The Unfinished Business of Mexico’s Energy Reform

EPRINC

Mexico’s 2013 energy reform has led to pledges of almost $200 billion of private investment and renewable power auctions garnering bids to provide electricity at record-low prices. The Mexican government should continue to build on the successes of the reform, César Hernández, former Mexican undersecretary of electricity (right), and Jorge Castilla, managing director for Mexico at Accenture, said at an event hosted by the Inter-American Dialogue, the Embassy of Mexico, and the Energy Policy Research Foundation.

Mexico has immense untapped renewable energy potential. It is among the countries with the highest solar irradiation, and as the costs of photovoltaic technology continue to fall, this renewable potential will translate to lower electricity prices for Mexicans and increase rural access to power, said Castilla. The first three long-term power generation auctions have demonstrated that solar and wind are by far the most competitive renewable technologies in the Mexican market. In addition, new rules for rooftop distributed generation have made it an attractive option, especially for higher-income households paying for electricity at the unsubsidized tariff level. Hydroelectric and geothermal project bids have been less successful in recent power auctions. However, Hernández noted that changes to the auction structure, such as awarding contracts with longer construction phases or separating technologies into baskets, could increase the competitiveness of these technologies.

Private companies are increasing their share in electricity generation. Hernández projected that in the fourth long-term power auction private companies will account for one-third of offtake, whereas in the first two auctions the Federal Electricity Commission (CFE, the state utility) was the only buyer. Despite some initial postponements, power and transmission auctions are expected to continue under the new administration.

In the oil and gas sector, López Obrador has generated uncertainty among investors, repeatedly vowing to review oil and gas contracts awarded under the reform to root out possible corruption. However, according to Castilla, the transparency with which the auctions were conducted means it is unlikely that evidence of wrongdoing will be found. He also expects that the administration will walk back its declaration not to hold new auctions before 2021 as the revenues the reform promised begin to flow and López Obrador realizes the importance of private investment to fund the ambitious social programs and infrastructure projects he has promised. Castilla expressed support for López Obrador’s plan to allow Pemex to choose its own operating partners and end the requirement introduced under the reform that Pemex choose its partners under a competitive bidding process. He was also uncritical of the new administration’s plan to ban unconventional oil and gas development, which he said was not competitive with US shale anyway.

Finally, community land consultations created by the energy reform continue to be a challenge for renewable projects and natural gas pipelines, though Hernández downplayed the extent to which they deter investors, pointing out that the problems are not exclusive to Mexico. Clarification of the protocol for these processes will be necessary to lower risk and ensure that energy projects reach completion.

With the new administration in its early days, energy will not be the only sector in the spotlight. However, for all that López Obrador has criticized the reform, the potential that it created for economic growth and government revenue may become too difficult to ignore.