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Energy Supply Is the Real Challenge for Nearshoring

By Ricardo Zuñiga - CapWatt
Country Manager


By Ricardo Zuñiga | Country Manager - Mon, 05/22/2023 - 09:00

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One of today’s main discussion topics in Mexico is, of course, nearshoring, but we don’t talk enough about the challenges it will represent. Mexico’s proximity to the US is the main advantage for expanding operations or manufacturing in our country. The crisis of the last couple of years taught us the lesson that being closer is way better; we saw the disruption of logistics and its broad impact  on the global economy. The answer to the problem is nearshoring, but, of course, there are many issues around this solution that could make execution difficult, such as location, legal certainty, communication, roads, access, security, and trade agreements. The factor I consider the biggest challenge and that I know a little bit about is energy supply.

Being in close proximity to a market is not enough when other key pieces of the business are not there. The real challenge will be supplying the energy needed for all these businesses coming into the country. It should not be an issue but we have done so little in this regard in the past few years that now we are  seeing the consequences.

It’s not just power generation, it’s also the lack of infrastructure for delivering this power, fuels and others. This is no minor matter and cannot be solved as fast as companies will be able to be ready to start operations in Mexico. As a reference, let’s use a known example. Tesla is building a new plant in Nuevo Leon that is expected to take less than a year to be completed, which seems a little difficult to believe, at least for me. 

This is the main reason we will need to start building power generation plants today. The time needed to develop energy projects is,in many cases, longer than it takes  to build plants for various industries.. For this to happen, permits will need to be granted soon. 

The time that we are supposed to wait for authorities to address all requests for permits and others is too long, according to the latest information published. Just as an example, I will try to describe the regular process for a power plant to be developed. If today we start talking to one of the big industrials coming to Mexico and in a couple of months (being extremely optimistic) we are able to agree with them on the development of a tailor-made energy generation project on site (cogeneration, for  example), then contracts are negotiated and signed, studies and basic engineering are done, and MIA, EVIS, among others are also completed.  Next,we send the request for the permit. At this point, between six months and one year have  already passed, easily, but now we  need to wait for the permit to be issued, which, according to the latest publication from CRE, should take an estimated  two years. So, in three years, we might be ready to put in place the purchase order for the major equipment and at the same time deal with everything related to the construction of the power plant. Major equipment usually gets delivered on site in seven to 12 months and then instalment, commissioning, and COD will be expected in around three to six months or even more depending on complexity. In summary, we will need three to even more than four years for on-site power generation plants to come online. In the meantime, demand from new industrial plants will be needed at least two years before this.

Since companies coming to Mexico expect not only power, but clean power, then let’s do an exercise for an off-site solar plant. A solar plant requires the first stage required by any other plant, as described above. In addition to this, there is the negotiation for a convenient location. So, let’s say that in a good scenario, we could complete this stage in a year. Panels could arrive earlier than turbines or motors, instalment could be way faster and let’s say we get to 18 months in total. Oops, I forgot the permit timing. Again, add two years. Guess what? The lack of infrastructure on the transmission side could take years to happen and if we try to develop new infrastructure, of course, in accordance with the authorities, then the right of way could also pose a significant complication, especially in Mexico, and particularly  if you are near urban locations. In conclusion, it doesn’t matter which technology you are using, to get things done in Mexico, according to the rules established by the government, takes a much longer time than what is needed.

This is why distributed generation is almost the only model that is being developed right now in Mexico. We are developing it, but we also want to continue developing other power plants with the technology that best fits our clients. The issue is that whenever you want to develop anything bigger than 0.5MW, it’s almost the same as the scenarios described above. 

Mexico, we have a problem. We are jeopardizing the opportunity of a lifetime for the country: nearshoring. We really need to do something about it. Please don’t mess this up.We have the chance to be a better country, with better opportunities for us and our children. Be wise and think twice.

Photo by:   Ricardo Zuñiga

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