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Mexico Needs to Invest in Clean, Cheap and Reliable Energy

By Roberto Ballinez - HR Ratings
Executive Finance and Infrastructure Director


By Roberto Ballinez | Director - Tue, 01/25/2022 - 12:54

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On Jan. 17, the Open Parliament began to discuss the electricity reform proposal sent by the federal government. In this forum, which will last approximately one month, all speakers must bear in mind that carrying out an energy transition or not will mark the economic, social, and environmental future of our country. In Mexico, the manufacturing sector represents half of our industrial activity and contributes around 30 percent of the national GDP. Energy, and especially electric power, is a necessary input for almost all production processes.

On the one hand, due to the automation of many production processes, the industry demands more and more electricity. Likewise, our own demographic growth increases this demand annually at a rate of 1.5 percent on average. For this reason, ensuring clean, cheap, and reliable electricity must be a priority for current and future governments.

On the other hand, the international agreements to which Mexico has adhered seek, among other objectives, to gradually increase the generation of electricity through renewable sources and the reduction of our greenhouse gas emissions. For a decade, Mexico has tried to establish a government strategy in this regard with the publication of the General Law on Climate Change in 2012, the Energy Transition Law of 2015 and the launch of a pilot test of the Emissions Trading System in 2019. However, today, the market perceives that the goals we want to achieve and the plans we must follow are not very clear.

The challenges that we must face to achieve a rapid and orderly energy transition are diverse. In my opinion, the transformation of our power generation matrix is ​​undoubtedly one of the most important. The goal is to achieve an electricity generation model with the lowest possible carbon footprint. The strategy should consider some issues such as: 1) financing sources to improve, expand or develop the current infrastructure, 2) incorporation of new technologies, 3) promote a good business environment based on legal certainty and 4) public sector intervention. Keeping these topics in mind, we should be able to solve problems like the following:

Power quality. The market recognizes the problems faced by users and the costs they must bear to solve the setbacks of low reliability in the supply of electricity. Blackouts, even if they are brief, and voltage and frequency variations lead users (domestic and industrial) to invest in emergency power plants, voltage regulators and batteries. The low quality of the electricity supplied in many regions of the country may be part of the elements that hold back investment, competitiveness, and employment.

Distributed generation. With the Electricity Industry Law of 2014, distributed generation grew considerably. Today, there are companies on the market that build and design solar plants for this purpose. Even though the Ministry of Energy has assured that distributed generation will not be affected by the changes that the electricity reform proposal will bring, it seems that the new government policy would be limited to residential installations and small businesses; those that consume low-voltage (baja tensión) electricity. But what about companies and users with a relatively higher consumption? Distributed generation could also be applied to medium voltage (“media tension”) electricity supply. According to CFE, the objective is to directly advise citizens interested in this technology.

On-site generation: The modernization of the gas pipeline network should boost on-site electricity generation, mainly through cogeneration processes. The availability of natural gas offers great opportunities for the industry and, without a doubt, would improve our competitiveness. However, let us remember that around 85 percent of the natural gas consumed in our country comes from the United States.

In the past, the federal government built large power plants in remote locations and expanded the transmission and distribution grid to transport electricity and comply with the needs of users. Today, on-site generation (solar or cogeneration) can reduce the old planning, logistics and financing challenges faced by the federal government. At the same time, the quality and quantity of energy demanded by the industry could be guaranteed. Additionally, on-site generation can produce surpluses that can be made available to other users through interconnection to the grid.

Currently, more and more companies, voluntarily or due to market pressure, are seeking to reduce their CO2 emissions. Even in the most ambitious cases, they are seeking to become carbon neutral or net zero by 2050. The net zero goal is what is driving the world energy market today. These regulatory or self-imposed goals are what are driving the energy transition.

In the case of our country, at this time, private investors do not see the appropriate conditions to allocate resources to the construction of new wind farms, solar farms or cogeneration plants. This despite the enormous potential for wind and radiation that Mexico has. Unfortunately, these investments are being attracted by other countries that have an energy policy that favors renewable energies. Countries like Colombia, Brazil, Dominican Republic, Canada, Germany, and France are receiving this flow of resources from abroad.

Given these circumstances, our country obviously needs to increase public and private investment as soon as possible. According to official data, the level of investment in relation to the national GDP decreased from an average of 21.0 percent in the period 2014 to 2018 to 19.3 percent in 2019. For 2020 and 2021, several analysts expect it to be around 18.0 percent. These numbers contrast with the internationally accepted rule of thumb, which indicates that investment must represent at least 25.0 percent of GDP.

The increase in investment could trigger the structural and sustainable growth of the country in the long term. This will be achieved if and only if there is legal certainty in the business environment. Any investor needs confidence to invest, whether in our country or anywhere else in the world. The market needs a credible and consistent discourse from the government regarding national economic growth and development.

Photo by:   Roberto Ballinez

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