Policy Issues and Challenges Under Mexico’s New Electricity Reform

The Big Picture

The Mexican government introduced a new Electricity Sector Law (Ley del Sector Eléctrico, LESE) on Jan. 29, 2025. This law modified previous legislation dating back to the Enrique Peña Nieto administration (2012–18), which largely opened the sector to private and foreign investment. The new 2025 legislation is aimed at strengthening the role of the Federal Electricity Commission (Comisión Federal de Electricidad, CFE) and reinforcing state control over the sector.

LESE emphasizes energy sovereignty, affordability, and reliability; however, it contains significant contradictory stipulations that could produce the following implications: 

• Hinder competition.
• Increase electricity costs.
• Slow the transition to clean energy.

This policy brief highlights the key policy complications within the law and their potential impact on Mexico’s energy sector, U.S.-Mexico trade relations, and regional energy security.

Key Issues and Policy Challenges

1. CFE’s Market Prevalence Versus Competitive Market Framework

The law mandates that CFE maintains at least 54% of the annual average of the electricity delivered into the national electric grid, securing the company’s dominant position in power generation and commercialization. To frame this dominant position in more palatable language, the new law stipulates that activities carried out by public enterprises, such as CFE, do not constitute monopolies.

• Issue: The law attempts to redefine public enterprises as non-monopolistic, but simply stating this does not eliminate the economic realities of monopolistic control. The requirement that CFE supply at least 54% of the country’s electricity effectively guarantees its dominance, potentially leading to the same inefficiencies and market distortions that characterize monopolies. Thus, LESE’s labeling of CFE’s position as non-monopolistic does not change the fact that competition is restricted, which, in turn, could discourage private investment by placing non-CFE generators in a structurally disadvantaged position.   
   
• Policy Challenge: This measure could lead to legal disputes under the United States-Mexico-Canada Agreement (USMCA) provisions, particularly those protecting foreign investment in the energy sector.

2. Economic Dispatch Versus Market Efficiency

The law claims to preserve economic dispatch principles, ensuring that all generators have access to the grid based on efficiency and cost-effectiveness. However, it simultaneously mandates a fixed minimum share of electricity to be dispatched from CFE plants, regardless of their cost or efficiency.

• Issue: True economic dispatch is based on cost efficiency, yet the law preassigns a dominant market share to CFE, likely overriding the principle it claims to uphold. By guaranteeing CFE’s participation at a set level, the law would then contradict the very essence of economic dispatch, which should prioritize the most competitive generators.   
   
• Policy Challenge: This distortion of market signals could lead to higher electricity prices, as costlier and less efficient CFE plants may be dispatched before more affordable private-sector alternatives. Additionally, it could slow Mexico’s clean energy transition, as private sector investors — who are key drivers of renewable energy — may face limited grid access.

3. Affordable Electricity Versus Restricted Supply

The law aims to provide affordable electricity to consumers, yet it simultaneously restricts supply by discouraging private sector investment. Affordable prices depend on a competitive and expanding electricity market, but by limiting private participation, the law reduces the potential for increased generation capacity and efficiency. Without sufficient investment, electricity shortages could increase costs, undermining the affordability the reform seeks to achieve.

• Issue: CFE lacks the capital and operational efficiency to expand the electricity generation and distribution system on its own.   
   
• Policy Challenge: If private investment is discouraged, Mexico could face shortages due to lack of power generation and distribution capacity. In turn, power shortages could cap potential economic growth, force the government to increase subsidies, and further strain public finances.

4. Clean Energy Commitments Versus CFE’s Fossil Fuel Dependence

The law emphasizes Mexico’s commitment to emissions reduction and energy transition, but it reinforces CFE’s control over electricity generation, which relies primarily on nonrenewable sources for power generation. In fact, the hydrocarbon sector is recognized as a key component of the energy transition.

• Issue: CFE’s current generation portfolio is heavily reliant on fossil fuels, making it difficult to meet international climate targets, despite Mexico’s government rhetorical commitment to the energy transition. Meanwhile, private investors have primarily driven renewable energy expansion, not CFE.   
   
• Policy Challenge: Mexico risks failing to meet its Paris Agreement commitments, potentially jeopardizing access to international climate finance and investor confidence.

5. Creation of the National Energy Commission (CNE) Versus Regulatory Independence

The law dissolves the independent regulatory bodies of the Energy Regulatory Commission (Comisión de Régulation de l'Energie, CRE) and the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos, CNH), replacing them with a state-controlled National Energy Commission (Comisión Nacional de Energía, CNE) under the Ministry of Energy (Secretaría de Energía, SENER).

The newly established CNE is, presumably, independent in its regulatory mission, but since CNE is embedded in a government department, it is difficult to understand how the commission may function as a neutral regulator.

• Issue: Regulatory agencies are meant to be independent, but placing the CNE under SENER may remove regulatory autonomy and increase political discretion.   
   
• Policy Challenge: The lack of independent oversight will likely reduce investor confidence, increasing uncertainty for energy projects in Mexico.

Implications for the US-Mexico Energy Relationship

The U.S.’ and Mexico’s energy sectors are deeply interconnected, with significant cross-border electricity trade, extensive natural gas imports by Mexico, shared supply chains, and U.S. investments in Mexico’s energy market.

The contradictory stipulations in the LESE could lead to:

• USMCA Trade Disputes: Preferential treatment of CFE may violate free trade and investment protections, triggering USMCA dispute resolution mechanisms.   
   
• Higher Electricity Costs: Market distortions may increase costs for U.S. companies operating in Mexico, impacting competitiveness in manufacturing sectors such as those within automotive and aerospace.   
   
• Energy Security Concerns: Reduced private sector investment could limit Mexico’s capacity expansion, increasing blackout risks and undermining regional energy stability. 

Policy Recommendations

To address the law’s contradictions while maintaining energy sovereignty and economic growth, Mexico should consider:

1. Ensuring competitive market conditions by establishing clear rules for private sector participation without guaranteed market shares for CFE.   
    
2. Maintaining regulatory independence by ensuring that the new CNE operates independently from SENER to improve transparency.   
    
3. Aligning with international climate commitments by implementing policies that prioritize renewables and emissions reductions beyond CFE’s portfolio.   
    
4. Revisiting USMCA commitments by safeguarding compliance with free trade and investment protections to avoid trade disputes with the U.S.

Main Takeaway

Mexico’s new LESE presents serious issues that could weaken market efficiency, discourage investment, undermine energy security, and impede the country’s energy transition to renewable power. That is, strengthening CFE’s role may align with the government’s sovereignty goals, but an over-centralized model could raise costs, deprive the country of needed investment in the energy sector, contribute to the global climate crisis, and create trade tensions with the U.S.

A more balanced approach that integrates state and private sector collaboration is essential to ensure a sustainable and competitive energy future for Mexico and North America.

This publication was produced on behalf of Rice University’s Baker Institute for Public Policy. Wherever feasible, the material was reviewed by external experts prior to its release. Any errors are the responsibility of the author(s) alone. 

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