Green Economy

Renewables in Mexico

As the world speculates over a potential rewriting of the energy landscape amid the rise of renewables and rumbling geopolitics, Mexico has emitted mixed signals over reducing fossil fuels and the private sector’s role in the energy matrix.

Mexico’s potential for clean energy is formidable, its geography boasting some of the world’s best wind and solar resources that remain in virgin territory. National Renewable Energy Laboratory (NREL) data for 2020 reveals that 40% of its renewable energy was derived from hydropower, 30% from wind, 21% from solar, and the remainder from geothermal and bioenergy sources.

Solar has the greatest potential and could generate no less than 77% of new renewable energy additions over the coming decade. The Achilles heel has been Mexico’s inadequate transmission infrastructure, and NREL data shows that a well-managed renewable market could shave USD1.1 billion off Mexico’s production costs while inviting USD17 billion in new investment and generating around 72,000 jobs.

Not Fully Charged

Over recent years, Mexico taken bold strides toward opening up its energy sector to new modes of production and new models of business alike.

The Program for the Development of the National Electric System (PRODESEN) sets out in black and white the annual planning of the National Electric System over a 15-year horizon, stipulating the national energy policy in lockstep with the National Development Plan (NDP) 2019–2024. Yet, its own findings reveal that the target won’t meet until 2031, seven years behind schedule.

Meanwhile, official numbers put Mexico’s clean energy generation for 2021 at 86.27 terawatts (TW), accounting for 26.7% of total generation. Electricity demand is set to rise by 12.7% by 2024, which will require an additional 41.03TW of clean energy to meet the targeted 35% clean energy ratio.

That marks a 47.7% rise from current levels. In this context, one must consider the controversial policies of incumbent President Andrés Manuel López Obrador (AMLO), who has backpedalled on key energy reforms of his predecessor…

…Erstwhile President Enrique Peña Nieto

Peña Nieto enacted the Electric Industry Law (LIE) and the Hydrocarbons Law (LH), opening the energy sector to free-market competition. Moreover, the renewable energy industry suddenly became one of the leading beneficiaries. Long-term electricity auctions would then garner around USD9 billion in investments for the renewable industry, raising production capacity and, by extension, reducing clean-energy prices. All promising developments, whereby names like Siemens Gamesa, Canadian Solar, Italian Enel Green Energy and Eletricite de France rushed to capitalize on Mexico’s untapped, solar, wind and hydro matrix.

Peña Nieto also mandated the Comision Reguladora de Energia (CRE) and the Comision Nacional Hidrocarburos (CNH) to enforce asymmetric regulation between state and emerging private sector players to ensure state compliance with regulatory obligations for an equitable playing field. Indeed, by 2018, 45% of the country’s electric power was generated by private companies.

But Then Came the Elections

Incumbent President López Obrador has followed his own playbook. And upon assuming office in December 2018 his nationalist stance favored reinstating the historic market control of Petroleos Mexicanos (PeMex) and the Comision Federal de Electricidad (CFE).

Pemex under the state’s wing has bloomed into Latam’s second-largest oil company after Brazil’s state-owned Petrobras. Government policy seemingly downplayed the alternative energy sector that depends upon foreign participation.

Tellingly, Mexico added around 30% less renewable energy capacity in 2021 than in 2020 due to a 46% drop in new solar energy capacity. More than a dozen fully ready solar and wind energy projects are languishing in regulatory limbo. Small wonder that the primary obstacle to green energy is mistrust among investors.

US and Canada Not Amused

Among other moves, pending auctions for new exploration and production licenses were suspended and over 100 previously awarded permits came under review sending shivers through the energy market. In 2021, the President modified the above-mentioned LH and LIE, ceding the government catch-all ‘discretionary powers to suspend permits of private companies for unspecified reasons of national security, energy security, the national economy or, where applicable, for violation of laws and permit terms.’

Eyebrows rose further as Pemex and CFE were authorized to assume control of facilities with suspended permits, implying nationalization by any other name. Cue corporate lawyers on speed-dial. Washington has labeled AMLOs energy policies discriminatory against US firms, claiming favoritism towards state-owned CFE. It argues that they contravene the USMCA free trade treaty signed by member states the US, Mexico, and Canada.

Pragmatism Gains Traction

Yet, it is not all grim and following a meeting with President Biden in 2022 López Obrador confirmed that he would permit foreign direct investment in the solar energy sector, “…as long as they partner with the CFE.” This year he also green-lit a deal with 17 European-based companies enabling their investment in Mexico’s renewable sector under the same arrangement.

Not all deals are expected to materialize by the 2024 end of the current NDP, and Mexico clearly needs renewed momentum on its renewables.