The Mexican government must take measures to improve and solidify the participation of small and medium-sized companies in the country’s electrical market, according to a new paper from the Mexico Center at Rice University’s Baker Institute for Public Policy.
The paper, “The New Legal and Regulatory Framework of the Mexican Electrical Sector: Possibilities of Inclusion of Small and Medium-sized Companies,” was authored by Ana Lilia Moreno Gonzalez, a senior researcher at Centro de Investigacion para el Desarrollo A.C. in Mexico City and currently area director at the Instituto Federal de Telecomunicaciones (Federal Telecommunications Institute). It analyzes portions of Mexico’s energy reform legislation related to increasing participation by small and medium-sized companies in the electrical market and presents conclusions regarding the viability of the new legal framework to include such companies and, in particular, whether such inclusion is reasonable and relevant for strengthening the rule of law in Mexico.
“On one hand, the reform of the electrical system’s legal framework establishes guidelines that, based on the industrial structure of the electrical sector, will result in changes that will lower electricity prices,” Moreno Gonzalez wrote. She noted this will increase the competitiveness of all sectors, including small and medium-sized companies, whose production and distribution costs will be reduced.
“Thus, the reform will have a positive impact on economic development and will strengthen the rule of law by establishing conditions that are suitable for growth,” she wrote. “On the other hand, although the reform states clear intentions of including the participation of Mexican companies in certain production chains, among them small and medium-sized companies, the mechanism of integration based on quotas and an industrial policy of ‘national content’ could create an incentive for artificial or unsustainable inclusion over the long term.”
The paper was written for a Mexico Center research project examining the rule of law in Mexico and the challenges it poses to implementing the country’s energy reform. The project’s findings are compiled in a Spanish-language book and are being posted on the Baker Institute’s website in English.
Mexico’s energy sector had been under strict governmental management since 1938. This changed in 2013 and 2014 when Mexico amended its constitution and passed legislation overhauling its energy sector to allow private and foreign investments. For the electrical industry, the reform is focused toward a competition model in terms of wholesale and retail electricity services.
In Mexico, the electrical industry is composed of generation, transmission, distribution and trading of electrical energy as well as planning and control of the country’s national electrical system and operation of the wholesale electrical market. It also covers the supply of primary consumables for the industry. The electrical energy market in Mexico is worth 311 billion pesos (approximately $16.3 billion), of which 58.5 percent represents the industrial sector, 25.4 percent represents the domestic market and the remainder is divided between primary sector and business activities, according to Moreno Gonzalez’s paper.
“Small and medium-sized companies have clearly pointed out that regulatory cost is, by far, the most choking factor for them,” she wrote. “At the same time, over the course of several years, Mexico has been working on creating and modifying laws that create an incentive for the use of renewable energies to decrease dependency on fossil fuels, reduce greenhouse gas emissions and trigger economic growth.
“However, even though there has been a clearer vision of the industrial organization of the electrical sector since the energy reform, there are enormous challenges for the successful and effective implementation of legal reforms that will lead to tangible results for small and medium-sized companies.”
In her recommendations, Moreno Gonzalez calls for the elimination of bureaucratic barriers, the design of new and official standards for energy generation and the reformulation of the country’s energy subsidy mechanism, among other measures.