Rising Costs, Risk Shifts Redefine Mexico's Power Market

Q: How has your strategy evolved over the past few years, considering Mexico’s shifting regulatory landscape and five years since the onset of the pandemic?

A: The market has undergone significant changes, not only due to regulatory shifts but also because of the absence of new, or rather, additional, generation capacity.

Qualified suppliers have faced considerable challenges in securing additional electricity. I refer specifically to energy supply, not installed capacity. Both power prices, measured in megawatt-hours, and capacity prices have increased markedly. In particular, the spot market for capacity has driven up costs.

Generators have been able to commercialize capacity at significantly higher prices than before. Six years ago, capacity prices were typically around US$6 to US$7 per kilowatt-month. Today, they range from US$22 to US$28 per kilowatt-month, representing a three to fourfold increase.

Power prices have also risen, though the evolution there has been more complex. Around six years ago, electricity prices hovered in the US$30 to US$40 per megawatt-hour range, with many contracts indexed to natural gas. Today, average prices are closer to the US$50 range.

Despite these increases, clients can still realize savings of around 15 to 20% compared to CFE tariffs, which remain attractive. However, it is a substantial drop from the 30 to 40% savings we saw a few years ago. This reduction in potential savings stems from both the limited development of new generation projects and the regulatory uncertainty that has dampened investor confidence. While demand in the electricity market continues to grow, the supply has remained relatively flat, pushing prices upward.

Q: Has President Sheinbaum’s current energy policy aligned with your expectations? Would you say she has delivered on her proposed approach to the market?

A: I believe it is still too early to make a definitive assessment. Many power generation projects from the previous administration have yet to come online, most of which are government-backed. There are very few private projects currently awaiting completion, and we have not yet seen clear signals from the new administration regarding a broader openness to private participation in the energy sector.

From my perspective, there is still some hesitancy within the private sector. Of course, I do not have full visibility into every company’s internal strategy or discussions.

That said, I hope to see renewed willingness to grant power generation permits to private entities, and for the government to move forward with bidding processes for new projects. If those are launched in a timely manner, we could see combined-cycle plants come online within three years, solar projects within one year, and wind projects within two years.

Q: How have client demands and the industry’s mindset evolved in recent years?

A: We have consistently advocated for shifting risk away from the client. For example, during the inflationary surge in 2022, when inflation reached around 8% in the United States and was even higher in Mexico, many contracts were indexed to US CPI and, in some components, to Mexico’s INPC. This presented a significant risk.

I often asked clients whether they were comfortable bearing the full consequences of inflation, especially if it were to reach levels seen during the Volcker era, when inflation in the US exceeded 20%. The answer was always no. As a result, we began encouraging suppliers to assume that risk. Initially, it was met with strong resistance. But surprisingly, within a year, suppliers began offering fixed-price contracts, independent of inflation indices.

At that point, the difference between the fixed price and the inflation-indexed price implied an inflation premium of around 5%, while the expected inflation for the following year was just below that, at around 4.5%. In other words, the cost of hedging was quite reasonable, and this marked a turning point in supplier risk appetite.

Energy consumption surplus or shortfall risk has typically been one that suppliers are reluctant to absorb. However, we are now seeing a growing number of suppliers, albeit limited, offering pay-as-consumed structures. These contracts, also known as "take-and-pay" rather than "take-or-pay," allow clients to pay only for what they consume, eliminating the risks associated with over or under-contracting.

We have implemented such innovations in our advisory work. Today, in the contracts we help negotiate, we estimate that 70 to 80% of the contractual risk is now borne by the supplier. Eight years ago, that ratio was reversed, with the client carrying the bulk of the risk. Looking further back, under the former ”autoabastecimiento” scheme, clients bore virtually 100% of the risk. The shift in risk distribution toward suppliers is a clear sign of a more mature and competitive market.

When the market opened in 2016, I spoke with colleagues who had observed the development of other deregulated markets, such as those in Spain or the United States. They told me it would take about 10 years for a new market to reach maturity. We have accomplished that in less than a decade. As we approach 2026, the Mexican wholesale electricity market has evolved rapidly in both sophistication and competitiveness.

As a firm, we take pride in having been active agents of change, always focused on securing more favorable and balanced terms for our clients.

Q: Now that isolated supply has been authorized for the development of projects of up to 20MW, what do you think is next for this sector? What are the main challenges you foresee for these projects, and how do you believe industrial clients will approach them?

A: There is undoubtedly a significant opportunity in this space. However, the market still needs time to mature. Initially, it is likely that end users will need to make the capital investment themselves.

For third-party developers to step in to finance the infrastructure and sell the power to clients onsite at competitive rates, both the financing landscape and project development ecosystem need to evolve. That includes building a stronger base of EPC contractors to foster competition and reduce costs. This process will take time.

Nonetheless, the potential is enormous, particularly for industrial users operating in regions with limited power availability. There are thousands of users in Mexico with demand levels well below 20MW. The regulatory framework for isolated supply has created an attractive segment that aligns well with the scale and needs of many of these users.

Q: Is ESG still a relevant priority for industrial players? And second, what role do you see energy consulting firms playing in helping companies to meet these goals, assuming they remain important?

A: At the global scale, ESG has undoubtedly lost some of its prominence, particularly in the capital markets. ESG-themed investment funds, which were at the forefront three to five years ago, have seen a decline in momentum. However, that should not be interpreted as a diminished importance of the underlying principles.

Among our clients, particularly those in the automotive sector, environmental considerations remain critical. Many of these companies are required by both their customers and their own sustainability strategies to demonstrate a substantial renewable energy component in their supply chains. Procuring 100% renewable electricity has become one of the most direct and effective ways to meet those targets.

In our experience, clients in this sector typically aim for between 30% and 100% renewable energy use. The environmental component of ESG is very much alive and will remain relevant. Governance, of course, is essential for any organization and is not going away. The social dimension is also important and should continue to be addressed seriously, even if it currently receives less public attention.

What has faded somewhat is the acronym "ESG" as a marketing term—it has become more of a branding exercise in some contexts. But the principles it represents are still fundamental, and energy consultancies play a key role in helping clients operationalize them, especially by designing and executing strategies to decarbonize their operations efficiently and credibly.

Energy Intelligence Consulting assesses the energy use of players in the commercial and industrial environment and advises on the best possible power option to reduce costs.