Key Challenges for the Capacity Market in Mexico

(In collaboration with Gabriel Cerdio Gudiño)

On Jan. 13, 2025, the government of Mexico published a document titled, “Strategy for Equitable and Sustainable Economic Development for Shared Prosperity” (“the Strategy”). This document outlines a six-year plan targeting various economic sectors.

With regard to the electrical sector, the 2030 target appears unambitious considering the significant lag in capacity build up since 2018. The projected increase in generation from 356TWh to 413TWh translates into a compounded annual growth rate (CAGR) of just 2.5%, while Prodesen 2024-2038 forecasts a demand CAGR of 2.4% over the same period.

Furthermore, it is noteworthy that there exists a constrained demand from data centers and industrial parks, estimated at 3.6GW, using reports from AMPIP and DataCenterDynamics. Therefore, to close the gap between expected demand and supply, it would require an increase in supply at a 3.7% CAGR or 120bps on top of the Strategy’s objectives. 

Given this context, the investment plans for increased power supply considered in the Strategy are expected to be insufficient to address the issues of scarcity and high prices that have persisted during the previous administration. In other words, while the projected growth in generation capacity might meet future demand growth, it fails to account for both constrained demand due to limitations in available KVAs and generation capacity, as well as changing consumption dynamics arising from increasingly larger data-driven sectors. 

Additionally, as we have discussed in previous articles, Mexico has the opportunity to surpass the inertial growth in GDP by capitalizing on nearshoring opportunities that cater to the needs of the North American market. However, for this to materialize, it is essential to ensure an adequate supply of electricity to support new investments. Consequently, a growth rate of 3.7% may also appear somewhat lackluster. 

The key challenge to tackle in the country is the deficit in capacity. The reluctance to permit interconnection for new, large consumers stems from concerns that nighttime demand will not be adequately met. Any viable electrical system must have sufficient firm capacity available to respond to peak demand, which primarily occurs from 19:00 to 00:00 each day. Cenace publishes annual data regarding the demand and supply of power, making it essential to understand the dynamics of these variables for an accurate interpretation of the generation projections outlined in the Strategy.

Starting with power supply, variations over time may reflect the impact of aging power plants reaching the end of their operational lifespan and/or hydroelectric facilities facing water shortages. The reality is that the supply of capacity within the National Interconnected System has contracted significantly between 2022 and 2024, decreasing from 8.0GW/year in 2022, 4.4GW/year in 2023, and 3.6GW/year in 2024. This reduction represents a substantial decline of 55.0% over just two years.

Conversely, power demand exhibits a more volatile trajectory. From 2022 to 2023, demand experienced a decline. However, in 2024, demand began to recover, showing growth compared to 2022. The total shift in the power demand curve between 2022 and 2024 indicates a growth range from 6.5% to 8.5%, dependent on varying price levels.

For the power market to achieve equilibrium, where the price of power aligns with that of a reference technology (meaning that the market price sufficiently covers the costs of a gas turbine plant), an incremental firm capacity of 5.0GW is necessary (or an investment of approximately 6.2 GW of equivalent capacity in combined cycles will be required).

In that regard, the Strategy anticipates an increase in generation supply from combined cycles of 30.2TWh. To generate this amount of energy, around 4.3GW of capacity will be needed. As for cogeneration capacity, it forecasts an incremental supply of 17.3TWh, roughly equivalent to 2.4GW. Lastly, the Strategy anticipates an increase of 9.8TWh of hydroelectric generation, corresponding to about 7.4GW. However, given the prevailing water scarcity in Mexico, it seems highly improbable that hydroelectric capacity can be expanded. 

Therefore, while it may seem that aggregated combined cycles and cogeneration projects could satisfy existing capacity needs, we expect a significant lag in capacity deployment that will aggravate price pressures in the power market. The multibillion-dollar investments in artificial intelligence and data centers in the United States has significantly driven up demand for electric turbines, making it increasingly difficult to secure production slots from any of the three manufacturers holding the vast majority of the market. These OEM’s estimate that even if a down payment is made today, delivery of a turbine could occur as late as 2029, meaning that the new project would only commence operations around 2031. 

Additionally, aging conventional thermal power plants and carboelectric plants should soon be retired. Currently, these plants produce 37.0TWh, but it is projected that by the end of the current government administration, their output will drop to just 2.1TWh. As it stands, additions will account for 6.7GW/year and retirements for 5.3GW/year.

Despite these shortcomings, the Strategy does present a feasible approach to help address power shortages in the Mexican market. The projected growth in photovoltaic and wind energy is substantial, with a target build-up of 32.7TWh and 15.7TWh, respectively. Although these technologies could effectively alleviate supply issues, pairing them with electricity storage solutions would be critical to optimize their production. In line with this, the new Electricity Sector Law rightly stipulates that any new project connecting to the grid must include a certain proportion of battery storage.

Summarizing, 1) Mexico will need more investment in electricity than the Strategy is considering; 2) it is of the essence to provide much more capacity to the market; 3) combined cycles, cogeneration, and hydroelectric plants may not be a solution to the problem; 4) photovoltaic and wind energy paired with energy storage solutions could alleviate this problem.

The Mexican government should consider facilitating investment in these technologies by accelerating the deployment of pending regulation and allowing both the public and private sectors to invest at a greater pace.