Mexico’s Energy Transition: The Time is Now

Klaus Schwab, founder and executive chairman of the World Economic Forum, grabbed headlines in 2016 when he wrote The Fourth Industrial Revolution. The title was overwhelmingly attractive. Being part of history and capturing our time as one of those inflection points for humanity is certainly impressive. But the essay also created fear due to its transcendental implications. It described a future of non-stop, accelerated change; a long, vertiginous leap for humanity. The prediction that 60 percent of the kids entering primary school would work in jobs that were non-existent at that moment made everyone wonder what the future would be.  

The power sector is not only part of this revolution but together with data and technology, it is considered one of its important pillars. This is for a reason that is unrelated to the immediate productivity and comfort that machine learning provides through our smart phones. The main reason is the medium-term threat of climate change, a motivation that is unique and revolutionary in itself: the unprecedented global, communitarian effort to save the planet.

COVID-19 has accelerated all of these trends. Last year was considered the year of the explosion of videoconference and groups working through the use of digital tools. A fascinating bubble is now in place around climate change. Larry Fink, the boss of BlackRock, wrote in February 2021, “We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity.” In 2016, by the time Schwab published his famous book, skepticism about Tesla was starting to float around. Its US$22 billion market capitalization seemed not to tally with the real value of the company. Today, Tesla’s market capitalization is $800 billion, 600 percent higher than one year ago. In that period, it has sold around 300,000 cars. Volkswagen sold 9 million cars in 2020 but it is six times smaller in terms of market cap. The main reason for this is the consumer trend surrounding climate change products.

In 2020, renewable energy firms like Sun Power, Enphase, Sunrun, Senova, or Vestas, among others, exploded in the stock market, all increasing their market value between 100 and 800 percent. In the same group, we can put fuel cell manufacturers like Bloom Energy and Plug Power. Governments are taking action as a consequence of this. China installed 50GW of solar power in 2020, almost equivalent to the total installed capacity in Mexico. Europe is planning to tax products not manufactured under strict ESG standards, including carbon reduction mechanisms.

The task of stopping (and even reverting) climate change is monumental. Predictions are a high-risk bet under this scenario of rapid change. Paths to decarbonization could change as technology evolves, and it is precisely the creative destruction process that makes economies and cultures evolve. Nevertheless, some of those trends are clear in the short and medium term. I would emphasize three, which happen to represent a great opportunity for Mexico:

• Gas-fueled power generation will continue as the central block of the energy transition, as it has been for the last 20 years, substituting much dirtier coal and fuel-oil power plants. Utility-scale power plants will be needed as much as other small, on-site or off-site power generation blocks. Hybrid concepts will also become more common, such as microgrids where a conventional power generator is combined with solar or batteries. The difficulty to store electricity for long periods, and the possibility of retrofitting these power generation blocks to consume hydrogen or synthetic fuels will provide the long-term visibility that this capital-intensive infrastructure requires. Regulatory wise, capacity and ancillary services need to provide sufficient cash flow for dispatchable generators.

• Solar is considered the king of the electricity sector, the International Energy Agency said last year. With renewable energy meeting 80 percent of the growth in demand by 2030, solar has become the cheapest form of electricity production and its deployment will increase year after year in the next decade.

• Digitalization will have an increasing impact on all sectors of the economy. Data and artificial intelligence will change the way we consume energy, enabling further installation of distributed energy resources, from accessible smart thermostats with demand response, to distributed solar panels working together as a virtual power plant. The efficiency gains from a digital economy will also play an important role in how power companies can offer optimized products by reducing their capital investment and operational costs.

Mexico cannot miss this train called the Fourth Industrial Revolution. In terms of the energy transition, now may be the right time to do it at an affordable cost. The debate around the benefits of deregulation, central planning, and strengthening of CFE is one that lawmakers and civil society will need to solve, with a special focus on the consumer. Car companies will not only move to electric vehicles but will soon require 100 percent, clean, low-cost energy to manufacture their products. Regardless of the regulatory framework and the discussion on who does what, or how private companies can help in this endeavor, the participation in an integrated economy for a country that relies on exports for 40 percent of its GDP makes the energy transition probably the most important challenge for Mexico’s success in the coming years.