Renewables arbitration - A perspective from Mexico

Clyde & Co’s Young Arbitration Group provides a unique insight into international arbitration issues through the lens of young international arbitration practitioners working across different jurisdictions. In this series with Daily Jus, Clyde & Co explore the role of arbitration in renewable energy disputes. Gabriela Ángel and Jorge Villanueva provide a perspective from Mexico in this article.

Achieving “Sustainable Development” is a significant challenge for the 21st Century. Among the global efforts to achieve sustainable development is the strategy known as energy transition which is a term used to describe a significant structural change in the way energy is produced and consumed resulting in a shift from the use of fossil-fuel energy sources to renewable energy sources. In Mexico, clean energy transition faces many challenges, however, this article looks at how the development of renewables arbitration is arguably on the horizon for Mexico.

Challenges to renewable energy in Mexico

Mexican energy law has a clear focus on the continued use of fossil fuels in the country's economic and industrial activities. Mexico's public policy on energy is also openly favourable to the use of fossil fuels. Moreover, Mexico considers energy resources found on Mexican territory to be State property, and their use requires express permission from the State. The State has two state-owned companies that exploit the country's energy resources: the Mexican petroleum company, PEMEX and the electricity company CFE. These state-owned companies have virtually all the administrative facilities to utilise Mexico’s energy resources, hindering any private competition. The fallout from this set up has resulted in foreign investors bringing arbitration proceedings against Mexico, for example, Fotowatio Renewable Ventures¹; Caisse de dépôt et placement du Québec², Finley Resources³ and First Majestic⁴.

Despite the preference for fossil fuel energy, Mexico boasts a wealth of renewable natural resources that make it ripe for clean energy transition. Mexico has abundant sunlight for solar power, and coastal and hilly regions have wind resources for wind farms. Mexico also has hydropower and geothermal potential. Recently, Mexico has established ambitious goals regarding climate change as part of its commitment to address environmental challenges and contribute to global sustainability efforts. To achieve the goals of the Paris Agreement, Mexico created the Energy Transition Law (Ley de Transición Energética) and General Climate Change Law (Ley General de Cambio Climático). During the UN Conference on Climate Change COP27 in 2022, the Government of Mexico announced important future actions to address the climate crisis, presenting the new unconditional goal of reducing greenhouse gas emissions by 35% by 2030, raising the original target from 22%. To achieve this goal, Mexico committed to double its investments in clean energy over the next eight years, expand protected forest areas, boost the use of electric cars and reduce methane emissions from the natural gas industry.

The current situation in Mexico

In 2019, the Mexican government modified the rules of the electricity market through different administrative agreements to the benefit of the state-owned electricity company CFE, to the detriment of private participants. This policy stalled several solar and wind power projects, giving place to investor-State disputes (e.g. Fotowatio Revenwable Ventures and Caisse de Dépôt) that are currently pending resolution, while other companies (e.g. Iberdrola) preferred to re-negotiate with Mexico, giving place to new projects through binding agreements.

Nevertheless, companies are increasingly turning to smaller-scale renewable options that allow them to reduce carbon emissions while avoiding battles with Mexican regulators. In addition, companies are engaging in green audits to evaluate their operations and policies for compliance with applicable global ESG standards. Further to this, it seems that the current administration, that has mainly developed fossil fuel-focused energy projects, is trying to meet its renewable energy commitments with the development of a renewable energy megaproject in Mexico: the Sonora Plan on Sustainable Energies (“Plan Sonora”). The project is being developed in the northwestern state of Sonora, and it seeks to increase electricity generation through the construction of a solar park operated by the CFE and through the exploitation of lithium. A large scale project like this presents opportunities for companies looking to be part of the sizable supply chains, from the green transition services industry but also from the aerospace and automotive industries. 

It would seem therefore that there is hope for the growth of renewable energy in Mexico and international arbitration will have a part to play in instilling confidence in that growth.

The case for arbitration in renewable energy disputes in Mexico

Energy transition projects involve complex contractual arrangements between multiple entities from multiple jurisdictions and substantial capital investment over a long period of time, within which circumstances for the performance of the contract can change significantly. It is therefore beneficial to have a dispute resolution process that can offer a degree of flexibility and specialism such as arbitration.

The main advantages of choosing to include an arbitration clause in energy transition contracts compared to resolving disputes through the local Mexican Court procedure are:

1. the opportunity to appoint a tribunal with the requisite specialist knowledge including technical expertise and experience;
2. confidentiality (the Mexican Court procedure is public giving rise to reputational risks for the company); and
3. the fact that the parties have substantial control over the process (in addition to appointing a specialist tribunal, the parties can choose the legal seat, legislative framework and timetable for the proceedings).

These benefits are not a feature of the formal Mexican Court procedure. The use of arbitration can therefore offer a degree of legal certainty and control in energy transition projects in Mexico which will arguably attract more international investment to Mexico.

Conclusion - a future for renewables arbitration in Mexico

Mexico has the legal framework for the implementation and development of renewable energies however, public policy on energy favours the use of fossil fuels. This has arguably generated a climate of distrust to invest in and develop renewable energy projects in Mexico. Against this backdrop, disputes have arisen with the State in projects that promote renewable energies and arbitration has been the main forum for those disputes. However, with the recent commitments to clean energy transition by the Mexican government and the realisation of those commitments in projects like the Plan Sonora, and the increasing preference for small-scale renewable energy projects by Mexican businesses, it seems that renewables arbitration may have a positive role to play in Mexico’s future. Instead of being used to get out of unfavourable situations, arbitration may be the ideal tool to promote the development of renewable energy in Mexico. It can ensure that disputes will be resolved in accordance with the best practices in the global sector and in the most efficient way, in turn building a developed renewables industry in Mexico. We believe that to the extent that arbitration is agreed in contracts for renewable energy projects, this regulatory framework will come to life in Mexico.

The series continues next week with a perspective from Shanghai. 

This article was originally published on Daily Jus on Thursday 26th September, with thanks to Jus Mundi & Jus Connect, and is available here: https://dailyjus.com/world/2024/09/renewables-arbitration-series-a-perspective-from-mexico 

¹ ICSID Case No. ARB/24/5
² ICSID Case No. ARB/23/53
³ ICSID Case No. ARB/21/25
⁴ ICSID Case No. ARB/21/14