A Decisive 2021 for the Mexican Energy Sector
STORY INLINE POST
It would be a massive understatement to say 2020 was simply a challenging year for the Mexican energy sector. The clash of external circumstances — a once in a century pandemic shocking markets globally and the potential shift in energy policies by our upstairs neighbor — meeting internal regulatory hurdles and an administration, seemingly, willing to end any previous framework for the private sector to work with created a terrible environment for growth and investment in the space.
In the context of the year just concluded, it seems like a reasonable quest to ponder 2021 and the challenges ahead. While the raging pandemic continues (locally, perhaps even more so than in other countries) and as the ramifications of vaccine deployment, efficiency and new strains continue to dominate public markets for at least several months, we can’t help but wonder what will create the biggest headwinds for the sector this coming year. So, wishing all a happier 2021, here are a couple of thoughts on things to look out for this year.
Let us start with the Biden-Harris administration and their clear shift in energy policy for the US. While not a surprise to anyone, an overarching question for Mexico is, how much and how strongly will the US attempt to influence its allies and neighbors on climate change. With just weeks in office, President Joe Biden has signed executive orders that not only brought the US back into the Paris Agreement but created positions, task forces, and processes that put climate at the center of US foreign policy and national security. For instance, the Special Presidential Envoy for Climate (seated in the National Security Council, by the way) states, “…it will be a US priority to press for enhanced climate ambition and integration of climate considerations across a wide range of international fora.”
Encouraging as this may seem for the renewables space in Mexico in particular, the fact is the US is going through significant challenges itself. Coming off a jarring and divisive election and still working through challenges in healthcare and the economy, the prospects of the administration being able to focus and prioritize its energy policies in the short term seem unlikely. Monitoring the ability to fend off the pandemic and reinstate stability in the US will be critical for Mexico’s energy sector and a key aspect of how 2021 shakes out.
The second dynamic that could shape our sector this year is the increasing focus in global markets on ESG financing. As demonstrated in 2020 with green, social and sustainable bond issuances reaching new highs (US$42 billion in North America, more than 2016-2019 combined), and savings materializing in new issues for sponsors, there is no shortage of investor appetite in sight. For Mexico’s energy space, this means capital should be available for well-rounded projects in a variety of manners. Whether it’s a corporate achieving certain energy efficiency objectives or a transition bond in a less likely sector like mining or consumers, there should be opportunities in the space that capture this trend.
Last, but not least, the political landscape in Mexico for this year will, of course, play a role in the sector. With the large midterm election coming up in June (20,000-plus elected positions are at stake across Congress, governors, state legislatures and local municipalities) and energy having played such a central role in AMLO’s policymaking and campaigning, the strategy and participation of AMLO in the election, and the response of the opposition, can have a material impact on the future.
With the US changing gears and leading the way, and markets indicating clear preferences for green, social and sustainable investments, where does Mexico stand? How do we prepare to achieve our own (modest) commitment to the Paris Agreement? This year will be critical for the AMLO administration to show progress (at least internationally) as 2024 looms closer and closer, and the internal discourse does not seem to be pointing in the right direction.
With so much to offer in renewable sources, it would be a shame if Mexico misses the opportunity. With so much to come, it will be a challenge to capture it.