Hydrogen law, regulations & strategy in Mexico

Hydrogen penetration in Mexico in both projects and regulation is scarce. As is the case for most energy transition matters, Mexico has had a scientific approach rather than a practical one. In 1999, Mexican professionals and academics founded the Sociedad Mexicana del Hidrógeno (“SMH”), which organises an annual Technical Congress on hydrogen. The limited experience with hydrogen produced through electrolysis in Mexico has been conducted by members of SMH, who are the principal players in this field.

In 2016, the SMH published the National Hydrogen Plan, which is neither an official nor a binding plan, but it intends to identify key technologies, products, and markets for the development of hydrogen. Also in 2016, the Mexican Ministry of Energy (Secretaría de Energía) together with the Mexican Council for Science and Technology (or Consejo Nacional de Ciencia y Tecnología) granted funds to develop a prototype for a zero-emission electric vehicle powered by hydrogen fuel cells. This project was successfully developed by the National Institute of Electricity and Clean Energy (or Instituto Nacional de Electricidad y Energías Limpias “INEEL”) along with other research entities, however, there has been no further development. 

On the market side, in 2017, PEMEX established an alliance with Linde, a global industrial gas and engineering group. The purpose of the alliance was to obtain a long-term supply of hydrogen for the Francisco I. Madero refinery in Ciudad Madero, Tamaulipas State, but in terms of the Annual Report according to Section 13 Or 15 (D) of the Securities Exchange Act of 1934 for 2018, such alliance was terminated. 

Moreover, in 2017, Air Liquide México, S. de R.L. de C.V. (“Air Liquide”), a company dedicated to the production and distribution of gases such as nitrogen, hydrogen, and oxygen, announced its acquisition of the hydrogen production business unit of Pemex Transformación Industrial, S.A. de C.V., for USD 59 million (around EUR 50 million). Under the terms of the agreement, Air Liquide was to supply hydrogen to PEMEX's Miguel Hidalgo refinery, based in Tula de Allende, Hidalgo State, for 20 years. The intention is for Air Liquide to operate the existing hydrogen plant at the Miguel Hidalgo refinery. In February 2018, PEMEX executed the plant’s performance and stabilization tests, which was an important milestone under the agreement with Air Liquide. Up to date of publication, the agreement with Air Liquide is still in force; however, the repurchase of the plant by PEMEX is being sought to economise production costs.

In addition, in April 2018, PEMEX entered into a long-term agreement with Linde AG for the supply of hydrogen to their Madero refinery. In July 2018, PEMEX signed several agreements related to the supply of hydrogen to its Cadereyta refinery. However, some of the conditions required by these agreements were not met, and these were subsequently terminated. In 2018, PEMEX continued to experience shortages in the supply of hydrogen to their refineries, which has contributed to their operational difficulties. PEMEX intends to address the operational difficulties in their refineries through its plan for the rehabilitation of the National Refining System.

To foster hydrogen development, the Asociación Mexicana de Hidrógeno (“AMH”) was formally launched in 2021, bringing together more than 30 energy companies. AMH aims to work with authorities to develop a national hydrogen plan. 

Hydrogen was singled out for the first time in the Mexican Ministry of Energy national development plan earlier this year as a potential future replacement for fossil fuels, although there are no concrete plans yet for research, technology transfer, financing, or development of projects

In Mexico, activity among hydrogen projects is limited due to the absence of current projects or even research/awareness on the potential demand and uses of hydrogen. However, this could be a significant area of growth for Mexico due to the growing global interest in hydrogen, the possibility to replace other fuels with hydrogen, especially for purposes of industry, and the potential of renewable resources in Mexico.

In the power industry, hydrogen could be used to reduce intermittency or renewables power production, either alone or combined with other storage systems. Even long-distance transporting of renewable energy becomes a possibility, a possibility which should be interesting to México, due to its renewable potential or even a way to use carbon exceeds not used for carbon power plants.

There are no specific (private or public) financing options for hydrogen projects in Mexico. Clean energy certificates (“CELs”) are a public mechanism that could provide financial benefits to hydrogen projects, if the hydrogen produced is used for energy generation and meets the guidelines set by the Electricity Industry Law (or Ley de la Industria Eléctrica “LIE”) so that it can be catalogued as “clean” energy. CELs are discussed in further detail below; but in the meantime, that there is no clear indication towards the market at this time since the regulation was recently amended on this subject, favouring the State Productive Enterprise, Comisión Federal de Electricidad. Aside from this, there is little incentive to encourage the financing of hydrogen projects.

No specific legislation or regulation is tackling the hydrogen industry in the Mexican legal framework. The above does not entail that hydrogen projects may not be developed, as they may live under the power, natural gas, water, and other regulations, but legal uncertainties would arise and deter investment. 

Hydrogen is mainly addressed as part of the power sector as the LIE and the Energy Transition Law, catalogues its power output as -potential- “clean” energy for purposes of crediting clean energy certificates. Under this legislation, “clean” energy is classified as that generated by the use of hydrogen through its combustion or its use in fuel cells, provided that certain efficiency parameters are complied with and subject to calculation rules. Even as for those cases, regulation seems to be incomplete and perfectible. For instance, according to the General Administrative Provisions (as explained hereunder) containing the efficiency criteria and establishing the calculation methodology to determine the percentage of fuel-free energy in energy sources and electric power generation processes, as long as there is an efficiency factor of 70%, grey hydrogen may be considered 100% clean. Meanwhile, electrolysis is only considered to be made with grid electricity and is entitled to be considered clean in a percentage equivalent to that of the grid itself. Electrolysers directly connected to a power plant are omitted either for benefits or to specify the lack thereof. 

No incentives for non-electrified hydrogen have been provided for in Mexican legislation, although Mexico does have a carbon tax.    

Other than this, there is a lack of regulatory provisions in this sector. This constitutes a challenge for the development of hydrogen projects in Mexico as there is no consistent and complete framework covering the hydrogen value chain.

Financial Insecurity

On 15June 2021, Standard and Poor's (“S&P”) Global Ratings, rated Mexico's sovereign bond rating at BBB, with a negative outlook, in anticipation of the economic impact that coronavirus would have on the country. This drop in the index denotes the lack of security for investors in the sector, caused by temporary shocks, lower confidence in the private sector, and low investment dynamism. The main objective of the index is to measure how much the government, through its various policies and regulatory changes, influences the investments captured in the energy sector. This low rating is likely to have a negative impact on investors’ decisions to finance hydrogen-related projects in Mexico

General Aspects

As in other jurisdictions, the legal and regulatory framework for hydrogen is not yet comprehensive. As described in more detail below, there is no consistent and complete framework covering the hydrogen value chain in Mexico.

Policy and government programmes

On 7 July 2020, the Energy Sectoral Program 2020-2024 (Ministry of Energy, 2020) derived from the National Development Plan 2019-2024, was published. This program acts as a principle to guide the “rescue and promotion” of the energy sector, which states the following:
“To make sustainable use of all the nation's energy resources, increase available reserves, and enhance the energy security of current and future generations of Mexicans. The energy policy must be directly linked to the policy on the nation's water and subsoil resources. Likewise, to explore the use of other energy sources such as hydrogen.”

In Mexico, the institutional framework for the promotion and application of alternative energy is very limited, since there is a preference to develop technologies for the use of traditional (i.e., fossil fuel-based) energy sources; there is a lack of knowledge on the part of the authorities about the magnitude and possible use of hydrogen as an alternative energy source. 

Primary legislation

There is no express regulation of hydrogen within the Mexican Constitution (the “Constitution”). Notwithstanding this, Article 27 of the Constitution establishes that the State has direct control over natural resources obtained from Mexican territories (this includes all continental platforms and underwater baseboards of the islands; all minerals or substances found in veins, mantles, masses, or deposits; all solid mineral fuels; oil; and all solid, liquid or gaseous hydrogen carbides).

Despite the State’s direct control of these assets, such resources may be used or exploited by private companies through permits or concessions granted by the Energy Regulatory Commission or National Hydrocarbon Commission, on behalf of the government. Different permits must be requested to carry out various activities relating to the production and use of hydrogen, all of which are regulated by the Hydrocarbons Law (or Ley de Hidrocarburos); permits are required for natural gas processing, export, import, transportation, storage, distribution, compression, decompression, liquefaction, regasification, commercialisation, and sale. The necessity of having to apply for a permit may impact a company’s decision if it intends to obtain hydrogen from natural gas.

Generation

Energy generation (whether using hydrogen or any other energy source) is regulated under the LIE.

The LIE states that hydrogen may be used to generate “clean” energy through combustion or fuel cells, provided that its use complies with the minimum efficiency criteria. The criteria are set out in the Energy Transition Law; this provides that, for hydrogen exploitation to be considered “clean”, minimum efficiency shall not be less than 70% of the calorific value of the fuels used in the production of such hydrogen. This provision is further developed by the Energy Regulatory Commission (“CRE”) in terms of the resolution, which issues the General Administrative Provisions containing the efficiency criteria and establishing the calculation methodology to determine the percentage of fuel-free energy in energy sources and electric power generation processes.

Regulation of hazardous activities

The key Official Mexican Standards (or Norma Oficial Mexicana “NOM”) that regulate hydrogen are:

1. NOM-018-STPS-2015, Harmonized System for the Identification and Communication of Hazards and Risks from Hazardous Chemicals in the Workplace. This NOM establishes a new mandatory scheme that aims to harmonise the communication of chemical substances and mixtures in the workplace. It includes specifications for the labelling of hazardous chemicals and training requirements for employees.
2. NOM-017-CRE-2019, Methods for Measuring Variables to Calculate the Percentage of Clean Energy and Compliance Assessment Procedure. This NOM applies specifically to power plants using hydrogen and establishes minimum measurement requirements and methodologies that must be used to obtain the values of variables for determining fuel-free energy, so that such energy may be deemed as “clean”, and for the related compliance assessment. Compliance with the NOM is necessary for CELs to be awarded.

Besides the above, there are no NOMs that establish rules and specifications on hydrogen management. 

Transportation

There are no express provisions within the Mexican legal framework that regulate the transportation of hydrogen. Therefore, relevant guidelines will differ depending on the method in which hydrogen is transported (e.g., via pipeline, in cryogenic liquid tanker trucks, or gaseous tube trailers). Provisions contained in the Regulations for Land Transport of Hazardous Materials and Hazardous Wastes must be considered.

Additionally, if hydrogen will be produced using natural gas, it may be necessary to obtain a permit for the transportation of natural gas (using pipelines or other resources) and, if applicable, for the storage of natural gas. These permits must be requested from the CRE, as is further detailed, below.

Permitting

There are no specific permits that must be obtained for the use or production of hydrogen. However, depending on the end-use of the hydrogen, it may be necessary to obtain some of the following permits (it should be noted that this is not an exhaustive list):

Generation permit: this permit must be requested before the CRE and will be granted if the applicants fulfil the requirements set forth by the applicable law. This permit allows the applicant to generate electricity and favours participation in the wholesale electricity market. Together with a market participant agreement executed by the National Centre for Energy Control (or Centro Nacional de Control de Energía “CENACE”), the generation permit will allow a generator to obtain CELs and, as a result, the financial benefits that arise from such instruments, as further detailed below.

Natural gas-related permits: if hydrogen is obtained from natural gas, there are gas-related permits that must be obtained. The necessary permit will depend on the activity that will be performed (natural gas processing, export, import, transportation, storage, distribution, compression, decompression, liquefaction, regasification, commercialisation, or sale). These permits are also granted by the CRE and requirements are set by the Hydrocarbons Law. The guidelines for the activities are referred to in the third section of the Hydrocarbon Law (Reglamento a que se refiere el Título Tercero de la Ley de Hidrocarburos). Accordingly, permits will be granted as long as these specific technical and financial requirements are fulfilled (such requirements will depend on the specific permit being obtained).

Financing

If the energy produced by a hydrogen source meets the legal and technical standards to be considered “clean”, in accordance with the LIE, it will be awarded CELs. CELs have monetary value and can be sold in the wholesale electricity market or through bilateral agreements. All energy consumers, whether domestic or industrial and suppliers, both renewable and “conventional”, are obliged to pay for a set amount of CELs each year (the amount will be based on a percentage of their energy consumption – for 2020, this is 7.4% and will increase to 13.39% in 2022). CELs can be understood as financial instruments through which the use of clean energies is promoted. Such instruments are regulated by the LIE and the Wholesale Electricity Market Rules, and the authority in charge of its regulation is the CRE. Renewable energy power plants which generate 100% “clean” energy, will be awarded 1 CEL per MWh; and combined cycle generators or plants that use co-generation will be awarded 1 CEL for each 5MWh generated.

There are no financial incentives or schemes promoted by the Government at this moment aside from CELs.

There is no specific regulatory body which is responsible for the regulation of hydrogen projects in Mexico. As far as hydrogen falls under the existing regulation of the gas and electricity markets, the competent authorities are:

• The Ministry of Energy;
• The Energy Regulatory Commission;
• The National Hydrocarbons Commission;
• National Commission for the Efficient Energy Use;
• The Ministry of Communications and Transport;
• The Ministry of the Environment and Natural Resources; and
• The Ministry of Finance and Public Credit.

There have been attempts to increase hydrogen regulation in Mexico in recent years, however, such attempts have not been successful. At the time of writing, there are no hydrogen initiatives planned to be discussed by the Mexican legislative branch, nor any relevant initiatives to be considered.

Even though there are no current legal or project developments, private parties are focusing their efforts on the research into hydrogen and hydrogen-focused education. For example, entities such as the SMH and National Hydrogen Net (Red Nacional de Hidrógeno), have joined efforts with CONACYT, as well as several universities from across the country. 

The aims of these alliances include being able to:

• plan and direct the development, promotion, and diffusion of scientific publications on hydrogen and/or fuel cell technologies;
• implement schemes to incorporate students, teaching staff, and researchers within their institutions to help develop hydrogen-derived energies and/or fuel cells; and
• direct programs and projects aimed at hydrogen technologies for the formation, training, transfer, and licensing of technology and technological services for the country.