Mexico's Energy Reality: Past, Present, and Future

The Mexican energy market was opened unprecedentedly with the Energy Reform of 2013. The current administration, however, reversed various competition measures labeling them to be detrimental to the state-owned enterprises. As the country prepares to embrace the nearshoring wave, addressing energy supply concerns becomes an increasingly pressing priority. 

Two major challenges lie ahead as Mexico prepares to meet its international commitments for 2035 and 2050: nearshoring and the energy transition, explains Hector Olea, President and CEO, Gauss Energia. While foreign investment has grown, new investments have been limited due to concerns about legal security and a reliable gas supply. Meeting the 35% clean energy target by 2024 will be challenging, especially with the pandemic's impact on energy use.

“How did Mexico achieve its current energy production capabilities and what role will the past play in the country’s energy future?” asks Andrea Villanueva Villarreal, Senior Legal Counsel, CFE. 

The 2013 reform paved the way for private investment in infrastructure and energy, while allowing the introduction of more projects with renewable focuses. One of the goals of the reform was to transform CFE and PEMEX into productive companies that competed with private actors. The reform introduced more electricity tenders, in which various actors, including CFE, could compete to sell energy. These tenders would have allowed users to choose from a series of offers that provided various advantages, enticing companies to be more competitive. With this opening, Mexico then entered the Top 10 countries in the world with the most attractive energy market and with the highest investment in renewable energies. Mexico thus became part of the elite of countries with better conditions, climate, and regulation to invest in green projects, according to the Mexican government.

President López Obrador's administration suspended these tenders in 2018, considering them detrimental to CFE. Similarly, the regulation regarding generation and solar projects limited private entities' generation capacity and the deployment of large-scale solar projects. Permit approvals were stalled after the pandemic, and regulators were accused of injustices and favoritism toward the state utility in approving these permits.

In the hydrocarbons sector, Mexico's energy matrix relies on nearly 90% of fossil fuels and natural gas, which already constitutes almost 50% of the country's energy, three times cheaper than fuel oil. Natural gas has displaced other gasses in the country, constituting 82% of the demand in the electricity sector, 81% in the petroleum sector, and over 60% in the industrial sector.

Mexico is becoming increasingly dependent on imported natural gas since the state finds it more profitable for PEMEX to invest in oil. Consequently, the gas produced in Mexico is associated with hydrogen-contaminated gas, which must be reinjected into reservoirs or burned in the atmosphere. As a result, Mexico ranks seventh globally in atmospheric gas burning, says Francisco Barnés de Castro, President, Cifra2 Energy Consulting.

Moreover, PEMEX consumes 70% of ECO gas in its facilities, where over 90% of the gas needed for the national electric and industrial industries is imported. The most significant risk of energy supply shortage is the growing dependence on imported natural gas from the United States through two gas pipeline systems, which makes Mexico vulnerable to climatic effects and catastrophic failures in import products due to insufficient storage. There is also a lack of public policy to ensure gas supply.

Electric demand in Mexico is growing at 3.5%-4%, surpassing GDP growth. However, state investment is minimal, and the infrastructure purchases already underway are not increasing megawatts. This creates a widening gap that will seriously affect the country's economy. Regulatory uncertainties stemming from the previous administration's energy reform further complicate matters, adds Olea.

In the electricity sector, there has been a missed opportunity over the past five years to advance the incorporation of renewable energies. By 2024, only 30% of the energy will come from clean sources, falling short of the potential 35%. The critical issue is the need for more investment in transmission and distribution infrastructure, posing challenges in reaching industries and commerce. Regions like the Yucatan Peninsula and Bajio face distribution and transmission failures, says Guillermo García, Planning and Performance Evaluation Vice President, ITAM.

To address these problems, investing US$900 million annually in distribution and transmission and US$1000 million in generation is crucial. Although CFE is making efforts, these may be inefficient without comprehensive planning that integrates hydrocarbon, industrial, and energy planning across different sectors.

A significant opportunity arises from the geopolitical trend of nearshoring, which suggests aligning with the industrial policy of the United States, says García. However, Mexico lacks the infrastructure to capitalize on this opportunity fully. A coordinated infrastructure approach is thus needed to deliver more energy to support incoming investments, while a legal framework providing equal ground for investors and clear rules is essential.

Mounting uncertainty has been detrimental to new projects, especially large-scale ones. At the same time, the materialization of nearshoring has drawn attention to the projected energy demand, which is expected to put pressure on energy generation and transmission and distribution infrastructure. CFE has announced several projects to improve the grid to answer nearshoring investments, but these have yet to materialize.

The growing energy gap will likely force a change in policy toward a more rational allocation of roles between private and public sectors. The challenge lies in how this change will be administered — on a case-by-case basis or based on standardized rules. The hope is for timely implementation and a policy shift toward distributed generation.

As next year's elections draw closer, MORENA’s Presidential Candidate Claudia Sheinbaum has openly spoken about continuing the current administration's energy scheme. Meanwhile, Xóchitl Gálvez, candidate for the Frente Amplio por México coalition, has expressed support for private participation in the energy sector. Various companies await the election results to determine how to invest in Mexico.