Mexico Bets Energy Future on Oil Rather Than Renewables: NYT

While the world is betting on the clean energy transition to combat climate change, Mexico is putting its chips on rescuing its oil industry as the backbone of its energy policy.

At a time when scientists are sounding the alarm about the need to move away from fossil fuels that contribute to catastrophic global warming, Russia's invasion of Ukraine has spurred a global trend toward oil and gas production to secure the supply of fuels in the face of Russia's production blockade.

However, Mexico is going further. Based on his historical view of oil’s importance for national development, President López Obrador has pushed an energy policy that seeks to restrain private playrs the energy sector to return control to the state-owned companies, PEMEX and CFE. This policy has undermined the expansion of renewable energy, explains Oscar Lopez in a New York Times analysis.

Since his election as president, Lopez Obrador made his ambition to reverse the effects of the 2014 Energy Reform clear, as he considers it a corrupt mechanism to privatize the industry. Furthermore, in his vision to guarantee Mexico's energy sovereignty, the country must return to its golden age where oil created thousands of jobs and acted as the main engine of the national economy.

To rescue the state-owned companies, the administration has used the power of its regulatory agencies to keep renewable energy companies from gaining a larger market share, blocking the operation of their power plants while favoring state-owned fossil fuel-fired plants.

In addition to the construction of the new Dos Bocas refinery and the acquisition of Deer Park in Texas, the Mexican government plans to invest US$6.2 billion to build 15 gas and diesel power plants by 2024. These investments reinforce its commitment to reconsolidate the oil industry as the foundation of the national energy industry.

However, the Mexican government has not completely abandoned renewable energies, as it plans to spend US$1.6 billion to build a solar park in Sonora and retrofit CFE's hydroelectric plants.

One of the main measures to inhibit private participation in the energy sector has been the use of independent regulatory institutions as tools to push the presidential agenda. Through favorable appointments, the Energy Regulatory Commission (CRE) has consistently denied permits for any renewable projects coming from private capital.

According to analysts, one of López Obrador’s first moves was to install its supporters on the board of CRE, therefore turning an independent agency into a bulwark for the presidential agenda.

As of June 2022, more than 50 wind and solar projects proposed by private and foreign companies, equivalent to 7,000MW of capacity, were awaiting permits from the commission, some of the applications dating back to 2019. To date, these projects are not able to operate due to the missing permits.

In addition, President López Obrador attempted to reverse the 2014 Energy Reform by approving reforms to the Electricity Industry Law (LIE), which changed the priority of energy dispatch in favor of CFE power plants, regardless of their cost or level of pollution.

The reform was reviewed by the Supreme Court in April 2022 and remains the target of injunction requests from companies seeking to protect their investments.

The abrupt change in energy policy has had a major economic impact: foreign direct investment in the electricity industry went from US$5 billion in 2018 to less than US$600 million in 2021.

López Obrador has said that his country would be open to foreign investment in renewable energy projects, as long as the Ministry of Energy would be in charge of planning and CFE would have a majority stake. However, these conditions stand contrary to the principles of investment and economic competition established in the USMCA.

The modifications to Mexican energy policy have led the US and Canada to initiate a consultation process to resolve their differences under the dispute resolution schemes of the USMCA. If the consultations were to turn into international arbitration panels, Mexico could face hefty fines and economic sanctions.

Apart from the economic repercussions, López Obrador's energy policy may ensure Mexico is unable to meet its climate commitments. As a result, analysts say, Mexico will almost certainly fail to deliver on its promise to the world to reduce its carbon output. Government documents show that Mexico is two years behind schedule to reach its 2024 energy transition climate goals.

"People say, 'how is he going to meet his climate change commitments.' That does not matter to him, [López Obrador] is an oil man," explained Tony Payan, the Baker Institute for Public Policy at Rice University.