After years of confrontation and souring relations with Spanish energy giant Iberdrola, Mexico’s AMLO government has just agreed to purchase 80% of the company’s Mexican operations.
Earlier this week, the Mexican government struck an agreement with Spanish energy giant Iberdrola to purchase 13 of its power plants in Mexico. Mexican President Andrés Manuel López Obrador (aka AMLO) hailed the deal as a “new nationalization of the electricity industry,” allowing operational control of the 13 power plants to be transferred to the state-owned Federal Electricity Commission (CFE). With this, CFE will increase its share of the electricity market from just under 40% to 55.5%.
The acquisition was made through a national investment vehicle majority controlled by Mexico’s National Infrastructure Fund (Fonadin), a subsidiary of the National Works and Public Services Bank (Banobras). For its part, Fonadin is managed by Mexico Infrastructure Partners, an asset manager of investment funds in the infrastructure and energy sectors, and it will essentially be leasing control of the power plants to CFE. In other words, there are a lot of moving parts to this “nationalisation” process.
Iberdrola’s CEO, Ignacio Galan, described the deal as a win-win while expressing hard-earned respect for Lopez Obrador’s drive to increase state control over energy:
“That energy policy has moved us to look for a situation that’s good for the people of Mexico, and at the same time, that complies with the interests of our shareholders.”
By agreeing to sell up, Iberdrola has been able to put to rest a raft of lawsuits it was facing in Mexico, which could have cost as much as $800 million in litigation costs. The company will now be focusing most of its attention on the US and European markets, where it hopes to graze on the succulent green energy subsidies offered in the US government’s Inflation Reduction Act and the EU’s REPowerEU plan.
Iberdrola’s decision to divest most of its assets in Mexico, until recently one of its most important markets, is part of a growing trend I warned about back in September 2021, in Why Are Spanish Companies Beating a Retreat from Latin America:
For the past 30 years the region has provided huge money-making opportunities for many of those companies. It has also served as a giant springboard for international expansion as well as a highly lucrative home from home during Spain’s sovereign debt crisis. But in the face of deteriorating economic conditions, rising political uncertainty, depreciating currencies and growing resource nationalism in the region, some firms are now getting cold feet.
Rough Relations
The deal is the culmination of roughly two years of intense — and often not very cordial — negotiations between Iberdrola, Spain’s largest energy company, and the Mexican government.
AMLO has repeatedly likened the power Iberdola holds over Mexico’s energy resources to the Spanish conquistadors of the 16th century. It hardly helps that Iberdrola appointed AMLO’s long-time rival, former President Felipe Calderón Hinojosa, as well as Calderón’s former energy secretary, Georgina Yamilet Kessel Martínez, to its international board. At one point, AMLO even threatened to pause diplomatic relations with Spain over the abuses of its energy and infrastructure firms.
The 13 (mostly natural gas-powered) plants represent around 80% of Iberdrola’s installed capacity in Mexico. Their combined electricity generation capacity is 8,539 megawatts (MW), with almost 99% of that amount coming from the 12 combined-cycle natural gas plants. A major player in the global renewables sector, Iberdrola is — or at least was — the largest private participant in Mexico’s electricity industry.
The company landed in Mexico in the late 90s, lured by the opportunities offered by then President Ernesto Zedillo’s electricity reforms. It expanded rapidly during the following six-year terms of Vicente Fox, Felipe Calderón and Enrique Peña Nieto. Mexico quickly became a key market in its aggressive international expansion strategy. By 2020 it was the largest private electricity producer in Mexico, with a market share of around 20% (compared to 39% for CFE).
Peña Nieto’s energy reform bill of 2014 gave even freer rein as well as generous government subsidies to foreign companies in the energy sector. By the time AMLO came to power in late 2018, private companies, almost all of them foreign-owned, controlled more than half of Mexico’s electrical grid. They also enjoyed huge sway over the country’s civil service, regulatory bodies, and judicial and legislative branches.
Different Government, Different Rules
But all of that changed when AMLO came to power in late 2018. For the first time in 30 years Mexico had a government that was not only determined to halt the privatisation and liberalisation of Mexico’s energy market but to begin dialling it back. Allegations of corrupt practices and price gouging by Iberdrola and other energy companies became a popular talking point at AMLO’s morning press conferences. The juicy contracts began drying up. Instead, a range of obstacles began forming, from disconnections to nonrenewal of permits and fines for price gouging.
The times of plenty had come to an end. And not a moment too soon.
At the rate things were going, the CFE would be generating just 15% of Mexico’s electricity by the end of this decade, says Ángel Barreras Puga, a professor of engineering at the University of Queretero; the rest would be generated exclusively by private, foreign companies.
“Who was going to control prices in the market? Foreign companies, with all that entails. Behind the foreign companies are their national governments. And we have seen how the US government, the US Ambassador and US legislators came to Mexico to try to pressure AMLO to change his policies. Ultimately, they are all lobbyists of private companies.”
There are few better examples of this than US Ambassador to Mexico Ken Salazar, as Ken Hackbarth reported for Jacobin at the time of Sakazar’s appointment in 2021:
Upon leaving (the US Interior Department] in 2013, Salazar went through the revolving door to work for WilmerHale, a law and lobbying firm with close ties to the Trump family, whose roster drilling- and mining-related clients included none other than — you guessed it — BP. From his lucrative new perch in the private sector, Salazar used his clout to support the Keystone Pipeline and the Trans-Pacific Protocol (TPP), whose “investor-state” provisions would let corporations challenge environmental regulations in private tribunals; fought against ballot initiatives that would limit fracking and distance oil wells from buildings and bodies of water; opposed climate lawsuits against the fossil fuel sector; and, in a highly questionable skirting of ethics rules, provided legal counsel to the same company, Anadarko Petroleum, that benefitted on multiple occasions from his stint in government…
The fact of sending an oil and gas lobbyist to lecture Mexico on renewable energy — one, moreover, representing an administration that just opened 80 million acres for drilling in the Gulf of Mexico and is approving drilling permits on public lands at a faster rate than Trump — would be comical if it were not so revealing of the ugly underbelly of US-Mexico relations.
More to Come?
The AMLO-Iberdrola deal has raised concerns in business circles that other foreign energy companies could face a similar fate as the Spanish utility, as AMLO government pushes to expand the state’s role in the energy sector. Bloomberg describes it as a warning shot for international energy companies.
“The choice of words and messages is deliberate,” said John Padilla, managing director of energy consultancy IPD Latin America, adding that such moves could be intentionally sending a warning to foreign companies amid protracted trade disputes with the USA on energy policy. “The main message for private sector investors, at least on the electricity side, is certainly not a good one.”
Mexico’s nationalist energy policies have already stoked the ire of its North American trade partners, Canada and the US, which argue that they violate the USMCA regional trade agreement by discriminating against Canadian and US companies. As Reuters reported a week ago, the Office of the United States Trade Representative (USTR) is considering making a “final offer” to Mexico negotiators to open its markets and agree to some increased oversight.
Failing that, USTR will initiate a dispute settlement against its southern neighbour. If the panel rules against Mexico and the Mexican government refuses to rectify its behaviour, Washington and Ottawa could impose billions of dollars in retaliatory tariffs on Mexican goods.
Others see the Iberdrola-AMLO deal as potentially easing pressure on private energy companies. After all, the purchase of Iberdrola’s operations gives Mexico’s state-owned Federal Electricity Commission (CFE) a dominant market position with 55% of total energy generation, thus fulfilling AMLO’s electricity agenda. AMLO’s proposed constitutional-level energy reform bill sought to grant CFE at least 54% of the nation’s energy supply. It fell at the final hurdle. But through his purchase of 80% of Iberdrola’s operations, AMLO has achieved the same goal.
But that goal, of restoring a strong role for the state in Mexico’s energy and electricity sectors, is precisely what US, Canadian and European energy lobbies have been desperately trying to avert. As such, escalation is the most likely scenario in the incipient North American energy war.