In Energy

For 75 years, Mexico’s energy sector was nationalized and closed to private investment. Pemex, the state-owned oil giant, enjoyed a monopoly that gave it control of all aspects of the energy supply chain. The Federal Electricity Commission, known as the CFE, supported Pemex by providing the generation, transmission, and distribution of electricity.

Despite suffering from corruption, underinvestment, and financial loss, a large constitutional hurdle to any reforms delayed any significant transformation of the energy sector. In late 2013, the Mexican congress passed a constitutional amendment to open the country’s energy sector to non-state players—including local and foreign companies. In 2014, a series of additional laws were approved, including the end of CFE’s monopoly on the supply of retail power to industrial and large consumers. To that end, private players were encouraged to develop their own services for the Mexican market.[1] From 2013 to 2020, the new energy policies attracted U$200 billion in committed investments for power generation and oil exploration.[2]

Ever since the opening of the sector, Andrés Manuel López Obrador (AMLO), Mexico’s current president, has berated the participation of international companies in the energy industry. Resurfacing the idea of oil nationalism prevalent in the 1970s when he began his political career, AMLO has made it his obsession to reestablish the dominance of Mexico’s two state-owned companies, CFE and Pemex, turning the briefly reformed industry completely on its head.  By doing so, AMLO has sought to exact revenge on the private sector, which he claims corruptly benefited from the former presidency of Peña Nieto. In May 2021, a bill proposed by AMLO to ban outsourcing was approved by the legislature, limiting the effectiveness of the private sector to hire new workers.[3] This type of political intervention has forced prominent foreign and local investors to ship their money offshore and freeze incoming investments. In April to June of 2020, Mexico saw the largest outflow of money in the past 10 years. In fact, it is estimated that $100 billion in capital has fled the country solely in the past two years.[4]

AMLO’s policies have hindered the competitiveness of private companies to “level” the playing field between the private and the public sector. In February 2019, the National Energy Control Center (CENACE), controlled by AMLO-loyalists, cancelled the country’s fourth long-term electricity auction. In 2020, CENACE suspended the license for renewable energy plants—limiting the amount of renewable energy that could be generated in-country. CENACE also increased the transmission rates charged by CFE for renewable electricity—to benefit Pemex—and decided to bypass price-based power dispatch. A grid using price-based power dispatch is required to provide the cheapest electricity available, often renewable energy plants, in ascending order in terms of price. With the newly proposed regulations, privately-owned wind, solar and combined-cycle plants would be the second to last in the dispatch order, giving hydropower and CFE-owned plants special priority.[5],[6] In December 2020, the CFE announced it would spend U$3.1 billion by 2025 to add 4.3 GW to its generation capacity, aimed at sustaining the Mexican peninsulas where there is an energy shortage. The new capacity will be composed of six combined-cycle plants and five gas units, using aeroderivative turbines.[7]


5 Megatrends in Latin America’s Energy Sector for 2022 and Beyond

5 Megatrends in Latin America’s Energy Sector for 2022 and Beyond

What you can expect in the near term and how you can leverage these shifts


In addition to stuffing loyalists into important energy agencies, AMLO was able to pass two major policy reforms in the sector: the Electricity Reform Law, passed in March 2021, and the Hydrocarbons Reform Law, passed in April 2021. The Electricity Reform Law sought to solidify the changes imposed by CENACE, allowing for hydro power plants and CFE-owned plants to have priority dispatch over renewable plants owned by private players. Although this law is currently suspended due to legal injunctions brought forward by energy players, if it does proceed, Mexico’s energy generation will become even dirtier and more expensive to the end-consumer. 

After Pemex lost 50% of the retail diesel market and 30% of the retail gasoline market to competition, AMLO also sought to limit private competition by amending the Hydrocarbons law.[8] The law would give the Energy Commission (CRE) discretionary power to grant or reject permits for the importation, exportation, transportation, and distribution of fuel. Similar to the Electricity Reform Law, this law is currently suspended and awaiting a legal decision. Nonetheless, these laws have already severely impacted investor confidence, limiting private competition and slowing the development of new renewable projects in the country. In fact, analysts estimate that AMLO policies threaten 150 renewable projects under development and over $40 billion in investment.[9]

In the mid-term elections, AMLO’s ruling coalition, the Morena, retained majority in both chambers of the legislature, but was unable to capture the two-thirds majority needed to approve constitutional changes. For now, AMLO will have to contend to Presidential decrees and political maneuvers, which will be legally contested, to apply his energy reforms.

AMLO’s Policies Produce a Series of Investor Lawsuits and Billions in Losses

In July 2020, a leaked document revealed AMLO’s 17-point plant to “save” state-owned Pemex and CFE. The plan, focused on reestablishing the public sector’s energy dominance, included a proposal to curb new permitting for their competitors—this took place via the recent hydrocarbons law.[10] Shortly after the leak, AMLO vowed to change the constitution if he saw a threat to the well-being of Pemex and CFE. 

Although a constitutional amendment is unlikely to happen, AMLO’s actions are seriously concerning foreign investors. During his presidency, Donald Trump made an agreement with AMLO that he would accept Mexico’s anti-competitive energy policies in exchange for the construction of the border wall and the containment of illegal immigration via the U.S. southern border. Outside of President Trump’s executive cabinet, however, U.S. tolerance began to wane. As a climate-friendly President Biden settles into the White House, the Mexican government will experience increased pressure by U.S. energy companies and politicians.

By June 2020, in response to the leaked “17-point plan,” 40 bipartisan U.S. congressmen wrote a letter to President Trump complaining that AMLO was providing preferential regulatory treatment for Pemex and delaying (or even canceling) permits for U.S. energy companies. Although the letter was largely ignored due to the U.S. Presidential elections, it already reflected an emboldened U.S. investor. The USMCA treaty contains clear international arbitration laws and investor protections clauses that has AMLO facing several lawsuits for political interference in the energy sector.

This issue culminated with the appointment of Pemex as the operator of the 1-billion-barrel Block 7 in the Zama field. Block 7 was awarded to a consortium of companies—U.S. based Talos Energy, Wintershall Dea of Fermany and Britain’s Premier Oil—who had invested U$335 million in exploratory and appraisal wells. In 2017, the consortium discovered over a billion barrels of crude, which overlapped into the adjacent block owned by Pemex. Despite studies showing that Block 7 owns 60% of the reservoir, in addition to Pemex lacking experience in deep shallow-water projects, the Energy Secretariat designated Pemex as the lead operator of the Zama field. These types of political concessions in favor of the state-owned company are discouraging new investors from coming into the country.[11]

Investors have also expressed that there is a large disconnect between what the policies are doing—hurting private investment and much-needed development of new generation capacity—versus what they are trying to achieve—promoting the development of the public sector. In fact, credit agency Moody’s said that private sector investment in the Mexican electric sector will stagnate through 2024.[12] AMLO’s nationalist populism implemented during the past 24 months has undoubtedly made Mexico’s energy sector the most eventful in the region.

Despite fiscal pressures, AMLO continues to heavily subsidize the operation of Pemex, dolling out nearly U$16.5 billion dollars in his first 14 months at the helm, and championing a U$8 billon oil refinery in his home-state of Tabasco.[13] Even with those outsized allocations, Pemex’s situation remains dire as it struggles to turn a profit. In the first quarter of 2020, with a depreciating peso and a decline in crude prices, Pemex recorded a U$23.6 billion loss—one of its largest ever on record. In fact, it is estimated that Pemex was losing U$10 million dollars an hour during the first three months of 2020.[14] With U$107 billion in financial debt, Pemex is the most indebted oil company in the world.[15]

Source: Pemex Investor Relations Reports

Mexico’s large crude oil reserves, estimated at 5.8 billion barrels, are also running out of favor in the global markets. The country’s resources are mostly heavy crude oil varieties, which are experiencing deflating global demand as countries transition to lighter, lower-sulfur content to comply with new, stricter fuel emissions.[16] Pemex must diversify its production if it wants to stay afloat. It could start by reigniting its involvement in petrochemicals, as the demand for plastic will triple by 2050.[17]

The country’s high levels of fossil fuel subsidies also appear to be more harmful than beneficial. A study by the United Nations shows that Mexico would see a 1.2% increase in Revenue Total Factor Productivity (TFPR) and a 0.4% growth in profitability if there was a 10% increase in fuel prices. In essence, a decline in subsidies and an increase in fuel prices would encourage factories to replace old, fuel-powered assets with more efficient and productive technologies. Thus, both economically and environmentally, Mexico would benefit from a decrease in fuel-related subsidies and an increase in overall renewable capacity.[18]

Doors Open Slightly to Allow for PPP Opportunities

Although the nationalistic ideology remains at the forefront of AMLO’s popularity, the 2020 drop in the price of crude, coupled with the depreciation of the peso, the loss of investor confidence and Covid-19 lockdowns, made the financial losses unbearable for Mexico’s purse strings. AMLO quickly realized that the country needed other sources of funding and investment, forcing him to turn to the private sector, softening his ideological position.

Between October and November of 2020, the government announced two infrastructure packages with the private sector to shore up weakening public expenditures. The planned investments will amount to roughly U$25 billion dollars, including a U$2 billion liquified natural gas export plant built by the Mexican subsidiary of Sempra Energy. The pacific-coast LNG export plant, which is closer to Asian markets compared to its U.S. counterparts, was nearly scrapped after the government refused to approve a necessary 20-year export permit.[19]

Recent comments from Energy Minister Rocío Nahle have solidified the slight opening to the private sector. In October 2020, Nahle mentioned for the first time that Pemex could engage in strategic partnerships with private companies if “a feasible plan was presented.” Not only did Nahle recognize that joint ventures (and even oil auctions) may need to resume, but also that foreign investment may be needed.[20]  By collaborating with the government, and getting in its good graces, private players are more likely to have a successful endeavor in the country.

What’s Next? Mexico Must Capitalize on Its Rich Wind and Solar Resources

The silver lining in the energy sector is the optimism around the country’s energy resources. With an average solar radiation of 2,200 Kwh/m² per year, Mexico’s sunbelt in Baja California is one of the best solar spots in the world, comparable to Chile’s Atacama Desert and the MENA region.[21] Similarly, Oaxaca, a southwestern state with a coastline to the Pacific Ocean, has over 6,600 square kilometers of windy land with good-to-excellent wind resource potential—that is roughly the size of 1.3 million football fields.[22] In the entirety of Mexico, studies have estimated the wind potential to be around 70 GW, roughly the same amount of energy that was produced by all other energy sources combined in 2016.[23]

Prior to AMLO, the Mexican government introduced the Energy Transition Law in 2015, where it pledged that 35% of its generation mix would come from clean energy by 2024. For 2050, that number would rise to 50%.[24] The Energy Transition law also set clean energy requirements for suppliers and large consumers, mandating a 5% quota in 2018 with a gradual increase throughout the years.[25] In doing so, the Peña Nieto government created a market for bankable ‘Clean Energy Certifications’ (CELs), in which companies could acquire CELs to fulfill their clean-energy requirements. Companies could do so via three methods: i) bilateral PPA agreements, ii) long-term auctions, or the iii) CEL market. In October 2019, AMLO’s government modified the scheme, by allowing hydroelectric plants to issue CELs.[26] The rule change was specifically targeted to benefit CFE, who has nearly 17 GW of hydro capacity, and will no longer need to rely on the CEL Market to comply with Mexico’s minimum clean energy quotas.

Table I: Clean Energy Certification (CEL) minimum requirements, by year

By the end of 2019, clean energy accounted for 17% of total generation, most of which came from large-scale hydropower.[27] A lot still needs to change for Mexico to achieve the targets laid out in the Energy Transition law.

Like Argentina, the current AMLO administration is adamant in ensuring the success of state-owned companies. Despite this, AMLO recognizes that Mexico’s energy demand will not be satisfied without the help of foreign investors and companies. This creates certain pockets of opportunities, from thermal plants in the Mexican peninsulas, to solar farms in Mexico’s sunbelt, which can be satisfied via public-private partnerships. Due to the complex political environment in Mexico, and the volatile regulatory changes, it is ever more important to have a partner on-the-ground that can help mitigate inevitable challenges. Using AMI’s local network and its extensive knowledge of the country’s energy sector, energy players and investors alike are more likely to have a successful venture in Latin America’s second largest market.

Next Steps

Contact us to find out more about how our energy market research can help you evaluate opportunities in Mexico’s market.


5 Megatrends in Latin America’s Energy Sector for 2022 and Beyond

5 Megatrends in Latin America’s Energy Sector for 2022 and Beyond

What you can expect in the near term and how you can leverage these shifts



SOURCES

[1] Duncan Wood, Editor. (2018). Mexico’s New Energy Reform [Ebook].

[2] Espejo, S. (2020). Mexico to present projects open to private capital as it moves to undo energy reform. S&P Global

[3] Mexican president presents bill to ban outsourcing of jobs. (2020). AP News

[4] AMI Analysis

[5] Rodriguez, A. (2020). Proposed changes to dispatch order could dissolve Mexico power market – sources. ICIS – Independent Commodity Intelligence Services

[6] Mexico Darkens Power Sector Outlook. (2020). Latinvex

[7] Becerra Ortiz, J. (2020). CFE invertirá 62 mil mdp para ampliar generación eléctrica. El Financiero

[8] Espejo, S. (2021). Mexico set to pass bill likely to increase Pemex’s refined products market share. S&P Global

[9] Mexico Darkens Power Sector Outlook. (2020). Latinvex

[10] O’Grady, M. A. (2020). Mexico’s Assault on Energy Investors. The Wall Street Journal

[11] O’Grady, M. A. (2021). Showdown in Mexico’s Zama Oil Field. The Wall Street Journal

[12] Regulaciones y desinterés a energías renovables alejan a inversionistas en sector eléctrico mexicano: Moody’s. (2021). Infobae

[13] Coady, D., Parry, I., Le, N., Shang, B. (2019). Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates. International Monetary Fund

[14] Garcia, D.A. & Martinez, A. I. (2020). Mexico’s Pemex bleeds more red ink in nearly $24 billion quarterly loss. Reuters

[15] Eschenbacher, S., Gonzalez, A. (2020). Exclusive: Mexico’s Pemex could look to Mexican borrowers for financing needs. Reuters

[16] Mexico. (2020). U.S. Energy Information Administration report

[17] AON, Future of Risk: Energy

[18] Calí, M., Cantore, N., Iacovone, L., Pereira-López, M., & Presidente, G. (2019). Too Much Energy, The Perverse Effect of Low Fuel Prices on Firms [Ebook]. Vienna: UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION.

[19] Graham, D. (2021). Exclusive: Second Mexico investment plan worth up to $10 billion. Reuters

[20] La Sener abre la puerta a que Pemex se asocie de nueva cuenta con privados. (2021). Expansion

[21] Renewable energy in Latin America: Mexico. (2016). Norton Rose Fulbright.

[22] Elliott, D., Schwartz, M., Scott, G., Haymes, S., Heimiller, D. & George, R. (2003). Wind Energy Resource Atlas of Oaxaca [Ebook]

[23] Mexico and its great potential as a wind power generator. (2020). REVE News

[24] Demand analysis of emerging PV markets: Mexico of Central and Southern America. (2020). InfoLink.

[25] Mexico publishes requirements for clean energy certificates. (2017). PV Magazine

[26] Gerardo Marquez. (2019) Mexico’s New Clean Energy Certificates (CELs) Decree and Why it Matters. Edison Energy

[27] Mexico. (2020). U.S. Energy Information Administration report

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