Carla Ortiz
Country Manager Mexico
RER Energy Group

Podcast

/
Expert Contributor

The Importance of Energy Security

Thu, 06/09/2022 - 09:00

What comes to our minds in times of crisis when we think about the energy matrix of our country? As a society, we and our leaders should ask ourselves if we have enough resources to generate our energy. Do we have the capacity to provide the necessary electricity for the rest of the population? Will we have access to energy supply to cater to public services, industries and our home. At what cost will we be able to obtain these resources?

The ability to secure this energy supply and at what cost is referred to as energy security. It is an issue that we must consider, especially in troubled times. We have just experienced a pandemic that significantly changed energy consumption habits and we are witnessing a war between two countries where one of them has very large energy reserves. Russia is the leading country in natural gas reserves worldwide, estimated at between 30 and 40 percent. Russia is also the second-largest natural gas producer in the world. As if that were not enough, together with the US and Saudi Arabia, these three entities control 45 percent of all oil production in the world.

Europe imports 40 percent of its natural gas from Russia, while Mexico imports 90 percent of its gas from the US. The question that is often asked is, what happens if Europe stops buying natural gas from Russia and the US decides to sell to Europe instead of Mexico? As a result, Mexico would have to negotiate with another country to secure its natural gas supply, that is if it is fully available, and at what cost.

To understand in depth the dimension of this question and its implications, it is important to understand the makeup of Mexico’s energy sector. Mexico produces 60 percent of its electricity using natural gas, which defines the country's marginal price of energy. That is why we can find a direct correlation between energy costs in Mexico and the price of natural gas in the US. If the dollar price increases, the cost of energy in Mexico does as well. If the price of natural gas rises, the cost of energy also increases in Mexico, which is the second-highest cost in the industry after payroll, which implies inflation.

There are dire situations that can occur, have occurred and could happen again, leaving a perilous natural gas shortage in Mexico; for instance, the possibility that the US could sell natural gas to Europe, or events such as the 2021 frost that paralyzed the northern US region and left Mexico without natural gas. When Russia begins to raise the price of natural gas it also affects the world price. This is why energy security is an issue that must be addressed within political agendas and written extensively in newspaper columns. We should be asking ourselves, what can we do to remediate this problem?

What can be done to mitigate these supply and cost overrun risks that can lead to hyperinflation? For starters, we should have a more independent, renewable energy matrix (free fuel derived from solar and wind) that is robust and has a storage capacity that generates power and avoids intermittency, with better transmission lines and additional advantages for the Wholesale Electricity Market. Without a doubt, the first step is to become independent from fuel imports and what better way to do that than with renewables, which can provide a better quality of life for us and aims to protect our cherished planet.

Photo by:   Carla Ortiz