The passage of Mexico's energy reform just before Christmas in 2013 was historic on many accounts.  For the first time in decades the country's energy sector, long a symbol of national sovereignty, would fully open up to private and foreign investment.

Moreover, the reform, which entailed a constitutional amendment, was spearheaded by President Enrique Peña Nieto of the Institutional Revolutionary Party (PRI), the same party that had exerted state control over the energy industry starting in the late 1930s.

The reform also marked a milestone for Latin American power markets. Mexico is the last major market to deregulate and unbundle, a process that started with Chile in the 1980s and carried on throughout the rest of the region over the next two decades.

The drivers behind the reform are evident as far as the power industry is concerned. High electricity prices have hampered the competitiveness of Mexican industry and manufacturing. The dominant state utility CFE has posted consecutive billion-peso losses as it struggles with subsidies and an ageing electrical infrastructure.

The reform aims to attract new investment into the sector and modernize the grid. The government is allowing private players to participate freely as generators and marketers in a competitive wholesale market. CFE has lost its former regulatory and operational roles and is being transformed into a "state productive enterprise."

A fully independent system operator, a first for Mexico, will operate the wholesale market once it launches. Transmission and distribution (T&D) infrastructure remains public property, but the reform allows state enterprises to form partnerships with the private sector to develop projects.

Since the last Intelligence Series report on Mexico, the rules and regulations of the new market have become clearer. In August 2014, the Mexican congress passed a batch of secondary laws to flesh out the reform, including a new electric industry law. Earlier this year, the energy ministry (Sener) published draft rules for the wholesale market, which is expected to launch by year's end.

In July, the ministry also released the first edition of its new Prodesen report, which outlines the official development strategy for the power sector over the next 15 years.

Not all of the pieces are in place, including a final piece of secondary legislation that is stuck in congress. As the rules are tweaked and finalized, the power industry has remained in wait-and-see mode, but the market inches closer and closer to its first commercial launch.

Figure: GDP vs Electricity Use



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