rocky when the Mexican president became one of the last world leaders to congratulate Mr Biden on his election victory.

“I think the impact of this reform is a major reversal,” said Lourdes Melgar, a senior energy official in the administration of Mr Lopez Obrador’s predecessor, Enrique Pena Nieto. The Mexican president, she said, “had a very nationalistic view of how to use the resources.”

She added: “He wants to bring private producers to their knees and we see this in the most absurd ways.”

Jeremy M. Martin, vice president of energy and sustainability at the Institute of America, a public policy think tank in San Diego, said the legislation probably resonated with supporters of Mr. Lopez Obrador, who were made to feel that they were finally they have a president who puts Mexicans first.

“It doesn’t make any economic sense, but it matters a lot to people who think they’ve been fucked for years in Mexico,” he said. “It’s pure ideology, it’s political.”

The legislation will rewrite the rules governing the electricity sector. Among other changes, this will change the so-called transmission rules, which regulate the order in which plants supply their power to the country’s grid, giving greater priority to plants run by the state electricity company, the Federal Electricity Commission.

The liberalization of the energy market, approved in 2014 by the Mexican legislator, has given priority to low-cost electricity generation, which is increasingly benefiting solar and wind-generated power plants, inspiring a surge of private investment – from Mexico and abroad – in the renewable energy sector. sources.

But the new legislation effectively restores preferences for government plants powered by fossil fuels, which generate energy at higher costs and produce higher carbon emissions.

Mr Lopez Obrador and his allies say the bill aims to correct bias in major repairs in 2014, which they say has given unfair market advantages to private companies.

“We are leveling the word, setting clear rules, giving priority to national security,” said Rocio Abreu Artignano, a senator from the ruling Morena party and president of the Mexican Senate Energy Committee.

The current scheme, she said, “suffocates” the Federal Electricity Commission.

When more than 4.5 million homes and businesses in northern Mexico lost power last month after Arctic weather froze through border pipelines and the governor of Texas issued an order restricting natural gas exports, Mr Lopez Obrador said it was a lesson. about the need for energy independence.

Gas-fired power plants generate more than half of Mexico’s capacity; most of the natural gas is imported, with most of it coming from the United States, according to the Mexican government.

“We must always strive for self-sufficiency, to produce in Mexico what we consume: food, energy,” Mr Lopez Obrador said in mid-February as Mexico recovered from the interruptions.

But analysts and industry leaders say the new legislation, despite Mr Lopez Obrador’s insistence that it turn Mexico to greater energy independence, could actually make the nation more dependent on foreign energy sources by increasing dependence on fossil fuels to import.

Although household energy bills are likely to remain isolated from rising government subsidy prices, industrial consumers may experience an increase in electricity costs, which they are likely to pass on to their customers, analysts say.

“It doesn’t make any economic sense,” said Victor Ramirez Cabrera, a spokesman for Mexico’s climate and energy platform, a research group in Mexico City. He called the new energy supply model “absurd.”

Environmentalists and other critics have also fiercely called the legislation, saying it would reverse the hard-won carbon footprint and steer Mexico toward a course that runs counter to global efforts to tackle climate change, in violation of international agreements and possibly your laws.

Mr Lopez Obrador said the government plans to modernize its hydropower plants, which are being given higher priority under the new energy supply scheme, to help meet climate commitments. But critics of the legislation are deeply skeptical.

“There is no way to comply with the Paris Agreement under these conditions,” Mr Ramirez said. “Just pass him off as dead.”

No less worrying is the criticism that the negative impact of the legislation could have on foreign direct investment in Mexico. The law would essentially make it difficult for many private renewable energy companies to invest from the opening of the energy sector and cripple their chances of profit.

“It’s going to hit them hard,” said Gonzalo Monroe, an energy consultant based in Mexico City.

Investors “came to invest in the country, trusting the rules, the law,” said Xóchitl Gálvez Ruiz, a senator from the opposition National Action Party. “One night they were told, ‘You know what? I don’t like it, I will change the rules. “

Analysts and industry experts say lawsuits against the law are inevitable, including possible challenges on the grounds that it could run counter to the terms of the US-Mexico-Canada agreement, which replaced the North American Free Trade Agreement.

The legislation is just the latest in what analysts say is a series of foreign investments by Mr López Obrador, including the cancellation of a $ 13 billion airport project in 2018 and the blocking of a partially built brewery in northern Mexico last year. .

Following the approval of the new law by the Senate last week, the peso fell to a four-month low against the dollar. A poll by Reuters suggests that the currency may be in volatile months, in part due to concerns about energy repairs.

“Investment levels are falling and no one wants to invest here,” said Israel Telo, a legal analyst at Integralia, a consulting group based in Mexico. “Legal uncertainty is the deadliest weapon against investment.”

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