Mexico’s energy sector has undergone significant transformations in the last two years, driven by the policies of President Andrés Manuel López Obrador (AMLO) and the impacts of the COVID-19 pandemic. These changes have affected the roles and performance of the state-owned companies, Pemex and CFE, as well as the private sector participation and investment in the oil, gas, and electricity markets. In this blog post, we will review some of the main developments and challenges that have shaped Mexico’s energy sector since 2021.
The Constitutional Reform Proposal of 2021
One of the most controversial and recent events in Mexico’s energy sector is the constitutional reform proposal that AMLO sent to Congress on September 30, 2021. The proposal aims to reverse some of the key aspects of the previous energy reform of 2013, which opened up the sector to private and foreign investment and competition.
The main objectives of AMLO’s proposal are to strengthen the role and control of Pemex and CFE over the oil, gas, and electricity markets, and to reduce the regulatory and legal autonomy of the energy sector agencies, such as CENACE, CRE, and CNH. The proposal also seeks to cancel all power generation permits and contracts granted to private companies, as well as to establish a minimum share of 54% for CFE in electricity generation.
The proposal has been met with strong opposition and criticism from various stakeholders, including private companies, industry associations, civil society organizations, and international partners. They argue that the proposal would violate Mexico’s commitments under trade agreements, such as USMCA and CPTPP, as well as international treaties on climate change and human rights. They also warn that the proposal would undermine Mexico’s energy security, competitiveness, and sustainability, as well as discourage investment and innovation in the sector.
The proposal is currently under discussion in Congress, where AMLO’s coalition has a majority in both chambers. However, to approve a constitutional reform, a two-thirds majority is required in each chamber, as well as the ratification of at least 17 out of 32 state legislatures. Therefore, the outcome of the proposal is still uncertain and depends on the political negotiations and alliances that will take place in the coming months.
The COVID-19 Pandemic Effects on Energy Demand and Supply
Another major factor that has influenced Mexico’s energy sector in the last two years is the COVID-19 pandemic, which has caused unprecedented disruptions and challenges for both demand and supply sides. According to SENER, Mexico’s total primary energy supply decreased by 6.3% in 2021 compared to 2020, while its total final energy consumption decreased by 7.5% in the same period. The most affected sectors were transport (-13.9%), industry (-8.9%), and services (-7.4%), while residential consumption increased by 1.9%.
The pandemic also affected the production and trade of oil and gas in Mexico. According to Pemex, its crude oil production declined by 1% in 2021 compared to 2020, while its natural gas production declined by 12.4% in the same period. The company also reported a net loss of $23 billion USD in 2021, mainly due to lower sales volumes and prices, higher financial costs, and exchange rate fluctuations. On the other hand, Mexico’s oil exports increased by 6.6% in 2021 compared to 2020, while its oil imports decreased by 18.5% in the same period. Mexico’s natural gas imports increased by 3.4% in 2021 compared to 2020, mainly from the US via pipelines.
The pandemic also had an impact on Mexico’s electricity sector. According to CENACE, Mexico’s electricity demand decreased by 2.6% in 2021 compared to 2020, while its electricity generation decreased by 3.4% in the same period. The most affected sources were coal (-26.8%), fuel oil (-18%), and hydro (-10.9%), while solar (+23.9%), wind (+10%), and nuclear (+5%) increased their share. CFE reported a net loss of $2.8 billion USD in 2021, mainly due to lower revenues, higher fuel costs, and exchange rate fluctuations.
The Opportunities and Challenges for Renewable Energy Development
Despite the adverse effects of the pandemic and the policy changes proposed by AMLO, Mexico’s renewable energy sector still has some opportunities and challenges for development in the coming years. According to SENER, Mexico’s renewable energy share in total primary energy supply was 9.6% in 2021, while its renewable energy share in electricity generation was 23.4% in the same year. The main sources of renewable energy in Mexico are hydro, wind, solar, biomass, and geothermal.
One of the opportunities for renewable energy development in Mexico is the growing demand and interest from consumers, especially large industrial and commercial users, who are looking for cleaner and cheaper sources of electricity. According to CRE, the number of qualified users who can buy electricity from the wholesale market or from qualified suppliers increased by 28% in 2021 compared to 2020, reaching more than 1,600 users with a total demand of 18,600 MW. Many of these users are opting for renewable energy contracts or self-generation projects to reduce their carbon footprint and energy costs.
Another opportunity for renewable energy development in Mexico is the potential for regional integration and cooperation with other countries, especially the US and Canada, under the framework of USMCA and other initiatives. According to SENER, Mexico has an interconnection capacity of 2,200 MW with the US and 400 MW with Guatemala and Belize. These interconnections allow Mexico to exchange electricity with its neighbors and benefit from the complementarity and diversity of their renewable energy resources. For example, Mexico can export solar power during the day and import wind power during the night from the US.
However, renewable energy development in Mexico also faces some challenges and barriers that need to be addressed and overcome. One of the challenges is the regulatory and legal uncertainty that has been created by AMLO’s proposal to reform the constitution and reverse some of the previous energy reforms. This uncertainty has affected the confidence and expectations of private investors and developers, who have seen their projects delayed or canceled due to legal disputes, administrative obstacles, or political pressures. According to SENER, the total installed capacity of renewable energy projects under construction or in operation decreased by 18% in 2021 compared to 2020, reaching 9,800 MW.
Another challenge for renewable energy development in Mexico is the technical and operational integration of variable and intermittent sources into the grid. According to CENACE, the maximum penetration of renewable energy in Mexico’s electricity system was 43% in 2021, while the minimum was 4%. These variations pose challenges for grid stability, reliability, and security, as well as for market design, dispatch, and pricing. To address these challenges, Mexico needs to invest in grid infrastructure, storage technologies, demand response mechanisms, and smart grid solutions.
Conclusion
Mexico’s energy sector has experienced significant changes and challenges in the last two years, mainly due to the policies of AMLO and the effects of the COVID-19 pandemic. These changes have affected the roles and performance of Pemex and CFE, as well as the private sector participation and investment in the oil, gas, and electricity markets. The future of Mexico’s energy sector depends on the outcome of AMLO’s constitutional reform proposal, as well as on the recovery and resilience of the economy and society after the pandemic. Renewable energy development still has some opportunities and potential in Mexico, but it also faces some barriers and risks that need to be addressed.