The CRE issues a resolution that promotes the regression of the energy transition

1. Amendments and additions provided for by the Resolution: A. In the first place, the Resolution amends the methodology for calculating the efficiency of electric power cogeneration systems and the criteria for determining systems as “efficient cogeneration,” issued in Resolution RES/003/2011. Among the main amendments are the following: • The definition of “Cogeneration” is added, which was not previously described in the methodology, including two conditions for cogeneration to be considered as such, namely that (i) the electricity generated is used to satisfy the needs of establishments associated with the cogeneration, or (ii) the generator undertakes to make its surplus electric power production available to the Federal Electricity Commission. • The definition of “Fuel-free energy” is added, defined as: “electric energy attributable to the use of clean energy, defined in each case, in terms of this Methodology.” • On the other hand, the reference values for calculating the efficiency of a system are amended, increasing the percentage of such values, while at the same time the electric power loss factor is updated, increasing the amount that must be considered according to the voltage level at which the National Electric System is interconnected. B. In the second place, the Resolution amends the sixteenth and eighteenth provisions for accrediting efficient cogeneration systems, issued through Resolution RES/291/2012. The express reference stating that the processes of the petroleum industry must be evaluated in order to be considered efficient is eliminated. C. In the third place, the Resolution amends the general administrative provisions that set forth the efficiency criteria and where the calculation methodology is established to determine the percentage of fuel-free energy derived from energy sources and electricity generation processes established by Resolution RES/1838/2016. Among such adjustments are the following: • An additional scenario to which the methodology will be applicable is added, namely the case of those plants that use auxiliary cooling technology to improve the thermal performance of the compressor-turbine ratio. • The values of the loss factor and the reference values are updated, which directly affect the formula for carrying out the calculation of fuel-free energy in efficient electric power cogeneration processes. • The installed capacity (from 30 MW to 50 MW) of power plants installed at an altitude greater than 1,500 meters above sea level to which the new reference values will be applicable is expanded, said values being considerably lower than those previously considered. • The processes of the petroleum industry or any other, whose purpose is the production of some type of fuel, may be considered efficient cogeneration. • Added as clean power plants that use fossil fuels are those whose electricity generation is carried out with two or more thermodynamic cycles sequenced for the maximum use of the residual thermal energy of their main cycle that comply with the efficiency criteria established by the CRE. • Finally, Chapter VIII is included, which develops in a precise manner the formula so that the power plant units that use auxiliary cooling to condition the air entering the thermodynamic cycle, which comply with the efficiency criteria established by the CRE, may determine the applicable fuel-free energy. These amendments represent a drastic change for the perception and development of the clean energy market and the energy transition in Mexico, by considerably expanding the scenarios and/or cases for the determination of fuel-free energy within electric power generation processes, as well as the reduction of those limitations established for its consideration. In this sense, the publication of the Resolution will have serious repercussions on the Clean Energy Certificate Market. 2. Impact of the Resolution on the Clean Energy Certificate Market. The Electric Industry Law determines the general bases for the operation and obtaining of CECs, and likewise establishes that efficient cogeneration is considered a type of clean energy. In this sense, CECs are instruments issued by the CRE to accredit the production of a specific quantity of electric power from clean energy sources. The main objective of these certificates is to incentivize the generation of clean energy, creating an additional economic value for renewable energy producers and thus contributing to decarbonization. As a result of the foregoing, on October 31, 2014, the guidelines establishing the criteria by which such CECs are granted and the requirements for their acquisition were published in the DOF. Among the conditions for being eligible for CECs, the following cases stand out: (i) Clean Power Plants that begin operations after August 11, 2014, and (ii) Legacy Power Plants that generate electric power from Clean Energy that began operations before August 11, 2014, provided that they have carried out a project to increase their Clean Energy production. Taking into account the background of the regulation of CECs, it is evident that the implications of the publication of this Resolution—by updating the reference values of the methodologies for calculating the efficiency of cogeneration systems, the criteria for determining efficient cogeneration, and the calculation methodology for determining the percentage of fuel-free energy—directly impact the manner and requirements for obtaining CECs, by facilitating or expanding the cases in which such certificates may be granted. The foregoing will have the direct effect of increasing the supply of such CECs in the market, while at the same time reducing their value and, consequently, the incentives for obtaining them. As a result of the Resolution, the mechanisms and incentives that Mexico has been implementing to reduce emissions at the national level and to comply with its international commitments are undermined. One of these incentives is the CECs, which play a fundamental role in fostering decarbonization and a sustainable energy transition. By undermining these incentives, Mexico will face difficulties and harsh criticism in achieving the commitments that contribute to the reduction of emissions at the national and international level. The foregoing has a direct impact on the goal established by the Advisory Council for the Energy Transition, which seeks that 35% of the country’s electricity generation come from clean energy sources by the year 2024. Likewise, Mexico would be in breach of various international instruments for regulating climate change, such as the Paris Agreement that Mexico signed in 2016 and which seeks to keep the increase in global temperature below 1.5°C, through incentives that reduce carbon emissions. The foregoing makes it evident that our country’s actions are not being carried out in accordance with the global trend that seeks to mitigate and eradicate—to the extent possible—the negative impacts of climate change. 3. Legal remedies available to those affected by the Resolution. Article 27 of the Law of the Coordinated Regulatory Bodies in Energy Matters establishes that general rules—as is the case of the Resolution—acts or omissions of the Commission may be challenged only through indirect amparo proceedings. However, in 2020 the Second Chamber of the Supreme Court of Justice of the Nation declared—through binding jurisprudence—that said provision is unconstitutional. That is, private parties may access ordinary remedies or means of defense—such as annulment proceedings—prior to bringing amparo proceedings. In the event that the mere entry into force of the Resolution causes harm to private parties—a situation that must be the subject of particular analysis—they could challenge the Resolution through indirect amparo proceedings within a period of 30 days from said entry into force. Said period expires on July 7, 2023. For additional information, please contact our partners of the Energy & Natural Resources Industry Group: Edmond Grieger, Partner: +52 (55) 5258-1048 | egrieger@vwys.com.mx Ariel Garfio, Partner: +52 (55) 5258-1008 | agarfio@vwys.com.mx Adrián Magallanes, Partner: +52 (55) 5258-1077 | amagallanes@vwys.com.mx