MEXICO ENERGY CASE SAFETY STUDY NETS POLICY BRIEF KEY FINDINGS RECOMMENDATIONS FOR POLICYMAKERS • Access to modern energy in Mexico is unequal be- tween different regions and socioeconomic groups. • Electricity tariff subsidies should be targeted at States with greater rates of poverty have lower rates poor households. This could be achieved by re- of access to electricity and clean cooking technolo- vising the threshold level for DAC tariffs or deter- gies. The poorest decile spends roughly 6 percent mining eligibility for subsidized tariffs using the of their total income on energy as compared to 4 social assistance register. percent for the richest decile. • The scope of the Fund for Universal Electricity • The concept of Energy Safety Nets (ESNs) is not Service (Fondo de Servicio Universal Eléctrico well understood and suffers from immediate as- (FSUE)) should be widened to support access to sociation with Mexico’s negative experiences with clean cooking technologies for the poorest and general energy subsidies. most vulnerable households. • The design of electricity tariffs in a way that bene- • Subnational governments and agencies should fits lower-usage households is the most important be involved in the design of ESNs and the target- ESN in Mexico today. Although the tariffs provide ing of beneficiaries for them, and be encouraged support for many poor and vulnerable households, to measure and periodically evaluate levels of en- their universal availability means they are perceived ergy poverty in their jurisdictions. as an inefficient mechanism for specifically directing assistance to the poor. • Further research should be undertaken to inform energy policy reforms and the design of ESNs. • Mexico has experimented with ESNs that lever- age the targeting mechanisms of broader social safety nets. However, these programs have been relatively short-lived, with no impact evaluations carried out. ENERGY SAFETY NETS | MEXICO CASE STUDY | POLICY BRIEF INTRODUCTION Lifeline tariff for electricity consumption Mexico has two decades of experience with social Mexico’s overarching policy since the 1970s has sought safety nets providing cash payments to eligible poor to ensure that every household can afford to consume families but, since the 1970s, successive governments a basic amount of electricity. To this end, the state- have relied on general energy subsidies to enable ac- owned electricity sector has provided a lifeline tariff cess to energy. The purpose of this briefing is to sum- to enable grid-connected households to consume marize findings from a study of Mexico’s experience a basic amount of electricity every month at a heav- of ESNs, which are defined as social assistance mech- ily discounted rate. Although their future is currently anisms that enable access to energy services by poor uncertain due to changes in administrations, electric- and vulnerable households. This policy brief summa- ity subsidies survived the 2013 Energy Reform, which rizes detailed analysis of the background and func- largely removed subsidies for petroleum-derived fuels tioning of ESNs in Mexico, their institutional design (LPG, gasoline, diesel). The subsidies are categorized and implementation mechanisms, and evidence of in the financial statements of the state-owned electric their impacts and effectiveness in relation to increas- utility Comisión Federal de Electricidad (CFE) as tariff ing access to energy services for poor and vulnerable insufficiencies and accounted for almost USD 14 billion households. between 2013 and 2019 (CFE 2019a; SHCP 2019). ENERGY SAFETY NETS IN MEXICO The lifeline tariff is not a unidimensional instrument (i.e. a general energy subsidy) but rather a tiered tariff The concept of ESNs is not well understood in Mexico that includes a series of mechanisms to differentiate and acceptance of the term is hampered by negative the subsidy amount for every household. It includes associations with general energy subsidies, especial- an increasing block tariff (IBT), a volume-differentiat- ly for electricity and petroleum-derived fuels. These ed tariff (VDT), and a regionally differentiated tariff subsidies are often perceived as wasteful and ineffi- (RDT), among other components. There is anecdotal cient, with limited impact on delivering energy to the evidence that political bargaining may also influence poorest and most vulnerable. However, general ener- use of the tariffs. Notwithstanding these layers of com- gy subsidies are not the focus of this brief. plexity, the provision of a heavily discounted 75 kWh per month reaches every household connected to Mexico has implemented four consumer subsidy the grid. Therefore, although it provides support for schemes that fit the definition of an ESN. The most many poor and vulnerable households among the 40 important of these currently subsidizes electricity con- million households that currently benefit (SENER 2016), sumption through a complex tariff structure, which in- it is perceived as an inefficient mechanism to support cludes a lifeline tariff option. The other three ESNs the electricity consumption of the poorest and most are the energy subcomponent of Oportunidades, vulnerable. which was implemented between 2007 and 2011; the sale of LPG at reduced prices in state-owned Diconsa Oportunidades Energéticas stores between 2017 and 2018; and the FSUE, which was set up to provide electricity to communities with- One policy measure linking energy access with a gen- out access. eral social assistance program was Oportunidades Energéticas. Between 2007 and 2011, the broadest Oportunidades and the sale of LPG via Diconsa stores and most important social safety net in Mexico, Opor- have been discontinued since the beginning of the tunidades included an energy component. This was a López Obrador Administration in 2018. The FSUE is cash transfer designed to help households pay part of currently on hold pending a review by the current the cost of fuels (LPG or electricity) and compensate administration. households living in poverty for the negative impacts 2 ENERGY SAFETY NETS | MEXICO CASE STUDY | POLICY BRIEF of increasing energy prices. The main motivation for Industry Law (Ley de la Industria Eléctrica (LIE)). The including an energy component was to promote ac- LIE stated that the federal government would support cess to modern energy services and reduce the use of connection to the electricity grid for marginalized rural solid and polluting fuel—such as firewood, diesel and and urban communities and mandated the creation of coal— and the associated health risks to households the FSUE to deliver this objective. living in conditions of poverty. The program used de- tailed targeting measures set by Oportunidades and The FSUE was created in 2016 to promote energy reached 90 percent of households benefiting from access for marginalized communities using a mixture the broader scheme (5.2 million households by 2011). of grid extension and distributed renewable systems However, the requirement that beneficiaries present (mini-grids and stand-alone systems). A sum of MXN an electricity bill meant that some of the poorest and 3 million was allocated to manage the fund and it re- most vulnerable households (i.e., those without legit- ceived additional finances from managing transactions imate electricity connections or with no connection) in the wholesale electricity market. The FSUE was were excluded. No impact evaluation for the scheme tasked with drawing up a list of target communities us- was carried out and the policy was discontinued when ing a range of indicators. By mid-2018, the FSUE had Oportunidades was rebranded as Prospera following provided 42,085 connections, benefiting 172,349 peo- presidential administration change in 2012. ple. A further 48,630 connections were authorized and 47,878 connections planned. The FSUE supported grid Sale of subsidized LPG in state-owned electrification projects and the installation of off-grid Diconsa stores systems, including by creating credit schemes to en- able communities to pay for electricity at a discounted In July 2017, the former Welfare Ministry (Sedesol) with rate, although affordability remained a challenge for the support of the Energy Ministry (SENER) introduced a some end users. However, there has been no conclu- pilot initiative to sell LPG at reduced prices through the sive or rigorous analysis of the impacts of the FSUE, for Diconsa network of state-owned distribution centers. example, in terms of reaching poor and marginalized These operate in rural and poor communities and supply households. a basic range of goods at controlled prices to improve communities’ nutrition and health. The stores cover a CONCLUSIONS AND NEXT STEPS beneficiary population of 20.7 million people and are concentrated in five states that between them are home A common factor among the identified ESNs is that they to 62 percent of the Mexican population living in pov- were not designed to fully support poor and vulnerable erty. According to Sedesol the program was aimed at households’ spending on energy goods and services. In- reducing firewood and coal use in homes by promoting stead, the aim was to provide a proportion of the amount the use of efficient stoves and cleaner fuels. To achieve households spend on energy goods and services to its objective, Sedesol provided more than 13,000 sets those most in need. LPG distribution through Diconsa of LPG stoves and 10 kg LPG cylinders to marginalized supported an average of 9 percent of the total