2022: An Uncertain Year in Energy
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2022: An Uncertain Year in Energy

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Karin Dilge By Karin Dilge | Journalist and Industry Analyst - Thu, 12/22/2022 - 11:20

In the past decade, the energy industry in Mexico has faced diverse challenges while evolving into a greener, more sustainable sector. Nonetheless, the industry has become increasingly advanced. Among the most relevant events the sector saw in 2022 were this administration’s constitutional attempt to undo the 2014 Energy Reform, a trade dispute with Canada and the US, and its impact on investment as well as permits.

This year, Mexico ranked 33rd out of 40 countries on the 58th EY’s Renewable Energy Country Attractiveness Index (RECAI). Mexico scored 54.6 points, dropping one spot since the last RECAI of May 2022, when it was ranked 32nd with 54.8 points.

Answers to Mexico’s low score can be found in the fact that at a time when the world is betting on the clean energy transition to combat climate change, Mexico’s current administration decided to rescue the oil industry. Since López Obrador became president, he has pushed an energy policy that seeks to restrain private players and return control to state-owned companies PEMEX and CFE, which has hampered the expansion of renewable energy. 

To rescue these state-owned companies, the administration used the power of Mexico’s regulatory agencies to keep renewable energy companies from gaining a larger market share, blocking the operation of their power plants while favoring state-owned fossil fuel-fired plants. When confronted, Mexico’s government would point toward the instability of privately-owned intermittent solar and wind power plants, as well as hint at corruption during past administrations.

One of the main measures to inhibit private participation in the energy sector has been the use of these independent regulatory institutions as tools to push the presidential agenda. According to industry insiders, the Energy Regulatory Commission (CRE) consistently denied permits for any renewable projects coming from private capital. The government, meanwhile, blamed these stops in permitting on the COVID-19 pandemic.

The modifications to Mexican energy policy led the US and Canada to initiate a consultation process to resolve their differences under the dispute resolution schemes of the USMCA. On Dec. 1, 2022, Raquel Buenrostro, Mexico’s Minister of Economy, held a meeting with US Trade Representative  Katherine Tai in Washington. The representatives discussed the state of the consultations on Mexico’s energy policy under the USMCA. Two weeks later, Buenrostro presented a plan to resolve the spat. The ministry underlined the importance to speed up the consultation period to assure players who want to invest in Mexico. Projects that remained attractive for investors include distributed generation (DG) photovoltaic projects, which do not need permits below 0.5MW, and large-scale liquefied natural gas (LNG) export projects.

The plan presented to Tai and the Canadian International Trade Minister, Mary Ng, consists of two points. The first proposes to gather a technical task force to clear doubts and explain the decisions that have been taken for Mexico’s energy sector. According to Buenrostro, this will ensure that the third round of questions submitted by the US and Canada are answered as truthfully as possible. In addition, the ministry suggested holding these consultations in Mexico City. Secondly, the plan recommends establishing working groups between December 2022 and January 2023 to address different issues, including the legal situation regarding the Electricity Industry Law, amparos requested by private companies, reviewing permits, the transition to ultra-low-sulfur diesel (ULSD) and the outlook on pipelines in the north of Mexico.

Furthermore, the document established that consultation blocks one and two will be worked on jointly with the US and Canada, while the third and fourth blocks will be exclusive to the US and Mexico. 

According to Reuters, US Commerce Secretary Gina Raimondo said in September that the US$52.7 billion Chips Act would create significant opportunities for Mexico in the energy and water-intensive semiconductor industry. Nonetheless, for Mexico not to lose out on the opportunity and others associated with nearshoring, it will have to move quickly to improve power transmission networks and renewable energy access and create competitive incentives.

Mexico’s transmission and distribution infrastructure has long since been identified as a weak point in its clean energy transition strategy. To many industry analysts, this is no surprise: Mexico’s geographical, technological and financial constraints prove challenging. If Mexico is to improve its grid system, public-private cooperation will be key, argued experts.

Ivette Castillo, Managing Director LATAM, GE Grid Solutions, pointed out that successful planning requires that all market actors understand the objective of the grid operators, which is different in every system. The Mexican system is mature and is currently being modernized. “Security, reliability, effectiveness, green power and low costs are the priority right now in the Mexican system. This is imperative to understand where investment and policy should be directed,” added Castillo.

“Over the past four years, there has been little investment in the power transmission network, and we are beginning to feel the effects. The system is reaching a point where it is getting too expensive to be able to connect to the transmission network,” said Eduardo Andrade, General Director, Burns & McDonnell. Andrade added that focusing on getting more money for CFE will be fundamental to enabling other companies to interconnect. Although the state utility has often declined the support of the private sector, experts said it needs help to carry out bigger projects.

What is more, storage infrastructure is increasingly needed to inject flexible power into the grid. Nevertheless, one of the most important obstacles standing in the way of storage development continues to be the legal and regulatory certainty of projects, as there is no framework for the technology.

Industry experts agreed that as Mexico’s generation capacity continues to increase at a pace that its transmission infrastructure cannot keep up with, the development of storage infrastructure is becoming more urgent if the Mexican electricity system is to function efficiently and reliably. What is more, storage project development is understood as a vital part of the global energy transition. Nevertheless, Mexico’s sole proposed large-scale battery storage project is focused on export and will be connected to California’s grid instead.

In sum, the energy industry was characterized this year by legal uncertainty, but it was also defined by the efforts of the private industry to keep helping Mexico’s state-owned companies CFE and PEMEX in building better infrastructure for energy to reach every corner of the country. Industry experts have repeatedly urged throughout the year the need for collaboration between the private and public sectors to enhance the grid system. Many hope that the government will reevaluate its position and open participation to the private sector in 2023.

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