MEXICO CITY: The Mexican peso took a dip on Wednesday following the Senate's approval of controversial legislation that will give priority in electricity dispatch to the state power utility.

The peso weakened 1.08% to 20.8 per US dollar on Wednesday after the Senate approved the bill on Tuesday evening.

The legislation, aimed at strengthening state utility CFE, has frayed market nerves amid criticism it is essentially an "indirect expropriation" that could elbow out private sector renewable energy providers.

The bill, proposed by President Andres Manuel Lopez Obrador, was approved by the lower house on Feb. 23. It will now go to Lopez Obrador for his signature.

Once the law takes effect, CFE plants will have priority in dispatching electricity they generate into the grid, even if they use more polluting fuel oil and coal as sources.

The reform implies a "risk for private investment" in the energy sector, an analyst note by local firm Banco Base said.

The "greater risk perception over Mexico" could put pressure on the exchange rate in the short term, the firm said, adding that the peso could further weaken to around 21 per US dollar.