A proposed regulatory overhaul of Mexico’s energy sector would cause havoc for private power generators as all of their supply contracts with non-state offtakers would be cancelled, according to analysts at Fitch Ratings Inc.

Through a bill sent to the lower house on Sept. 30, President Andrés Manuel López Obrador is seeking to restore the primacy of state-owned utility Comisión Federal de Electricidad (CFE) in the power market. The bill, if passed, would modify the constitution and upend the current merit-based dispatch rules, prioritizing plants owned by CFE.

The proposal would “bring Mexico’s entire power supply chain — generation, transmission, distribution and supply — under CFE control, ending the autonomy of the country’s independent system operator,” said Fitch Mexico analysts led by Jesús Enríquez Torresdey, director for infrastructure and private finance, in a research note. 

“CFE would dispatch its power plants ahead of cheaper, more efficient generators following an economic order that considers production costs (i.e., variable plus capital costs) instead of just variable costs,” the analysts continued. “CFE would also be incentivized [to] restrict access to the network, limit the permits of new private generation companies (GenCos) and limit investment in new transmission lines to connect private GenCos, exposing them to curtailment risk. 

“This would likely displace private solar power energy and efficient gas-based power generation.”

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