Mexico is currently the second-largest power market in Latin America and appears poised for continued growth. During the lead-up to the creation of the North American Free Trade Agreement (NAFTA) in the early 1990s, Mexico began a restructuring process to spur greater international investment in electricity infrastructure. Although more than 6,000 megawatts (MW) of capacity was installed under these programs, the investments relied largely on long-term contracts with the state-owned Federal Electricity Commission (Comisión Federal de Electricidad; CFE). Even following the reforms of early 2013, CFE remained the manager of the generation, transmission, and distribution functions.

During this period, inefficiencies in the electric sector persisted largely because of underinvestment in capital stock. At least in part, this was a result of an ineffective pricing and regulatory policy regimen, coupled with heavily subsidized retail rates and high overall system costs. As part of this system, the government reimbursed CFE by subsidizing retail prices through tax and dividend discounts. By 2002, however, the subsidy had become greater than the discount provided, eroding CFE’s capital base and ability to fund capital investment. Further, industrial customers faced relatively high retail electric costs and rates that varied from month to month, creating obstacles to planning and investment. During this period, efforts to address these structural problems were unsuccessful.

This paper will discuss recent changes in the Mexican energy sector over the past five years, including the new auction design and the role and results of the energy auctions. First, it will go over the background of the reforms, and provide a perspective on the current system and key grid changes. Next, it will offer some insights on finance and key market participants. Following this, it will discuss some of the human capital obstacles and new programs. Last but not least, it will summarize the major successes and challenges of the restructuring process.