Electricity Prices Pressured by Rising Natural Gas Costs

US gas prices have been increasing the past week, which consequently impacts Mexico’s power and gas markets, as the American product is the source for over 65 percent of the electricity supply in the country. As the trend is expected to continue through the rest of 2022, experts are concerned of how this could affect the government’s ability to maintain the subsidy on electricity prices.

As CFE was said to require adding close to US$7.4 million to the Federal Expenditure Budget (PEF) in order to sustain the rising gas prices, utilities could be expected to respond to market pressures by increasing electricity prices. Susana Cazorla, Consulting Partner, SICEnrgy explained that, as natural gas prices at the Henry Hub recently breached US$9/MMBtu, much more money is needed to subsidize electricity and keep electricity fees from rising more than the inflation. “We are talking about an increase by more than double the original price for the main source of electricity generation,” emphasized Cazorla.

However, such pressure could also accelerate the transition to other energy sources, or fuel switching altogether. S&P Global pointed to this possibility, as a similar episode in February 2021 made combined cycle generation drop to its lowest level since 2018. Currently, the main challenge would be that alternative fuels such as coal and fuel oil have also become more expensive and would not necessarily provide much relief. S&P reports that Mexico’s conventional thermal power production levels are reaching those of August 2021, the peak demand month of last year.

S&P Global recently pointed out that these unstable power prices could reinforce power production alternatives such as wind and solar, as consumers see them as more appealing than coal or fuel oil.

Gonzalo Monroy, Managing Director, GMEC, explained that when the PEF for 2022 was published, the Ministry of Finance (SHCP) calculated natural gas prices to be US$2.5/MMBtu. However, at the beginning of the year, prices in Mexico had already risen to US$3.81/MMBtu. Prices are currently oscillating between US$8/MMBtu and US$3.81/MMBtu.

Some reports by CFE claim that the state utility had “coverage” in the case of rising prices and concluded that these were not affecting electricity fees. However, a share of these fees is fixed, and cannot be charged to consumers to begin with. Moreover, industrial activity will have to endure the effects that increasing prices will have on rising production costs, which feeds back into the general inflationary pressures.

Sixty-five percent of the electricity supply in Mexican homes is produced using natural gas. Nevertheless, the country is not a highly relevant natural gas producer, as it is responsible for less than 30 percent of its own supply. The US, where most of Mexico’s natural gas comes from, has been able to duplicate the participation of American liquefied natural gas (LNG), mainly in the European market.

The slow recovery of the oil and gas production after the pandemic exacerbates natural gas’ supply issues. After the worst economic chapters of the pandemic, “the demand started building up faster than the supply,” said Cazorla.