Regulatory Uncertainty Drives Away Renewable Energy Investment
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Regulatory Uncertainty Drives Away Renewable Energy Investment

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María José Goytia By María José Goytia | Journalist and Industry Analyst - Wed, 02/23/2022 - 13:31

President López Obrador administration’s rejection of renewable energy generation in favor of fossil fuels and the strengthening of state companies like CFE and PEMEX are driving away renewable energy investments, as well as jeopardizing Mexico’s commitment to an energy transition aimed at reducing carbon emissions by 35 percent in 2024.

For instance, the weakening of the wind energy industry has been caused by its lack of growth in recent years. Its development outlook has been reduced by 44 percent, according to the Global Wind Energy Council (GWEC), adjusting generation downwards from 16 GW in 2024 to 9 GW.

"Recently, Mexico's government has shown reluctance to further develop renewable energy projects, including wind, which is reflected in public spending commitments, where the vast majority is invested in fossil fuels," reported the GWEC. In their document "Seizing Wind Energy's Green Recovery Opportunities in Developing Economies,” the council reports that project and regulation uncertainty, plus slower permitting processes has led to a decrease in investment in renewable energy in Mexico, slowing down the sector's growth in recent years.

Recently, Mexico´s federal government has not authorized new wind and solar projects, since the focus has been to support CFE by exempting the company from competing in the open market. In addition, there is an increasing difficulty in permit´s procedures for renewable energy production. For instance, in the past, evaluations and tests for private wind projects would take between three to four months to be completed, today it can take between 1.5 and 2 years.

Also, the lack of promotion for renewable energies represents a significant economic loss. The GWEC warns that the Mexican economy risks losing the opportunity to incorporate US$3.5 billion to the gross added value of wind energy production and 225,000 new jobs to the sector.  In addition, Mexico will pass on the opportunity to reduce 181 million metric tons of carbon dioxide emissions.

The lack of renewable energy development is accompanied by discussions at the Open Parliament held in Congress regarding President López Obrador´s electricity reform which prioritizes CFE over the private sector in electricity generation, not taking into account production costs nor sustainability issues. This decrease in renewable energy production also possesses a risk to Mexico's competitiveness, since the goals of many companies are aligned with an energy transition aimed at reducing carbon emissions. This concept was reaffirmed by Alberto de la Fuente, president of the Executive Council of Global Enterprises (CEEG), during the Open Parliament forums, where he assured that if Mexico does not meet its clean energy goals, global companies could choose to leave the country.

"If we do not produce clean energy in Mexico, then we will fail in the fight against climate change, we could face tariffs and quotas on our products, we will lose market competitiveness, but furthermore, companies may simply leave if they know that in Mexico, they will not be able to meet their clean energy goals," said de la Fuente during his intervention.

Mexico’s international commitments to the clean energy transition include 31 percent reduction in greenhouse gas emissions by 2030 and 35 percent of energy generation from clean energy sources. Though President López Obrador’s administration has openly dismissed wind and solar energy generation, they have argued they will include an increase in natural gas implementation to fulfill the goal, however, this also poses a risk to Mexico’s energy sufficiency.

Today, Mexico is more dependent on natural gas than ever before, since the country’s domestic natural gas demand has grown 30 percent in the last three years aimed at generating 60 percent of its electricity supply. To meet this demand, Mexico is currently importing record amounts of natural gas via pipelines from Texas, from where it imports 75 percent of its total natural gas demand.

Mexico does not produce enough natural gas in-house to fulfill its current demand, and relying on Texas imports has proven risky in the past, as climate conditions can alter the pipeline supply jeopardizing Mexico’s energy generation, as it occurred in 2021. The reliance on foreign natural gas also dismisses the government’s discourse to achieving energy sufficiency in-house.

According to the CEEG, Mexico needs to invest at least US$6 billion by 2024 to meet its clean energy goals. This amount of investment cannot be covered by the government alone, it requires a strong involvement from the private sector. With regulatory uncertainty continuing until late April and the government’s discourse maintaining its line in favor of fossil fuels, private sector’s bet on new clean energy projects in Mexico is highly unlikely.

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