 Welcome back. I'm Jay Fidel. This is St. Tech, more specifically. This is Energy in America with Emily Medina who joins us from Mexico City and talk about energy in Mexico. That's part of the Americas, you know. We want to think of it that way and we want all the Americas to be joined, right Emily? We want to be together in the Americas. Absolutely, especially in this trying times. Oh gee, I, you know, I talked to our correspondent Carlos, he is from Mexico and he's with the University of the Americas in Puebla and talking about COVID, a serious problem in Mexico. For some reason, Emelo did not take it seriously and then he quoted himself an irony in that. So electricity, you're with, of course, he brings the Energy Policy Research Organization out of Washington, the Lupo Urizi, and you look at it from, you know, the advantage of Mexico, and there's been a significant development in Mexico by electrical generation, I guess, by quote, reform, end quote. So what is the nature of this reform? Who initiated it? And what does it do? Yes, Jay. So this week, you know, there's been some developments on Mexico's energy policy. More precisely, the precedent passed or send a priority bill to Congress to reform the electricity sector. And what this bill seeks to change is a dispatch system. So I'm not sure if you know what the dispatch system is, but I'll give a little bit of an explanation as to what it is for those who don't maybe and have an understanding of the electricity market. So the dispatch system basically means that, you know, Mexico has or follows a merit order in its grid system where we have a system that prioritizes more economic and efficient sources of energy, like natural gas and renewable energy, particularly wind and solar, which are very, very efficient here in Mexico, considering that we have a lot of sun and wind. So here in Mexico, you know, we have a high potential for renewable energy. But what this bill seeks to do is to instead of prioritizing energy sources that are more economic and efficient, it seeks to prioritize CFP and power generation. And CFP is a national utility system. It's state-owned. So before the energy reform in Mexico, it was a state monopoly, you know, and, you know, let's back up a little bit. So the bill intends to have, to prioritize energy coming from CFP power plants. And what this means is that instead of following the merit order based on cost and efficiency, it does not distinguish on the quality of the source of electricity. So the bill seeks to prioritize CFP power generation, particularly hydro energy, which is about 7% of Mexico's electricity today. And it also seeks to, you know, prioritize, I would say, more dirty sources of electricity like fuel, oil and diesel. Independent power producers would be, would resolve highly disadvantaged from this policy. So I guess, why is this, why does this bill get passed? Who is driving it? And for what interest? Well, as you may already know, the government that we have right now in Mexico is very nationalistic in terms of their approach to energy policy. It basically has the mission or intent to prioritize both state owned energy companies, CFP, which is comision federal electricity, which is a utility company, and also Pemex, which is Petrolios Mexicanos, hydrocarbon, Mexican energy company. So the whole purpose of this policy is to return market power to CFP. And basically, you know, what's happened since the start of the energy reform, which was passed in 2014 by the predecessor of AMLO, which is Enrique Peña Nieto. So he passed a historic energy reform that basically opened up the energy sector to private sector participants and dissolved the state owned monopoly. So now that there's a lot more and compatibility in the energy sector, because we have, you know, a large number of independent power producers participating in Mexico's energy sector since the opening of the energy reform, and there's been huge amounts of foreign capital flowing into Mexico and investing in energy projects along the energy value chain. And basically, what this means is that right now the government sees private sector participation as a threat, instead of seeing it as a means to be able to allow for energy companies to produce electricity at the most efficient costs and also in a way that it's beneficial for the environment. So the word reform is so tricky. The one in 2014 sounds like a really positive, you know, positive progressive change. The one now doesn't sound like reform at all. It sounds like something else. In fact, it tends to reverse the reform that was done in 2014. Am I right? Exactly. I was taken office two years ago. I'm low and the head of the CFP, which is Manuel Barlett, also very nationalist, that so the government basically does not believe on or does not favor a market friendly approach. It is more advocate of an idea now that they want Mexican companies to give power to Mexican consumers. But in reality, you know, after eight decades of monopoly, we've seen that they have not been able to satisfy the needs of the Mexican population in terms of delivering energy in an efficient way. So this is the main reason why we had an energy reform in the first place. So it's very unfortunate that we have very, a government with a very different approach to energy policy than what we have before. I guess you can say it's almost, you know, in complete 360 degree difference of what we had before. So the start contrast in energy policy is really, you know, causing severe stress to many, you know, energy investors who have a lot of capital and stake and a lot of energy projects in Mexico that are currently at risk. Well, it's always rough when you do that. When you discourage an investor who has come in and put a lot of money on the table, you give him, you know, negative encouragement. You make it hard for him politically or economically because there are others in the pipeline from somewhere else who would, you know, be likely to put additional investment capital into that sector who want to discourage having seen what goes on with their predecessors. This happens in Hawaii all the time. And so it's not a good thing. Let me just get a little environmental, you know, environmental coverage here in the sense that, A, what is the situation in Mexico? Does electrical energy, is it available everywhere? Is the penetration complete through all of, you know, the areas including the outlying areas in Mexico? If I'm in a small town in the middle of nowhere, am I going to be able to get electrical service? Yeah, Jay. So Mexico, as you know, has a huge population. We have about 125 million. What's 40 million here and there? Or 80 million. I might be. You know, it's a huge population. And, you know, and to give people power in all areas of the country, which, you know, you're a developing country. You know, there's, you know, stark differences. You, you, you're, you may be in a state that, you know, has a high economic growth that you, you know, you drive, you know, a few miles down the road. And then you are, you know, in neighborhoods that, you know, lack access to basic surfaces, including energy. And it's a big issue in the country. And the energy reform sought to address this issue right now. You know, 98% of the Mexican population has access to electricity. But it's not the same to have access to electricity, you know, of poor quality than having, you know, steady access to reliable energy. And also, you know, we have to take cost into consideration. Because, you know, there's a large number of the Mexican population that is, it doesn't have, you know, a high income and, and energy prices really do affect their, their balance, you know. Well, I wanted to ask you about that. You know, we have a problem in Hawaii for many years because we're, you know, wedded to fossil fuel for the most part. And fossil fuel can be volatile and expensive. So the question is, what are the rates like in Mexico? You say that in the small towns, people don't have a lot of money. It's a problem. But how, how expensive is it? Can you talk in American dollars? Can you translate that to American dollars? Yeah. Well, it depends significantly who you ask. And because based on your geographic location, you get a price for electricity because the cost, you know, considers things like transportation of energy. And, you know, we have areas of the country like in the south of Mexico, like the Yucatan Peninsula, which is, you know, who that has very high electricity prices at around, I don't know, an average household would have. I've seen, you know, bills of $600 per month. So, and this is because, you know, they're the south of Mexico lacks access to natural gas because of its position. But if you look at places like Monterrey in the north of the country that borders the US and has access to very affordable gas, you will see very low energy prices. So it depends on the area you are in. But right now in, I mean, in areas like Mexico City, there are also very, you know, very, there are demand centers that are, you know, located in close, close to the production centers. And they, and we have, you know, electricity prices, you know, can range for, I don't know, about $100 per month. But there's also, there's also a billing system that takes into account if you are a high electricity consumer or a low electricity consumer. And based on your status, you get, you get, you know, the prices corresponding each level. I want to do, I want to settle one thing before we go too much further, Emily. I have my friend, Alexa here. Alexa. What's the population of Mexico? In 2020, the population of Mexico was 129 million people. Okay, yeah. I think that was closer. You're right. I owe you a tequila. Okay, well, let's move on to the whole thing about what the reform, if you will, in 2014 did and whether it was working and why in the world the second quote reform would take place and whether that undermined, you know, the progress that the country had made for independent electricity producers in the years from 2014. Yeah. So sorry, what was your question? We, I assume we made progress. Mexico made progress under the 2014 reform bill. Was it working? Was there any, and I guess it was, was bringing foreign investment into electrical sector. Was, was there really a need to have, you know, was it working to the point where, you know, you, you could say there was no need to change it. Was there a need to change it in the, in the bill that. If you ask me, the most energy analysts in the country, we would say that, you know, that this electricity reform that the current government is trying to undertake really is hurting investment and there's not a need to go back. You know, we, we already moved from where we were before. That was a monopolistic model. We already saw, you know, that it didn't work. It might have worked, you know, at the beginning, but you know, over the years it proved that it's not the system that Mexico needs right now. It's a cease, the monopolistic system, you know, leads to things like corruption and lack of investments in areas that needed. So if you ask me, the correct approach is to, you know, to stay with energy reform that has been very beneficial in attracting investment and also in helping the energy transition in Mexico. Because if you look at CFP's power plants and some of them are very polluting. And, you know, if you don't have a model that incentivizes new projects and new, and new developments in clean energy or including natural gas, then you are stuck with, you know, an inefficient system that is highly polluting. So, what about the cost factor? I take it from what you say that the independent power producers as, as capitalized by investment from outside the country are focused on renewables. Am I right about that? They're focused along, you know, the different sources of energy. They're not exclusive to clean power. And we mainly see independent power producers owning power plants on that run on natural gas, which are combined cycle power plants. And we also see a lot of projects in renewable energy like solar and wind. So, those are the most prominent sources of energy that are, you know, being operated by the independent power operators. So, what would you like to be an independent power operator? Are we talking about a lot of little independent power operators around the country rather than a few huge utility companies? And is there an advantage to that in terms of connecting with the grid, in terms of reducing prices for the product, in terms of coordinating their efforts? Or are they more efficient, you think, as a marketplace, as a delivery system than the old way with, you know, a handful of large utilities? So, the independent power producers basically produce energy and they typically sell it to the CFE, to the state-owned utility company as mandated in the law. They have to sell that power to the CFE and then the CFE, you know, puts it in the system with all of the other sources of energy and sells it to the end producer. So, basically how it works is that we have, you know, we don't have like that many independent, we don't have that many operators that sell energy to the end consumer directly, but this way the CFE can, you know, can manage the load from multiple stakeholders instead of being the only company in charge of producing energy. And this has resulted in a very, you know, efficient model that is practiced in many other countries. Actually, the energy reform was billed using best practices and it's a very competitive model that before this government took place, there was long-term auctions where the CFE would purchase power from independent power operators to then, you know, get the best price. And since this government took place, they've kind of discontinued the auction model and right now it's based basically on the long-term contracts that the CFE has with the independent power producers. Let me go to some questions we got from our viewing audience. Emily? Sure. Okay. It seems that Amlo is moving toward a populist Mexico-first energy policy. Does he have a lot of political support for that initiative or is he operating without political support? Yes, that's absolutely correct. You know, Amlo is basically moving in the direction of, you know, favoring CFE and Pemex, both state-owned companies to give them all the power in the energy sector, undermining private sector participation. And what this is causing is basically, you know, an issue where private sector companies are not that happy with the government right now because there's a lot of, you know, investments at stake from this policy. You mean they may lose their investment? Yes. So basically their investment is at risk. They would challenge it in courts. It's not like they're going to just lose their investments because it's in the Constitution that the government has to respect the contracts that were awarded legally. So what this means is that there's going to be possible investor-state dispute settlements, which is, you know, not a fun situation for the country to be in, especially in this moment where our economy is going through, you know, a harsh time. I have more along the same line other questions for you, Emily. The second related question is what options do foreign investors have? I assume some of them are American foreign investors, but could be Europe, but could be Asia. What options do foreign investors have? Does this policy in this new quote reform negate any provisions of the USMCA that was, you know, inked while Trump was in office? Yes. So that's absolutely correct, you know. This Mexican electricity reform that the government wants to pass basically wants to pass, you know, this law. It's a bill that will, you know, basically, favor the CFE and Pemex. And if you do that, you immediately violate the Mexican Constitution and also the USMCA. So you violate the Mexican Constitution because you give priority to the state companies, CFE in this case, and instead of having, you know, a fair level playing field, so this is completely unconstitutional because the companies that participated in half contracts are, you know, are in their right to compete in an equal level playing field. Going back a mile a minute. So you mentioned a minute ago that maybe there would be litigation. Is there litigation? Is there a political attempt to reverse this latest quote reform? It sounds like somebody needs to do that. Is anybody doing that? Yes. So the bill was passed by the president to the Mexican chamber. So to Congress. And what this means is that the Congress has 31 days to discuss the bill. And it's more than likely going to be approved because the government holds a majority. You know, it goes to your first question of whether, you know, how much power does the government have. And the answer to that is that I'm little holds a lot of power in Congress. And he, you know, he has currently a 60% approval rating. So he's doing very good in the polls. And basically what this means is that. Although it's going to pass in the, in the Congress more than likely, it will still be disputed by particularly by the effective companies. So the, you know, the energy companies are going to dispute the policy. And it will more than likely go to the Supreme court, who then gets to rule. And, you know, in favor of whatever they decide. And it's more than likely going to be in favor of the companies given that the bill is, is unconstitutional. Yeah. Well, that'll be a positive, but you know, how, how do things work in the Mexican courts? We get to see a decision on that in the near term or is it going to be after, you know, years later? It should be, you know, and a matter of months earlier this year and or last year actually in April last year. There was a similar executive order passed by the energy ministry in a change that they wanted to do based on the grid reliability, arguing that renewable energy was causing intermittency to the grid. And that, you know, that they needed to prevent more renewable energy projects from coming online, which was, you know, lack completely. It didn't have the evidence to support the policy. And what happened is that today the court ruled against this energy ministry policy. So we have, and luckily a Supreme court that is very, very strong. And how would you call it? It follows, you know, a strong, it's a strong institution. And this really is, it's important today. It is not checks and balances. You know, it's wonderful that you have that. So let me, let me go to the third part of the question that this viewer submitted, which is actually in many ways the most interesting part. You know, because these independent producers are either managed or American, you know, capitalized and, or maybe from somewhere else, but America has an investment role in these independent energy producers. And they offer the most part, I take it from this conversation, they're progressive and they could do a lot to democratize energy in, in Mexico. I'm therefore, although it's not clear how the relationship between Biden and Amelot is going to go because Amelot took his time in recognizing Biden's election, which I thought was not a good move on Amelot's part. And so the relationship may be off to a bit of a rocky start, but the question is, you know, what can Biden do? What is Biden doing? What is Joe Biden doing to help the American energy investors and managers who, who are creating and operating these independent energy companies in Mexico? What can he do to help them? What can he do to protect American interest? Does he have influence? Does he try to exert influence on, on Amelot? What is the role of the United States here? Well, you know, we're in a very difficult position where, you know, the U.S. is Mexico's closest alley. And we're treating, you know, foreign investors in our country in a very, you know, bad way, you know, by, you know, going in opposite ways of, you know, what the law stipulates and creating a lot of uncertainty and risk to foreign investments, particularly, you know, one of the closest alleys in the U.S. So what this does is that it creates, you know, an increasing tension with, with the U.S. government, which already, you know, or I guess it was a month ago or recently that the U.S. Congress sent a letter to, to the Mexican government saying that they were, you know, concerned about the direction that the Mexican government was taking the energy sector in. And basically, you know, saying that it's important that Mexico abide to its commitments. You know, they've, you know, send out these letters and, you know, already given clear notice to the government that they're not happy with what it is doing. However, you know, I haven't seen much action yet in, in terms of the unfolding of the legal disputes. But I think that, you know, it's a matter of time before we start seeing increase, you know, pressure in terms of litigation and that type of thing in terms to the Mexican government, which is going to really affect the relationship. Very, very interesting. What I think the government right now, you know, Biden taking office, I think it's going to be interesting to see how he exerts, you know, pressure on Mexico to abide to its commitments. And I think a way that, or an approach that he's going to take is going to be on the environmental side. Because this reforms that Anlo wants to do, or are a threat to our commitments in the Paris agreement. So I think, you know, the government, Biden can, you know, hold Anlo accountable in a way and that, you know, that basically saying that, you know, they're not with this policy, they're not going to be able to meet their renewable energy targets and what have you. Well, we're not finished with this. We'll have to circle back with you and see how it goes over the next few months. Very interesting discussion, Emily. Emily Medina with Ebrink in Mexico City. Thank you so much for joining us. Pleasure day.