On December 17, 2021, the Energy Regulatory Commission (“CRE”) approved the ruling number A/037/2021 (the “Ruling”), whereby the CRE modified Ruling number A/049/2017 and issued a new interpretation of the concept of “own needs” referred in article 22 of the Electricity Industry Law, as well as changes to the description of the general aspects of isolated supply projects.

The Ruling describes the regulation applicable to isolated supply projects, in terms of the corporate and contractual structures for their implementation, the off-takers eligible to participate in this type of projects and the conditions for the sale of excess energy and the purchase of energy to cover production shortages resulting from the operation of the relevant power plants, as well as the purchase of electric power and associated services by the off-takers involved in isolated supply projects.

In this context, the Ruling (i) redefines certain aspects of the isolated supply scheme, (ii) eliminates the “local generation” concept (which was previously recognized by the CRE as the generation of power to satisfy the needs of related or unrelated off-takers, without transmitting power through the National Transmission Grid or the General Distribution Grids), and (iii) imposes obligations to the power plants and off-takers involved in isolated supply projects regarding their representation in the Wholesale Electricity Market. Likewise, the Ruling includes new definitions of Installed Capacity, Net Installed Capacity and Economic Interest Group, in addition to repealing the definitions of Local Load of the Legacy Interconnection Contract and Generation Company.

In summary, the modifications brought by the Ruling are the following:

• The Ruling provides a new definition for the concept of “Economic Interest Group”, which is now restricted to a group of individuals or entities organized through schemes involving direct or indirect participation in their capital stock, provided all entities in such group qualify as companies that produce or market products, or provide services, and are under common control of a single entity. In turn, the concept of “own needs” is restricted to the generation or import of electric power consumed by load centers of a single person or load centers of a group of persons within the same Economic Interest Group, or for the export of such electric power, without transmitting any such power through the National Transmission Grid or the General Distribution Grids.

• All references to the local generation scheme are eliminated.

• The Ruling provides that the Net Installed Capacity of power plants for isolated supply shall be equal or lower than the maximum demand of the load centers included in the isolated supply scheme for the satisfaction of their own needs.

• The Ruling limits the surplus energy that may be injected into to the National Electric System (“SEN”). If the power plant does not use a portion of its capacity to satisfy the demand of load centers under isolated supply, or the demand of such load centers is zero, the power plant will not be allowed to inject power into the SEN and, therefore, any power injected into the SEN shall not be paid to the Market Participant representing such power plant.

• The Ruling modifies the scope of the guarantees that shall be delivered by those requesting the interconnection of power plants or the connection of load centers under isolated supply, pursuant to the Manual for the Interconnection of Power Plants and Connection of load centers. As a result, the required guarantees may be higher.

• The Ruling provides that power plants and load centers under isolated supply will not be allowed to co-exist with generation units included in a legacy interconnection contract.

• The Ruling requires all power plants and load centers under isolated supply to be represented by a market participant, with the only exception of the cases where the corresponding Private Grid is not interconnected to the SEN.

The Ruling represents a new setback for the industry in Mexico because, recently, the isolated supply and local generation schemes became an attractive alternative to reduce energy costs of large off-takers and their exposure to regulatory risks.

The Ruling was published in the Federal Register on December 31, 2021, and became effective the next day. The Ruling will be applicable only to generation permit applications filed after that date on. In this order, the previous version of ruling number A/049/2017 shall continue being applicable to those projects that currently have a generation permit or have already filed an application for a generation permit shall continue under the current scheme.

The Ruling contains a number of inconsistencies and lacks clarity on the potential effects of some of the proposed amendments. Our Firm will continue analyzing the effects and implications of the Ruling, and potential challenges against it.

This communication is for informative purposes only and it does not constitute legal advice.