The Mexican government has implemented sweeping legislation for the energy sector, including a new electric sector law -- called the LESE -- and a new law that overhauls the structure and governance of the Comisión Federal de Electricidad or CFE, the country’s power utility.

The LESE replaces an earlier electric industry law, known as the LIE, that was enacted in 2014 and that created a wholesale electricity market and an independent system operator and opened the door to thousands of gigawatt hours in private generation, particularly in renewables.

These new laws provide a path forward for private market participants after six years during which private investment in new power plants was virtually halted.

The Ministry of Energy has been directed to issue a development plan for the electric sector (Plan de Desarrollo del Sector Eléctrico) and to update it annually.

The first development plan is due by March 18, 2026 and will serve as the blueprint for development of new power plants and transmission infrastructure, for evaluation and issuance of permits and for the handling of interconnection requests.

One of the goals of the development plan is to ensure that the Mexican state will retain priority in power generation and commercialization. At least 54% on average of energy injected into the grid each calendar year must come from power plants owned by the CFE. Details about how to measure the 54% will be in LESE regulations that are expected later this year.

While the LESE replaces the LIE, it retains the structure and operating principles of the existing Mexican wholesale electricity market, including rules on participation, products and mechanisms for the purchase and sale of power and ancillary products, that were established by the LIE.

The country’s independent system operator, CENACE (Centro Nacional de Control de Energía), will continue to operate the national grid and manage the wholesale electricity market as well as determine the network upgrades required for interconnection to the grid.

Under the new law governing the CFE, the CFE is recognized as a state-owned public company, different from the “productive state enterprise” it had been under previous law. The CFE’s mission is to seek energy justice for the population at large and sustainable development of the electric sector.

All of CFE’s subsidiaries have been extinguished and their rights and obligations have been transferred to CFE.

The regulations that required CFE to operate through independent subsidiaries, with no preferential treatment, priority or exchange of privileged information among them, have been eliminated. CFE is no longer subject to strict separation rules that were originally intended to promote an efficient and competitive market. Strict legal separation remains a requirement only for private sector participants. This means that if a private party intends to generate and supply power, these activities must be performed by separate, independent entities.

New Structures

The different forms of private sector participation in electricity generation in the LIE, such as distributed generation, the sale of power and associated products through bilateral power hedging agreements between market participants and sales into the spot market, continue to be permitted under the LESE.

The LESE introduces more options for private participants, such as long-term production contracts for exclusive sale to CFE and a mixed investment structure that allows development of jointly owned projects with CFE.

Other business models from the LIE have been modified. For instance, “isolated supply” has been replaced by “self-consumption” with similar features. Likewise, clean energy auctions for sale of power and associated products -- previously mandatory for meeting the needs of basic supply users -- have been replaced by a different acquisition mechanism to be determined by CENACE. Auctions are no longer the sole or mandatory method for purchasing power for basic supply.

CFE remains the sole basic services supplier, and it may acquire power using the new mechanism to be announced by CENACE or bilaterally.

The LIE allowed distributed generation projects of under 0.5 MW in size. The LESE increases the threshold to less than 0.7 MW.

These projects do not require a generating permit and are interconnected to the general distribution grids. The generated power and associated products can be used for self-supply or be sold either to CFE or to the market through a qualified services supplier.

The LIE authorized use of an “isolated supply” structure that allowed on-site generation and imported electricity to meet the needs of a permit holder and other individuals or entities within the same economic interest group, essentially entities with a corporate or controlling affiliation.

In the LESE, “isolated supply,” meaning behind-the-meter generation, has been replaced by self-consumption projects. These are projects with a generating capacity of 0.7 MW or higher that are intended to meet the permit holder’s own power needs. It remains unclear whether self-consumption will be strictly limited to satisfying the permit holder’s own needs or if, as before, “own needs” will be interpreted more broadly in the implementing regulations to allow power delivery to the permit holder’s related parties.

These projects must obtain generating permits from the Comisión Nacional de Energía or CNE. Projects with capacities of between 0.7 MW and 20 MW will have their permits expedited through a simplified process.

Self-consumption projects can operate either entirely behind the meter or be interconnected to the grid. There is a preference for such projects that use renewable technologies.

Behind-the-meter projects cannot interconnect to the transmission or distribution grids, and all generated power must be used on-site.

If these projects are interconnected to the transmission or distribution grids, they must complete an interconnection process, comply with CENACE’s and CFE’s interconnection requirements and execute an interconnection agreement.

Excess energy can be injected into the grid without compensation. The LESE also allows for sales of excess energy from self-consumption projects to CFE. However, CFE is not obligated to enter into such agreements.

If a project employs intermittent technology, then it must either incorporate its own energy storage backup or pay CFE for backup services.

The LESE does not specify how to determine the required storage backup size or the cost of CFE’s backup services. This will have to be addressed in the implementing regulations.

The methodologies for calculating prices for excess energy put on the grid by interconnected self-consumption projects will be issued by CNE at a later stage.

Generation for Wholesale Sales

While the language of the LESE can be read to suggest that generators may only sell their energy on a merchant basis to the wholesale electricity market, projects with generating capacities of 0.7 MW or above continue to be allowed to sell power and associated products through power hedging agreements and bilateral transactions scheduled and settled in the wholesale electricity market.

Such projects can be developed by the Mexican government or by private parties. In addition, the LESE introduces the concept of mixed development, meaning projects developed jointly by the Mexican government and private parties.

Mixed development projects can be undertaken using the following investment structures: long-term production, mixed investment or any other structure to be defined in LESE regulations or in other guidance from the Ministry of Energy.

The three investment structures will be subject to the development plan issued by the Ministry of Energy.

The CFE will issue separate guidelines to implement mixed development projects that will regulate the selection process, impose operational and technical requirements, and specify agreement models, financial models and other applicable general terms.

"Long-term production" refers to power projects developed by private parties that are used to supply energy and associated products exclusively to the CFE. These power plants cannot sell any excess capacity or products to third parties.

Regardless of the ownership, these projects will be represented by CFE in the wholesale electricity market.

CFE will not contribute toward development of such projects, but when the production contract with CFE ends, CFE may choose to take title to the assets. This scheme resembles the old independent power producer scheme that existed before enactment of the LIE, and we expect the contracts to be of similar nature, with fixed and variable costs paid by CFE to private generators.

It is unclear whether long-term production projects will count as CFE generation or as generation from private parties for purposes of the principle that CFE is given priority to supply electricity.

In mixed investment projects, CFE must hold at least a 54% direct or indirect participation and will have a right of first refusal to purchase the energy and associated products. The products not acquired by CFE may be traded on the wholesale electricity market, with CFE serving as the power plant’s representative.

Other Changes

No private participation will be allowed in transmission and distribution.

The LIE allowed for the possibility for the Mexican government to enter into associations or agreements with private parties to finance, install, maintain, manage, operate and expand the country’s transmission and distribution infrastructure. The LESE does not allow any such possibility. CFE remains the exclusive provider of transmission and distribution services.

Private parties may only participate as CFE contractors in specific activities related to power transmission and distribution. The new CFE law allows CFE to enter into agreements with its affiliates or with private parties for activities related to installation, maintenance and expansion of the country’s transmission and distribution infrastructure.

Private parties are permitted to own and operate private transmission lines to interconnect their power plants with the national grid.

The LESE addresses reliability in dispatch.

Reliability refers to the ability of the power grid to meet electricity demand while complying with continuity, accessibility, quality, safety and sustainability requirements issued by CNE.

While the concept of system reliability was already present in the LIE, the LESE now explicitly incorporates it as a key condition for dispatch. As a result, dispatch procedures must not only prioritize safety and economic efficiency but also comply with the reliability requirements set by the CNE.

Any reliability regulations issued by the CNE will be crucial in assessing their potential impact on private generators.

In May 2020, the Mexican government introduced a policy that, under the pretext of grid reliability, sought to grant interconnection priority to CFE’s strategic projects, impose stricter requirements for renewable energy projects to obtain generating permits, and require payments for additional ancillary services to offset intermittency. (For previous coverage, see “New policy in Mexico puts dagger in private sector participation in the electricity sector”.)

This policy was ultimately ruled unconstitutional by the Mexican courts. However, the inclusion of reliability as a dispatch criterion under the LESE opens a door to the regulator to introduce new conditions that could affect intermittent generation, including private renewable energy projects, notwithstanding the fact that the LESE encourages renewable energy.

The LESE recognizes energy storage as a component of the electricity sector.

It empowers the CNE to establish a methodology for integrating storage systems into the market, set permitting requirements, and determine the payments that storage systems will receive for providing ancillary services to the grid.

CENACE must incorporate guidelines for operating energy storage systems into the existing market rules.

The energy storage systems may offer energy or associated products, including ancillary services, to the short-term energy market. However, available energy or capacity can only be offered for one type of service.

The Mexican government recently issued general guidance to regulate energy storage systems. These rules outline the process and rules for integrating storage systems with different types of facilities, including power plants, behind-the-meter installations, load centers and distributed generation projects. They also cover standalone storage projects.

The LESE recognizes electromobility and empowers the Ministry of Energy and the CNE to regulate it.

The Ministry of Energy will regulate the infrastructure and power supply for electric vehicles, but the CNE is authorized to establish rules for connecting EV infrastructure, set the pricing for power supply and impose terms and conditions on use.

Cogeneration is recognized as a separate category in power generation permits. Cogeneration plants are entitled to must-run dispatch, but such dispatch is limited to the power required for the direct or indirect thermal energy needs of their industrial hosts.

Clean energy certificates (CELs) remain part of the products that can be generated by clean energy projects.

The LESE clarifies that CELs will be granted to power plants regardless of their commercial operation dates.

Under the LIE, CELs were granted only to new renewable energy projects or expansions of existing projects that added clean energy capacity. Now, any existing power plant using clean energy technology will receive CELs, regardless of its age or whether it contributes additional renewable capacity. In practice, this change transforms CELs from an instrument designed to foster installation of additional renewable generating capacity into a tool for measuring clean energy generation.

CELs will be valid for a maximum of 30 months after issuance, in contrast to the LIE under which they had no expiration date.

Basic service supply for users with electricity demands below 1 MW is now classified as a strategic activity in which private parties cannot participate.

CFE will be the exclusive basic services supplier, with the goal of ensuring that the population at large receives power at the lowest possible rate. Under previous legislation, although some basic service supply permits were issued to private parties, they never commenced operations. This change formalizes what was already happening in practice.

As the basic services supplier, CFE may purchase energy and associated products through power hedging agreements executed directly with any generator under any of the project structures in the LESE and through other purchase mechanisms to be determined by CENACE.

The terms and conditions for such power hedging agreements will be included in rules to be issued by the Ministry of Energy or the CNE.

Developers of electric infrastructure projects must submit social impact assessments for approval by the Ministry of Energy. The Ministry of Energy will have 90 days to approve or reject the submissions.

The Ministry of Energy will monitor compliance with social impact obligations and mitigation plans.

No infrastructure development activities can commence without the required social impact authorization.

Implementation

The wholesale electricity market will continue operating under the existing market rules until new ones are adopted.

Permits and contracts under the LIE will remain in effect until original expiration and cannot be extended. Migration to the new LESE structures through an expedited process will also be available.

Legacy permits for self-supply, cogeneration, small production, independent production, and import and export of power granted under the Law of the Public Service of Electric Energy (LSPEE) that was in place before 2014 will remain in effect until original expiration and will not be extended.

The Ministry of Energy will establish mechanisms to facilitate migration of LSPEE projects to the LESE through an expedited process. The migration must cover the total capacity of the permit. Partial migrations are not allowed.

Contracts entered into by CFE’s subsidiaries under the LIE will be transferred to CFE. This includes, for example, power hedging agreements entered into by CFE Basic Supply and private generators through clean energy auctions held between 2016 and 2018.

Following publication of the LESE, the CNE is required to review the public service fees for power transmission services and CENACE’s operating costs. Market participants may face short-term adjustments and fee increases.