Energy Reform Halts Billions of Dollars in New Investment
The regulatory uncertainty generated by the government’s energy reform is holding back investment in Mexico. According to the latest reports from risk expert company Kroll, between US$30 and US$50 billion of investment is on hold, as investors await greater clarity in the regulatory framework to decide whether to go ahead with their projects or withdraw their capital.
The presidential reform initiative targets the disappearance of autonomous regulators CRE and CNH, the elimination of self-supply contracts and clean energy certificates (CELs), as well as the cancellation of all existing generation permits and power purchase and sale contracts with private parties. All this is to strengthen state-owned companies PEMEX and CFE.
"The entire energy sector, especially renewable energy project developers, are highly expectant in case there are changes in the drafts of the reform proposal. But in general, the entire energy sector has decided to put their new investments on hold," said Miguel Peleteiro, Oil and Gas leader, Dulf and Phelps, a division of Kroll.
Consistent with Kroll's data, the Mexican Wind Energy Association (AMDEE) reported that Mexico has run out of new wind energy projects to develop due to the uncertainty generated by López Obrador's energy reform. Leopoldo Rodríguez, President, AMDEE, mentioned that the association has no new projects in sight for the next few years. Rodríguez specified that there are merely eight power plants in the pre-operational testing phase that are awaiting authorization from the regulator to start operations.
This lack of investment in wind energy will limit Mexico's ability to meet its decarbonization commitments. Mexico must generate 35 percent of its energy from renewable sources by 2024. To date, Mexico only produces 29 percent, requiring an additional 9,500MW and an investment of US$10 billion over the next two years.
The stagnation of renewable energy in general is a major concern. With new investments in the sector held back, the country may not meet its environmental commitments. Furthermore, according to Alfredo Álvarez, Partner and Energy Segment Leader, EY, Mexico is at risk of losing its economic competitiveness in the coming years: if the reform is approved, energy will not only be dirtier but also more expensive. An increase in energy prices impacts all value chains, raising production costs and generating greater inflationary pressure. Economic activity beyond the energy sector will therefore suffer the adverse effects of the reform.