Electricity Generation Is King

In the world of finance, the phrase “Cash is King” has stood the test of time. In moments of market volatility, those who hold liquidity have a significant advantage among others, setting the terms, capitalizing on opportunities, and effectively navigating market uncertainty. Each market has its own currency. Today, Mexico’s electricity sector faces a similar reality: Generation is King. With industrial demand surging, reserve margins tightening, and new capacity stalled by regulatory and transmission bottlenecks, the true currency of the market is megawatts. Companies that own generation are evolving beyond their traditional role as mere suppliers. They now function as market makers, dictating prices, shaping contracts, and ultimately determining how market players interact and how industries pay for electricity. 

Installed Capacity vs Actual Generation

At the end of 2023, Mexico’s installed electricity generation capacity stood at approximately 89GW, with the Federal Electricity Commission (CFE) controlling 45GW, and 17GW coming from independent power producers (PIEs), mainly combined cycle and wind plants. 

While the nominal capacity is growing slowly, the actual energy delivered, which is the generation that truly powers the grid, is more nuanced. For instance, a 500MW wind farm in Oaxaca might appear substantial on a capacity map, but if transmission congestion limits 40% of that power from reaching Monterrey´s industrial clusters, the effective capacity available to factories is reduced to 300MW. Therefore, the delivery of reliable, dispatchable energy is far more constrained than the numbers suggest. The reliable delivery of megawatts is paramount to ensuring the uninterrupted operation of industrial facilities. Mexico’s true vulnerability lies in this gap.

Although long-term forecasts in PRODESEN 2024–2038 anticipate an installed capacity of 163GW by 2038, regulatory and transmission bottlenecks, as well as delays in permit issuance, have kept private sector participation around 30%, unchanged for the past three years. It is important to note that most of the private generation is controlled by a small number of companies currently. It is expected that the market will remain stable for the next couple of years as utility-scale generation projects typically take at least three years to develop. 

Market Structure and Strategic Positioning

The current market reflects a 54% CFE versus 46% private generation split, including PIEs, a rule established by Mexico´s previous AMLO administration and continued by President Claudia Sheinbaum´s. This structural imbalance acts as a natural barrier to new entrants, limiting competition and restricting more aggressive pricing power. Mexico Infrastructure Partners´s (MIP) strategic acquisition of the Iberdrola Mexico power plants in 2024, have further solidified this position, giving CFE somewhat of a related control of over 56% of installed capacity and supplying 55% of total system energy. 

To illustrate, consider a steel producer negotiating a power contract with CFE controlling over half of the market, the end-user is likely to face fewer counterparties as a buyer.  It’s somewhat like the mortgage market, when one lender has a particularly large presence—options can feel fewer, and the leading institution often sets the reference point for terms.

Meanwhile, private generators operate within a context of gradual permitting processes and limited transmission capacity. Since 2019, 150 generation permits have been authorized (≈20,000MW), of which 30 were for CFE (11,000MW) and 120 for private players, many of which are small-scale or on-site generation projects (<10MW). There are still pending permits, most of them from private generators, which highlights ongoing administrative delays, emphasizing the challenge of new generation projects entering the market. From another perspective, this showcases the government´s preference for supporting end-user´s on-site generation projects, which have become a good solution for many industrial and commercial companies. 

Rising Demand and Tight Margins

Mexico’s electricity consumption has been steadily increasing, compounding at 3.5% annually, driven by industrial expansion, electrification of economic activities, and the gradual growth of data centers and nearshoring initiatives. PRODESEN projects a baseline growth of 2.4% per year over the next 15 years, with high case estimates up to 2.9%, which is potentially conservative given historical trends. By 2038, net annual consumption is expected to increase 38.2% over 2024 levels.

Growth has outpaced both installed capacity and transmission expansion. This mismatch is eroding reserve margins and exposing industries to blackout risks. In 2023, capacity increased only 2.1%, with operating and testing capacity rising 0.6%, creating mounting pressure on the grid. Transmission capacity expanded by just 2.4% between 2018 and 2023, which has added pressure to the system and increased the likelihood of congestion and curtailment risk. As a result, reserve margins remain below 3%, compared with the 6% safety threshold, leading to emergency events and localized outages. 

In practice, if a single generation plant trips offline, for example a 750MW combined cycle unit in Tamaulipas, the entire northeast region may face immediate load shedding. That´s why localized blackouts in Monterrey during peak summer heat have become a more frequent occurrence. 

Geographic Concentration and Regional Impacts

Generation infrastructure is unevenly distributed throughout the country, with Veracruz leading at over 10,000 MW, followed by Tamaulipas and Nuevo León, reflecting a concentration in northeastern Mexico. Meanwhile, demand centers are growing more quickly in other parts of the country such as the Occidental region (4% annually), the Peninsular (+10%), BC Sur (+9%), and Noroeste (+7%) regions. In Cancun, for instance, demand from hotels and tourism infrastructure is rising by nearly double digits each year, yet most generation is about 1,000 kilometers away in Veracruz. Moving power across long distances through constrained transmission corridors creates congestion and delays, placing additional stress on the system and raising reliability challenges.  

Pricing, Reliability, and Market Signals

Rising demand, constrained supply, and limited transmission capacity have directly influenced market prices. Local Marginal Prices (LMPs) and the Net Capacity Price have escalated sharply, with capacity hedging prices increasing 300% from 2023 to 2024, while energy prices remain stable. Mexico faces high reliance on natural gas, whose international prices have surged due to global demand and geopolitical factors, which further pressures costs. Currently, combined cycle plants provide around 60% of the energy in the National Electric System, while renewable sources contribute below 20%.

Reliability is also a growing concern. CENACE reported 104 emergency events in 2024, though data after mid-2024 is limited due to potential national security considerations. In today’s business world, delivery, not just installed capacity, has become the key metric: companies that cannot secure reliable megawatts face significant risks particularly in industrial operations, including operational and financial challenges.

Consequently, global companies establishing operations in Mexico are increasingly inquiring about the availability of megawatts, beyond mere concerns regarding land and labor, from industrial parks, landowners and the local government. A data center with a 40MW constant power requirement cannot tolerate operating in a region experiencing frequent blackouts. Without guaranteed generation, Mexico could potentially miss out on billion-dollar investment opportunities.

Generation has therefore become one of the strategic controlling elements of economic activity. The tight supply has led to a situation where Qualified Suppliers have had to retain uncommitted capacity outside of Power Purchase Agreements (PPAs). This is due to the scarcity among generators and the soaring trading prices, which make every unused megawatt a strategic asset.

The Strategic Imperative

In the business world, energy is no longer just an input cost. It is the defining factor of competitiveness. Access to generation is a key factor in ensuring resilience, and its absence can lead to vulnerability. It is a strategic asset. Access to generation, particularly dispatchable megawatts is critical for operational stability, cost predictability, and maximizing growth potential. The market is indicating that “Generation is King”, and the holders of these assets, whether CFE or private generators, hold not only the ability to deliver energy, but also the leverage to shape contracts, pricing, and market participation through Qualified Suppliers.

Public policies, such as proposals for on-site generation (Autoconsumo) and simplification of on-site generation permits up to 20MW, aim to alleviate some pressures. Yet, the scale, timing, and regulatory environment suggest that near-term relief may be limited. Private companies can use qualified supply schemes to procure renewable energy, but availability is scarce and prices, such as for IRECs, have already nearly doubled this year, reflecting tight demand.

In the same way that investors seek liquidity in uncertain financial markets, Mexico’s electricity consumers are now seeking certainty in a system where megawatts are scarce. In this environment, Generation is King — the deciding factor between competitiveness and vulnerability. Those who hold generation assets not only ensure their own stability but also gain the leverage to dictate terms to the rest of the market.