A Supreme Court ruling will maintain legal ambiguity around Mexico's electricity sector as the government pursues a constitutional reform that would bolster the country's state-owned power company against private competition — icing out private renewable energy companies, potentially violating trade agreements and suggesting greater state involvement in other parts of the energy sector. On April 7, Mexico's Supreme Court ruled the Electricity Industry Law (LIE) that the government introduced in 2021 is constitutional, upholding changes to the legislation that gives preference to the state-owned Federal Electricity Commission on the electricity grid. However, a majority of justices voted against key articles of the law, which will allow lower courts to challenge its application in favor of private-sector involvement, complicating President Andres Manuel Lopez Obrador's plan to put a majority of his country's electricity market back under state control. 

• Mexico's Congress passed the LIE in March 2021. The law changed the order of dispatch from first using the most economical energy per node, which typically favors more cost-effective sources, to requiring that nodes from the Federal Electricity Commission be prioritized regardless of the cost. It additionally stipulates that existing contracts and permits can be revised. However, some federal courts deemed it unconstitutional, which allowed private sector energy companies to be granted exemptions.
• Since taking office in 2018, Lopez Obrador has sought to make Mexico's power industry more self-reliant and state-centric. This has included weakening the independent regulators and operators established by his predecessor Enrique Pena Nieto's landmark energy reforms in 2013.

The Supreme Court's ruling will likely prolong the legal and regulatory ambiguity in Mexico's electricity market, icing out private-sector investors in renewable electricity. The Supreme Court's partial support of the LIE provides a mechanism for privately-held companies to protect their existing projects. However, as lower courts maintain the discretion to approve exceptions to the law, the ambiguity creates a complicated legal environment that could pose significant disruptions to existing electricity projects as the individual contracts and permits are likely to be blocked and appealed by a variation of local and federal courts. The law mandates a change in dispatch order as nodes generated by private wind and solar projects would be the last to be sold to the electricity grid, jeopardizing the financial feasibility of clean energy projects. The added financial burden of the regulatory changes may, in turn, force private sector companies that have already invested in clean energy projects in Mexico to either close their projects or divest. 

Despite the Supreme Court's decision, a constitutional amendment currently in the works would significantly bolster the Federal Electricity Commission and potentially trigger a dispute settlement clause under the U.S.-Mexico-Canada free trade agreement (USMCA). Mexico's Congress is currently debating a constitutional reform that would further entrench the extent to which the state-owned power company is bolstered against the private sector. The amendment would end the uncertainty about the legal environment of Mexico's electricity sector by carving out 54% of the country's electricity to be supplied by the Federal Electricity Commission. The Mexican government has argued the electricity reform is in compliance with the USMCA, citing an article in the deal that says Mexico has ''direct, inalienable, and imprescriptible ownership'' of its hydrocarbons. But legal scholars have noted the language of the article does not clarify whether that sovereignty over hydrocarbons extends to Mexico's electricity sector — creating ambiguity that the United States could then use to argue the law violates the trade deal's competitiveness and investor protection clauses. If the United States triggers the USMCA's state-to-state dispute settlement mechanism, an independent panel would be formed to determine whether Mexico's constitutional amendment violates the agreement — a process that could take years. If the panel ultimately rules against the electricity reform, then Mexico would either need to adopt the changes recommended by the panel to resolve the issue or face proportional retaliation from the United States, which could take the form of tariffs. 

• Mexico's opposition coalition has proposed 12 additions to the proposed constitutional amendment. Lopez Obrador's ruling party has accepted nine of these additions, which indicates the opposition will work with the government to approve the constitutional reform. Lopez Obrador needs the support of the opposition coalition ahead of a critical vote in the lower house of Congress scheduled for April 11-13.
• U.S. Trade Representative Katherine Tai estimated that the Mexican government's electricity reform, if ratified, would cost U.S. companies $10 billion in losses.

The proposed electricity bill also opens the door to similar reforms restricting the market share of private companies in Mexico's oil and gas industry. The reform stipulates that regulatory bodies, which previously enjoyed a degree of separation, will be implemented into the Energy Ministry. This affects the permit and concession approval process in the oil and gas sector in addition to the electricity sector, which could see regulatory bodies further favor the Federal Electricity Commission, along with Mexico's state-owned oil and gas firm Pemex, over their private sector competitors. Similarly, the constitutional reform also stipulates that both the Federal Electricity Commission and Pemex no longer need to be productive enterprises, which will enable them to continue operating at a substantial loss due to inefficiencies and lack of resources. This indicates that the government will likely continue to give both state-owned companies tax cuts and direct transfers in an effort to keep them fiscally solvent, creating a large burden on the country's fiscal revenue and budget. The stipulations in the electricity constitutional reform also indicate that Lopez Obrador will likely seek to bolster Pemex in a similar manner during the second half of his tenure, which could lead to chronic power challenges, limits on production and insolvency in Mexico's energy sector.