Power Grab: What Mexico’s State-Centered Electricity Policy Means for Trade, Climate, and the Economy
Over the past two years, the government of Mexican President Andrés Manuel López Obrador has enacted a series of steps that aim to contain private investment in the power sector and return control of the sector to state utility CFE. These moves will reduce needed investment in the sector and lead to higher electricity costs for Mexican industry and manufacturing, affecting employment, trade, and Mexico’s ability to meet its clean energy targets, according to this new report by the Inter-American Dialogue. Based on analysis of key data, the report outlines the specific impacts of the policy measures on private investors in the power sector and analyzes the effects for Mexico’s economy, clean energy goals, and trade with the United States.
Key findings:
Many major multinational companies operating in Mexico depend on private sources of power generation, which has allowed them to consume cleaner energy from modern renewable and efficient natural gas plants. Private companies also supply a large and growing share of total generation.
Privately run energy generation projects in Mexico are generally cheaper than CFE-owned plants, meaning that the new policies seeking to limit private electricity supply in the power market will lead to higher electricity costs. Any rise in costs will have to be covered through an increase in rates to consumers or government subsidies, which would ultimately be borne by taxpayers.
The private electricity sector has helped boost employment in Mexico, providing billions of dollars in foreign direct investment and tens of thousands of direct and indirect jobs, and the sector is poised for further growth. However, if private sector-run power plants are not permitted to come online, additional investment and jobs will be threatened. Demand for renewables equipment also provides cross-border manufacturing, investment, and trade opportunities.
Energy-intensive industries are central to Mexico’s economy, comprising a significant share of GDP, providing employment, and generating critical products that are exported to the United States. Some of the largest Mexican producers in energy-intensive industries have benefited from the opening to private investment in the power sector, allowing these companies to generate and consume energy at more competitive prices, which gives them a competitive edge in global markets.
As US companies attempt to reduce the risk to their supply chains posed by global threats like the US-China trade war and Covid-19 in a “nearshoring” process, higher electricity costs will reduce Mexico’s attractiveness as a manufacturing hub.
Mexico has made a strong commitment to tackling climate change, in part by promoting clean energy. The energy market opening led to an increase in renewable energy capacity. However, due to the recent policy changes, Mexico will no longer be able to meet its clean energy targets.
An earlier executive summary of this report was published in August in a policy brief.
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