Mexico presses on with ill-conceived nationalisation drive [Gas in Transition]
Mexico’s government has reached a deal to acquire 13 power plants from Spanish energy group Iberdrola for $6bn, in what it has described as a “new nationalisation,” expanding state control over the energy sector. The move marks a clear departure for president Andres Manuel Lopez Obrador from the policy of his predecessor, Enrique Pena Nieto, who won international applause for breaking up the monopoly of state oil company Permex over the country’s hydrocarbon sector in 2013-14.
“This means we’re rescuing the Comision Federal de Electricidad, and it's a new nationalisation of our electric industry,” Lopez Obrador said during a press event on April 4.
By making this step, Lopez Obrador is embarking on a new nationalisation drive, bending the limits of the law, given that those 2013-14 reforms cannot be formally revoked without amending the Mexican constitution. The new leader has gone to extensive lengths to ensure that CFE, the buyer of the Iberdrola assets, along with fellow state company Pemex, the country’s main oil and gas producer, have preference over private and foreign-owned rivals. Lopez Obrado has, for example, pushed the government to suspend or slow down permitting processes for foreign firms looking to run filling stations. He has also backed CFE in lawsuits that seem to be aimed at forcing foreign partners to renegotiate contracts.
The new president remains committed to this strategy in spite of signs of failure. One notable example is his support for Pemex keeping the Olmeca refinery project going, even though its cost estimate has expanded 50% versus the original $bn cost. The project is also running considerably behind schedule.
The power stations being bought by the government include 12 combined-cycle thermal power plants (TPPs) and one 103-MW wind farm. The deal, managed by the National Infrastructure Fund of Mexico (FONADIN) and other federal entities, will move more than 8.5 GW of generation capacity to state control. The TPPs will still be required to sell their output to CFE.
A questionable rationale
Lopez Obrador said the acquisition would enable the government to press on with its energy policy.
“We have had some disagreements, but dialogue can achieve everything – dialogue and good will,” he said. “From these differences, something extraordinary has emerged. This is a historic moment.”
The president was likely referring to his past criticism of Iberdrola. In the past he has accused the company of initiating a media campaign against his government and engaging in unspecified graft. The government in recent years has also prevented new renewable projects from connecting to the grid, claiming they have not paid enough to support baseload power or transmission costs.
Iberdrola chairman Ignacio Galan also appeared to suggest that past troubles with the government were now water under the bridge, while reiterating the company’s commitment to Mexico.
“Iberdrola is grateful for the support and flexibility shown by the Mexican government to reach this agreement, and considers Mexico a strategic country with potential for growth and expansion where it will show its support for Mexico and the state by developing renewable capacity,” he said.
The sale is in line with Iberdrola’s strategy, giving it “new opportunities to accelerate growth in Europe and the US” in the short term, CFO Jose Sainz said. Despite selling more than three quarters of its generation capacity in Mexico to CFE, Iberdrola remains the country’s biggest private renewable energy producer.
It is possible that the price that the government paid for the assets was too high, as around two thirds of the facilities that were sold had been in operation for 10-25 years. The government therefore might have done better to invest in new power plants to meet rising electricity demand rather than acquiring older stations.
Furthermore, it is unclear what the government gains by obtaining these stations. Lopez Obrador argued that the deal would save Mexico money, but most of the electricity that the plants produce is already sold at a relatively low rate to CFE. The plants are obliged to sell this power to CFE, so in a sense the state utility had control over them anyway.
And while Iberdrola has said the deal is in line with its strategy, it seems clear that the recent difficulties that the government has created for the company was part of the motivation. Over the past two years, CFE has denied Iberdrola’s requests to amend power generation permits, tried to impose an historic fine on the company for allegedly misusing a self-supply permit and blocked its launch of several new power stations. Mexico’s grid operator CENACE has also at times disconnected other Iberdrola plants from the system.
All this suggests that on the one hand, Iberdrola might not have wanted to divest if it had not been for the government’s interference in its operations, and on the other hand, the government and the Mexican people stand to gain little from such a lavish expense.