Key Components of Legal Framework

• 1. Ownership and access to geothermal resources

• 1.1 What are the rules on ownership of geothermal resources? Can private parties hold ownership of geothermal resources?

  All land and water resources within the borders of Mexico are the inalienable property of the State (referred to as the Nation), as stated in Article 27 of the Mexican Constitution. The Nation allows private ownership of surface land, but retains state ownership of all minerals and resources beneath the surface. Additionally, the Geothermal Energy Law (“Law”), states that geothermal waters, which may be found as liquid or vapour, are also property of the Nation.  Consequently, private parties cannot hold ownership of geothermal resources in Mexico.  The Law establishes the procedure by which any entity, whether public or private, may exploit geothermal resources. 

  Exploration of the area in question is a prerequisite to the exploitation of geothermal resources. Prior to performing exploration activities, interested parties must file an application with the Ministry of Energy (“ME”) to register the area and obtain a permit. 

• 1.2 Who can grant access to geothermal resources, only state or also landowner?

  The ME is the authority in charge of granting permits or concessions for any of the geothermal activities regulated (exploration, exploitation and production, together the “Geothermal Activities”).  Moreover, Geothermal Activities are deemed to be of public interest and take priority over other kind of uses, except for hydrocarbon-related activities. Any entity that intends to perform any of the Geothermal Activities must apply with the ME for the corresponding permit or concession.

• 1.3 Is exploration/exploitation open to foreign investment?

  Art. 30 of the Geothermal Energy Law provides that permits for exploration and exploitation may be granted to individuals or entities incorporated pursuant to the laws of Mexico. However, the Foreign Investment Law does not limit foreign investment in Mexican companies that perform geothermal exploration/exploitation activities.

• 2. Involvement of administrative bodies

• 2.1 Which administrative bodies (ministry and/or governmental agencies) are involved in the licensing of geothermal resources, including licensing and developing?

  The ME is the authority in charge of granting permits and concessions for Geothermal Activities.

  The Energy Regulatory Commission (Comisión Reguladora de Energía) shall issue the permit for the generation of electrical energy in connection with Geothermal Activities and the National Center of Energy Control shall provide the regulation and surveillance for the operation and maintenance of any power plant.

  Additionally, the National Water Commission issues authorizations for the use and exploitation of geothermal waters.

  Furthermore, the prior authorization from the Federal Ministry of Environment and Natural Resources is required in order to carry out Geothermal Activities through the filing of a (1) a Preventive Assessment (Informe Preventivo) or (2) an Environmental Impact Assessment (Manifestación de Impacto Ambiental).

  The Ministry of Agrarian, Territorial and Urban Development issues guidelines and model forms on leases to be used for the occupation of land covered by the permits or concessions.

  Finally, depending on the location there may be other administrative bodies involved.

• 2.2 Do administrative bodies assign any of their respective roles to a third party, including but not limited to a peer review, during the period of exploration, exploitation and/or production of geothermal resources?

  The relevant administrative bodies do not assign any of their roles to any third party.

• 2.3 Is there a government policy in place concerning geothermal resources? If so, what is the object and to what end?

  In February 2014, the Mexican government issued the National Energy Strategy (Estrategia Nacional de Energía) (“NES”) for 2014 to 2028 and in December 2014 the Transition Strategy to Promote the Use of Clean Technology and Fuel (Estrategia de Transición para Promover el Uso de Tecnologías y Combustibles más Limpios).

  The main purpose of the government policy is to achieve sustainability through access to energy services. The goal in the long terms of the NES is to achieve (i) national coverage of energy, (ii) economic growth, (iii) social inclusion, (iv) energy autonomy, (iv) transmission to clean energy technologies and sources, (v) increase the energy efficiency, and (vi) diversify the energy matrix.

  The NES mentions the Mexican Energy Innovation Centers (Centros Mexicanos de Innovación de Energía) (“MEIC”), a consortium with participation of higher education institutions, research centres and companies. The main objective is that in a medium and long term a scientific-technological plan focuses in developing and takes advantage of technologies for specific renewable resources. In the Agreement that the Ministry of Energy approves and publishes the update of the first Transition Strategy to Promote the Use of Clean Technology and Fuel, December 2016, the MEIC has a specific area concerning geothermal energy, which objectives are: (i) the evaluation of national geothermal resources; (ii) development and innovation of exploration techniques; (iii) technological developments for exploitation, and; (vi) direct uses of geothermal heat.

  The Transition Strategy to Promote the Use of Cleaner Technologies and Fuel states that the lines of action relating Geothermal Energy, in accordance with regulations and Public policies, have the objective to: (i) develop technical regulations and safety standards, ecological balance and protection environmental for the integral management of sustainable geothermal systems; (ii)  strengthen land use rights throughout the life cycle of geothermal projects, considering its full social acceptance; (iii) update and integrate geothermal resource information with public access, and (iv) strengthen policies and regulations on the re-injection of geothermal wells.

• 3. Allowed Exploitation

• 3.1 Is exploitation of resources subject to licensing? Do landowners have the right to exploit recourses without a license? If yes, to what extent?

  Landowners may not exploit geothermal resources without a permit. Any exploitation of geothermal resources requires a concession granted by the ME. Applicants for the permit or concession must register the project and evidence legal, financial and technical capacity to perform Geothermal Activities.  

• 4. Role and voice of landowner or “project affected people” in the licensing procedure and land lease agreements

• 4.1 Does the landowner or any “project affected people” have a role in the process of granting a license for:
     (i) exploration,
     (ii) exploitation, and
     (iii) power plant (generation license)?

  Exploration and exploitation: The Law does not specify any role for the landowner or any “project affected people” in the licensing process for exploration and exploitation. Nonetheless, if landowner or any “project affected people” fall under the class of “indigenous people”, the 169 Treaty of the International Labour Organization applies. It grants indigenous people the right to be consulted regarding geothermal projects to be performed on their land. In addition, the Law also acknowledges specific rights granted to communal land owners (ejidatarios) regarding the use of their land. 

  Power Plant: Power generation activity is regulated under the Electric Industry Law which requires a permit to generate energy. Under this law, landowners also have no bearing with respect to the issuance of the permit itself, but some exceptions exist for protected classes of landowners (generally communities of indigenous people or otherwise rural or vulnerable communities) whereby specific consultation processes and social impact studies are to be made in order mitigate possible adverse effects to such communities.

• 4.2 Will an opposition of a landowner or any “project affected people” have a bearing on the process of granting a license for:
     (i) exploration,
     (ii) exploitation, and
     (iii) power plant (generation license)?

  The use or occupation of privately owned lands is subject to negotiation between the owner and the developer. However, given that Geothermal Activities are prioritized, failure to agree to terms may result in the intervention of the Nation to create a public easement. If the landowner belongs to the class of indigenous people or communal landowners, opposition will have more bearing since the permit or concession process will be suspended until the consultation is completed.

  The same principles apply to the construction of power plants, under the Electric Industry Law. 

• 4.3 Are the terms of land lease agreements regulated and if so, (i) what is a general timeframe of land lease agreements and (ii) what are the obligations for decommissioning at the end of the term?

  The Electric Industry Law sets forth the general terms and conditions that should be followed in the negotiation of lease terms when the intent is to generate electricity.  These include the obligation to properly inform owners on the intent and specific use to be given to the land being leased and shall be negotiated in good faith and under market conditions.  Agreements need to include financial mechanisms to be implemented in order to ensure the compliance with the decommissioning obligations and the removal of the infrastructure used at the end of the term thereof.

  Specific rules apply to protect the interests of land owners, and the ME may even appoint social witnesses to closely follow negotiations.  The Ministry of Agrarian, Territorial and Urban Development shall also be notified on the commencement of negotiations.  Said Ministry has the authority to issue guidelines and model contracts to be used in the negotiations.

• 5. Criteria for granting of a license

• 5.1 Which documents need to be submitted and what is the criteria for obtaining a license for:
     (i) exploration,
     (ii) exploitation, and
     (iii) power plant (generation license)?

  All Geothermal Activity permits require the following information to be submitted:  

  Legal capacity:

  • For individuals, a copy of an official ID; 
  • For companies, a certified copy of its corporate charter evidencing that the Geothermal Activities are included in the company’s corporate purpose.

  Technical capacity: 

  • A list of projects in which the applicant has performed exploration and exploitation activities during the past five years, including the countries in which the projects took place;
  • The CVs of the technical personnel that will work in the project evidencing their experience in exploration and exploitation activities.

  Financial capacity: 

  • Financial statements for the past two years evidencing the applicant’s financial condition.

  Other Information:

  • The location of the geothermal area to be explored or exploited;
  • Documents which evidence the legal ownership or possession of the land;
  • The project schedule with technical details;
  • The financial plan detailing the investment to be made;
  • If applicable, the Geothermal Registry data.

  For a power plant permit, applicants must file an application that includes:  

  • The corporate name and address of the applicant;
  • The name of the legal representative;
  • The type of permit requested;
  • The location of the power plant;
  • Estimated annual capacity;
  • The type of technology or main fuel used by the power plant;
  • Documentation evidencing the applicant’s legal, technical and financial capabilities;
  • A description of the project;
  • Evidence of payment for rights.

• 6. Duration of Licenses and Renewal

• 6.1 What is the maximum duration of a license for:
     (i) exploration,
     (ii) exploitation, and
     (iii) power plant (generation license)?

  Exploration: Exploration permits are granted for a three-year period, which may be extended once for a three-year period if the terms and conditions of the permit are met.

  Exploitation: Exploitation permits are granted for a thirty-year period, which may be extended for a similar term if the terms and conditions of the permit are met and the application is filed within the year prior to the expiration. 

  Power Plant Licenses: Generation permits are also granted for a thirty-year period, with the possibility for permit holders to request extensions.  The law does not specify any limit of years for the extension, but it may not exceed the initial term. 

• 7. Terms of License

• 7.1 What are the general terms of the license for:
     (i) exploration,
     (ii) exploitation, and
     (iii) exploration drilling and other drilling,
     (iv) power plant (generation license)?

  In addition to general information identifying the holder of the permit or concession, permits and concessions include:

  • A general description of the project;
  • The geographic location and limits of the geothermal area;
  • The projected schedule of investment and works to be performed;
  • Guarantees to be made by the permit/concession holder to comply with its obligations, including environmental obligations and rights of third parties;
  • The duties to be paid for the permit/concession;
  • Causes for termination or revocation;
  • Periodic reports to be submitted to the regulator;
  • The start date and the term of the permit/concession.

  In connection with the exploration of geothermic hydrothermal fields the holder of the permit shall drill and terminate from one to five exploration wells. For other type of geothermic fields, the ME shall determine the number of wells that shall be drilled.

• 7.2 Are exploration license holders granted pre-emptive rights with regards to exploitation or do exploration licenses automatically convert into exploitation licenses if the resource has been substantiated? If so, are there any conditions?

  There is no automatic conversion of permits into concessions, but exploration permit holders do have a right to request a concession to exploit geothermal resources at any time during the term of the exploration permit or up to six months after it expires. This right if only afforded to permit holders. 

  In the event the regulator desires to grant a concession that has not been requested by anyone, the granting of the concession is put up for public bids. 

• 7.3 Is an exploitation license included in a power plant license or are these licenses separate?

  As mentioned above, the power generation permits are regulated under different provisions, specifically, the Electric Industry Law. As a consequence, the permits are separate.

• 7.4 Are there any encumbrances in place for the licence holder to keep a license, once granted?

  The holder of the exploration permit shall provide a compliance guarantee which covers the term of the permit for an amount equivalent to 1% of the proposed financial scheme and the holder of the concession shall provide a compliance guarantee equivalent to 0.5% of the investment required up until the commercial operation of the concession. The aforementioned guarantees shall be issued by Mexican bond or credit institutions and shall be unconditional and irrevocable.

  The holder of an exploration permit or a concession may resign at any time; provided that no third party rights are affected, and in the event that there are is any harm caused to third parties, the losses and damages are paid in full.

• 8. Termination and revision of licenses

• 8.1 What actions by the license holder would warrant revision of exploration-, exploitation- and power plant (generation) licenses?

  The ME will not respond to misconduct with license revisions. It will, however, consider revoking the license entirely, as outlined below.

• 8.2 Does the license granting authority license have the power to revoke or terminate licenses? If yes, what actions of the license holder would warrant the termination of the license?
     (i) exploration license,
     (ii) exploitation license,
     (iii) power plant (generation license)?

  Yes. The following actions may be grounds to revoke a permit granted by the ME: 

  • Breach of the terms and conditions established in the permit;
  • Exploration or exploitation beyond the limits granted in the permit;
  • Assignment, sale or transfer of the rights conferred without prior consent from the ME;
  • Contamination of the area or surrounding areas by the permit holder without giving notice to the ME and without taking action necessary to remedy the situation;
  • Failure to maintain appropriate insurance and guaranties;
  • Substantial modification or alteration to the financial or works schedule/scheme; 
  • Failure to comply with the investment requirements;
  • Damage beyond repair to the geothermal area;
  • Failure to remedy damages suffered by third parties as a result of Geothermal Activities;
  • Recurring failure to make required payments;
  • Failure to comply with environmental regulations.

• 8.3 Can the license granting authority set forth conditions into licenses which provide for (i) stricter terms and conditions of licensees or (ii) more lenient terms and conditions for licensees, when such terms and conditions (whether stricter or more lenient) are not otherwise provided for by law?

  Articles 37 and 31 of the Regulation of the Geothermal Energy Law sets forth that the Ministry of Energy may include terms, conditions or information in the permits different from the ones provided by the Law and the Regulation.

• 8.4 What remedies does the License granting authority have in order to enforce compliance to the terms and conditions of a license, other than by revoking the license?

  Additionally, the Geothermal Energy Law provides fines from 179,200 MXN to 1,792,000 MXN in case of breaches to the provisions of the Geothermal Energy Law (Article 61).

• 9. Regulatory and information obligation

• 9.1 Briefly outline the surveillance carried out by the regulatory authorities during the license period, e.g. with regards to reporting duties and/or on-site visits.

  The ME monitors the use of exploration and exploitation licenses as stated in the Law and its Regulations.  The ME may, at any time, conduct an investigation to verify reports made by the license holder. As a result of such investigation, the ME may suspend work or activities related to construction or may revoke the permit/concession and require the cessation of all activities. 

  Other agencies, such as the environmental authorities, have jurisdiction over specific activities which may monitor activities to ensure that any obligations (e.g. environmental obligations) of the permit/concession holder are complied with, particularly conditions, actions or remediation activities imposed under the environmental impact study. 

• 9.2 Which information is required to be submitted to regulatory authorities during the license period for the holder of a license for:
     (i) exploration,
     (ii) exploitation,
     (iii) power plant (generation license)?

  Permit holders are required to submit the following information annually, as part of their financial and technical reports:

  • The reporting period;
  • Investments made in accordance with the financial scheme or schedule;
  • Geological information obtained during the performance of the geothermal activities;
  • Production data;
  • The results of geological, geo-hydraulic, geophysical, and geochemical studies of the area;
  • A study of the materials found;
  • Drawings containing the location and description of the works performed;
  • Information about the state of the geothermal area;
  • A general description of the works performed in accordance with the works schedule;
  • Results from the geothermal wells.

• 10. Power purchase agreements

• 10.1 Are general terms and conditions, such as duration of Power Purchase Agreements regulated? If no, are there any soft law or general recommendations in place in your jurisdiction?

  General terms and conditions of Power Purchase Agreements (“PPA”) are not regulated by Mexican law. The recent opening of the power market in Mexico has resulted in a greater possibility of variation in the price of power. As such, PPA’s are executed for shorter periods of time than before the reform. However, given obligations that significant consumers have with respect to consuming a percentage of their power from green sources, there is room to enter into long term PPA’s with off takers, even if only for a portion of their total needs.

• 10.2 What is the permitted or general duration of PPA's?

  The duration of PPAs is not regulated by law. Before the recent reforms, PPAs tended to last a period of time sufficient for the developer to amortize its investment and gain a reasonable profit. Under the current market conditions, PPAs last for reduced periods of time, or include tariff renegotiation clauses that trigger after a short period of time.

• 10.3 Are public and/or national regulatory authorities involved in any way in forming the terms of PPA's, either directly or indirectly?

  The general terms and conditions of PPAs are not regulated by law, so the national regulatory authorities are not involved in the formation of the terms between the parties. When a government entity, such as the Federal Electricity Commission, is the entity purchasing the power, it may impose the terms of the PPA to be bid. However, such terms are not mandatory among private parties.   

• 11. Incentives

• 11.1 Is there any governmental support or funding available for exploration activities?

  The Fund for the Energy Transition and Sustainable Use of the Energy (Fondo para la Transición Energética y el Aprovechamiento Sustentable de Energía) was created in 2008 in order to extend the available financing and loans for the energy transition, energy savings, clean technologies and use of renewable energies.

• 11.2 Are there any incentives offered by the government or local authorities for utilization of geothermal energy? If yes, in what form (e.g. tax and/or feed-in tariffs) and what are the maximum amounts permitted?

  N/A

• 11.3 What requirements must the project fulfil in order to be eligible to receive such incentives?

  The power producer has no impact on the CEC requirements of power purchasers and the tax incentive applies to all renewable energy investments.

• 11.5 In the case of production of electricity from geothermal, are there any incentives/rewards for utilizing the geothermal energy for other than producing electricity, such as waste heat?

  There are no direct incentives/ rewards for utilizing the geothermal energy for other than producing electrical energy.

• 12. Participation and authority of indigenous people

• 12.1 Are the rights of indigenous peoples in connection to geothermal resources regulated?

  As mentioned in the response to question 3 above, indigenous people benefit from the 169 Treaty of the International Labour Organization which grants them the right to be consulted regarding any projects (geothermal or otherwise) that will affect their land. Indigenous communities, however, are not entitled to any of the resources nor have any preferential rights thereto.

• 12.2 To what extent are indigenous municipalities involved in the process of granting licenses?

  Indigenous people affected by the granting of a license must be consulted in accordance with the 169 Treaty of the International Labour Organization. This consultation must take place before work begins. It must be unrestricted, and the indigenous people must be fully informed of relevant project specifications.

• 13. Alteration of law and regulation

• 13.1 What are the principles regarding retroactivity of laws and regulations, can changes in such rules affect license holders?

  It is a general principle of Mexican law, as established in Article 14 of the Mexican Constitution, that laws should not have retroactive effects and should accordingly not adversely affect permits or concessions already issued.

• 14. Taxation and capital controls

• 14.1 How does taxation in the sector affect license holders?

  License holders are taxed in the same manner as other legal entities in Mexico. Companies or corporations in Mexico are subject to a 30% corporate income tax. Duties must be paid for holding a permit or concession.  Payment of dividends may be subject to an additional withholding when made to individuals or foreign tax residents.  The percentage of the withholding for dividends is 10%, unless a lower rate applies under a double taxation treaty.

• 14.2 Please describe and provide information on the applicable tax rate and resource tax.

  Please refer to the response provided in section 14.1. In Mexico there are no resource taxes.

• 14.3 Is the sale of energy subject to VAT?

  Yes, the sale of electricity is subject to a 16% VAT.

• 14.4 Is VAT refundable and what is the procedure for VAT refunding?

  VAT paid is credited towards VAT collected.  Only final consumers are not entitled to credit nor recovery of VAT paid. 

• 14.5 Is the flow of foreign capital restricted with capital controls? If so, briefly describe the nature of such controls.

  No, there are no capital controls applicable in Mexico.

• 15. Environmental Impact Assessment

• 15.1 What demands are there regarding environmental impact assessment prior to exploration, exploitation and or production of geothermal energy?

  Exploration, exploitation and production of geothermal energy are subject to the prior authorization of the Federal Ministry of Environment and Natural Resources (“SEMARNAT”), through the filing of (1) a Preventive Assessment (Informe Preventivo) or (2) an Environmental Impact Assessment (Manifestación de Impacto Ambiental) depending on the circumstances. 

  • Preventive Assessment: Required for projects involving the exploration of geothermal reservoirs located on agricultural, livestock and wasteland zones (i.e. not on natural reserves or forest lands) Applicants must submit a Preventive Assessment to SEMARNAT in accordance with the provisions of the Mexican Official Standard.  
  • Environmental Impact Assessment: Required in all cases. Exploitation and production of geothermal energy as well as construction of geothermal energy plants must be authorized by SEMARNAT through 

  the Environmental Impact Assessment (“EIA”).  Other processes may be requested, as change of classification of lands (i.e. Forest Land classification).

  Furthermore, if the project involves the use of hazardous substances (e.g. hydrogen sulphide), then the environmental impact authorization process will require further action: (1) the filing of an environmental risk assessment and (2) an accidents prevention program.

  Special restrictions could apply if the project is to be executed in a natural protected area. Additional authorization may be required beyond that of SEMARNAT, the National Waters Commission and/or local and municipal authorities, depending on the specific characteristics of the project.

• 16. Other regulatory requirements or permits needed

• 16.1 What other licenses are needed in order to commence exploration, exploitation and/or production with geothermal energy?

  In addition to the exploration, exploitation and production permits, we have identified the following required permits:

  • Concession for the use and exploitation of geothermal waters, issued by the National Water Commission.
  • Construction license issued by the corresponding municipality;
  • Environmental impact approval from the Environmental Protection Ministry;
  • Water use permit from the National Water Commission;
  • Power generation permit issued by the Energy Regulatory Commission;
  • Local land occupancy permits/authorization (if applicable);
  • Permits for excavation, demolition or construction on properties adjacent to monuments protected by the National Institute of Anthropology and History (if applicable);
  • Interconnection Agreement with the National Center of Energy Control. Power generators connected to the National Power System shall execute the corresponding interconnection agreements, as issued by the Energy Regulatory Commission.

• 16.2 Which other regulatory requirements are in place, including but not limited to the need to provide insurances or guarantees, in connection with the commencing or continuing of exploration, exploitation and/or production of geothermal energy?

  In the case of exploration permits, a performance guarantee equal to 1% of the proposed financial program is required.  The financial program needs to be consistent with the contemplated work program.   In the case of concessions, the % is lowered to 0.5% of the investment required until commercial operation.   The guarantees are wither bonds or letter of credit and are returned once all obligations under permits or concessions have been complied with.

• 17. Legislation

• 17.1 Have there been any recent amendments to the legislation for licensing, exploration and/or exploitation of geothermal energy in the last 15 years? If so, have these amendments made a noticeable impact on the increase or decrease of production of electricity from geothermal resources?

  On August 11, 2014 the Geothermal Energy Law was enacted, registration, permits for exploration and concessions are regulated. Furthermore, on October 31, 2014 the rules and regulations of the Geothermal Energy Law were enacted.

• 17.2 Have any other factors made a strong impact on the production of electricity from geothermal in the last 15 years? If so, for what reasons.

  There have not been any other factors that made an impact of the production of electricity from geothermal energy.

• 17.3 Is there a specific legislation in place regarding geothermal extraction?

  The Geothermal Energy Law and its applicable rules and regulations.

• 18. Alternative or cascade use of resources

• 18.1 When applying for a licence, is it possible to apply for one license or authorization, which provides for multiple or cascade use of the resource, e.g. direct and indirect utilization (generation of electricity, district heating and cooling)?

  The concessions allow the concessionaire to exploit sub-products, except for hydrocarbon resources.  When sub-products are discovered in the exploration and exploitation of the geothermal resources, notice needs to be provided to the ME.   Depending on the manner in which the sub-products are to be used, the corresponding authorizations shall be secured from the competent regulatory agencies.  For instance, in the case of generation of electricity, a permit from CRE is required. 

• 18.2 Could mineral extraction from geothermal fluid be included under such cascade usage clauses?

  Yes, except in those cases where other laws, apply, such as the mining law or others, depending on the minerals.  There is no ability to exploit any hydrocarbons.

• 19. Water rights

• 19.1 Once an exploitation license has been granted for the operation of a power plant, along with access to fresh water for power plant operation, can the licence allow for sales and distribution of fresh water to local communities?

  Water that is not considered geothermal water is not included in the concession.  Concessionaires are required to re-inject geothermal water into the deposit in order to maintain its renewable nature.  Exploitation of the geothermal waters requires, in addition, concession from the National Water Commission.