The Role of Energy in Mexico's Nearshoring Rise

In recent years, nearshoring has become a prominent trend, with many companies opting to relocate their operations to the Americas. This strategy offers numerous advantages, including lower transportation costs, shorter supply chains, and enhanced access to the flourishing North American market. Consequently, Mexico has emerged as an attractive investment destination for companies aiming to establish a presence in the region. To ensure the success of these new businesses, a stable and dependable energy supply is imperative.

Mexico possesses formidable manufacturing capabilities and a skilled workforce, but to fully capitalize on the surging trend of nearshoring, it must prioritize the modernization and expansion of its electrical infrastructure to meet the escalating energy demands of intensified industrialization.

According to Ricardo Zúñiga, Country Manager, CapWatt, concerns among industrial stakeholders revolve around the lack of infrastructure available to new users looking to establish operations and the limited capacity for existing businesses to expand. This includes challenges related to insufficient readiness of industrial parks to extend their energy offerings to support the growth of industrial entities. “The demand is ahead of generation, and that is the issue that concerns major consumers the most,” he stated adding that the government should work on developing a set of rules to foster private investment.

The key challenge for Mexico lies in expanding and modernizing its electrical grid to guarantee a reliable electricity supply. This is crucial in regions with established industrial development, where energy demand is on the rise, as well as in developing areas where such infrastructure could stimulate industrial investment.

To attract the desired economic development, Mexico's energy strategy should also incorporate renewable solutions, aligning with the increasing global trend of companies seeking to reduce their carbon footprint. Eduardo Robledo, Senior Commercial Manager, Tuto Power, considers the availability of energy to be regionalized, which causes disparity in economic growth. “Companies relocate to areas with access to energy. We need to promote energy generation in the southern part of the country. Without energy or gas, industries will not relocate to states like Yucatan which rely entirely on energy provided by the public sector. This concentration of nearshoring in a single part of the country is a consequence of this factor,” Robledo highlighted.

Aldrich Richter, Managing Director, Bergen Engines noted that in nearshoring, being located near the US market is not enough to be the ideal investment destination. He said that companies are not only worried about having an energy supply, but how clean is this supply. He urged for regulations that allow companies to generate their own energy. “It is sad that Mexico arrives without a proposal or commitment to emissions reduction at COP28; however, this has gone unnoticed," he noted.

The link between electrical energy availability and operational capacity, particularly in energy-intensive sectors like manufacturing, is evident. Strengthening and expanding the transmission grid would enable Mexico to harness renewable energy from untapped areas with the potential for energy generation. Addressing issues like resistance and congestion in existing transmission lines is also crucial to minimizing energy loss, optimizing grid efficiency, and ultimately reducing costs for consumers.

Mexico's increasing reliance on gas imports is also anticipated to escalate with this nearshoring trend. Natural gas stands as a vital component in the country's energy transition, and as industries eyeing relocation to Mexico contribute to a significant uptick in energy demand, strategic planning is imperative to fortify the nation's energy system.

According to SENER, natural gas production as of September 2023 stood at 4.969Bcf/d. Notably, Mexico's gas imports continue to be substantial, nearing 6.8Bcf/d in June 2023. "While today we import 60% of the natural gas needed in the energy sector, we are not concerned that the supply may be cut off, but it is important to discuss the initiative to become leaders on the global stage in providing natural gas. This is especially significant considering that we are the seventh country with the largest reserves of this commodity,” added Carlos Hernández, CEO and Founder, Sujio.

Jerson Reyes, Key Account Manager, ENGIE, said the interconnection between nearshoring and the energy sector is no longer a distant future but a “present future,” emphasizing the role of adaptability in the sector. "Adaptability is a factor that we have been applying during the time ENGIE has been in the market. The industry continues to undergo constant change; this is a phenomenon that does not stop,” he added.

To address the current environment, Hernández summarized the primary concerns of industrial consumers: ensuring legal certainty and transparent pricing in the wholesale electricity market, feasibility for expanding energy demand and attracting investments, seeking cost savings on energy tariffs compared to the CFE, and a strong emphasis on clean energy solutions for the short, medium, and long terms. "This is not new, examples of these measures exist in countries like Spain, often implemented in self-supply. It was a significant factor in the progress of many companies in that country. We should adopt this model in Mexico, even though it happened there 20 years ago," Richter said.