Mexico is a country with a large and dynamic telecom market, which has experienced significant changes and reforms in the last decade. According to the GSMA, Mexico had 125 million mobile subscribers, 92 million mobile internet users, and 25 million fixed broadband connections in 2020. The telecom sector contributed 3.5% of Mexico’s GDP and supported 1.4 million jobs in the same year. The telecom sector also plays an important role in enabling digital inclusion, e-government, e-commerce, e-health, e-education, and other digital services in Mexico.

However, Mexico’s telecom sector also faces some challenges and risks that need to be addressed and overcome. Some of these challenges are related to the regulatory and legal uncertainty that has been created by the policy changes proposed by Mexico’s President, who aims to reverse some of the key aspects of the previous energy reform of 2013 and strengthen the role and control of the state-owned companies, Pemex and CFE, over the oil, gas, and electricity markets. Other challenges are related to the infrastructure development, human capital formation, investment attraction, and collaboration with other sectors and countries.

In this blog post, we will discuss some of the main challenges and opportunities for telecom innovation in Mexico in the coming years, as well as some of the strategies and actions that can be taken to foster a more innovative and competitive telecom sector in Mexico.

The regulatory and legal uncertainty

One of the main challenges for telecom innovation in Mexico 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 proposal has implications for the telecom sector, as it could affect 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. These markets are closely linked to the telecom sector, as they depend on reliable and affordable electricity supply for their operations and services.

The proposal also seeks to reduce the regulatory and legal autonomy of the energy sector agencies, such as CENACE, CRE, and CNH. This could have a negative impact on the telecom sector agencies, such as IFT, COFETEL, and SCT, which are responsible for regulating and promoting competition, investment, innovation, quality, and consumer protection in the telecom sector. The proposal could undermine their independence, authority, capacity, and resources to carry out their functions effectively.

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.

To overcome this challenge, it is essential to maintain a clear and stable regulatory and legal framework that respects the rights and obligations of all parties involved in the telecom sector, as well as the commitments and agreements that Mexico has signed with its trade partners and international organizations. It is also important to foster a constructive dialogue and collaboration between the public and private sectors, as well as civil society and academia, to find common ground and solutions that can balance the interests and needs of all stakeholders.

The infrastructure development

Another challenge for telecom innovation in Mexico is the infrastructure development that is needed to support the deployment and adoption of new technologies, applications, and services that enhance the performance, efficiency, and quality of telecommunication networks and systems. Some of these technologies include 5G, Internet of Things (IoT), cloud computing, artificial intelligence, and big data.

According to the ITU, Mexico ranked 67th out of 176 countries in the ICT Development Index in 2017, which measures the level of ICT access, use, and skills in a country. Mexico also ranked 59th out of 141 countries in the Network Readiness Index in 2019, which measures the ability of a country to leverage ICT for increased competitiveness and well-being. These rankings show that Mexico has room for improvement in terms of its ICT infrastructure development, especially compared to other OECD countries.

One of the main barriers for ICT infrastructure development in Mexico is the lack of investment and financing from both public and private sources. According to the World Bank, Mexico invested only 2.5% of its GDP in infrastructure in 2018, which is below the average of 3.5% for Latin America and the Caribbean, and far below the recommended level of 5% for emerging economies. The telecom sector also suffers from low investment levels, as it accounted for only 0.6% of Mexico’s GDP in 2018, which is below the average of 1.4% for OECD countries.

To overcome this challenge, it is necessary to increase and diversify the sources and mechanisms of investment and financing for ICT infrastructure development in Mexico. Some of these sources and mechanisms include public-private partnerships, concessional loans, guarantees, subsidies, grants, bonds, and crowdfunding. It is also important to create a favorable and attractive environment for investment and financing, by reducing regulatory and legal barriers, improving transparency and accountability, enhancing risk management and mitigation, and providing incentives and benefits for investors and financiers.

The human capital formation

Another challenge for telecom innovation in Mexico is the human capital formation that is required to create and adopt new technologies, applications, and services that enhance the performance, efficiency, and quality of telecommunication networks and systems. Human capital refers to the skills, knowledge, abilities, and attitudes of people that enable them to perform productive activities and contribute to economic and social development. Human capital is essential for telecom innovation, as it determines the capacity and potential of individuals, organizations, and countries to generate, adapt, and use ICT.

According to the World Economic Forum, Mexico ranked 97th out of 133 countries in the Human Capital Index in 2020, which measures the extent to which countries develop and deploy their human capital potential. Mexico also ranked 57th out of 63 countries in the IMD World Talent Ranking in 2020, which measures the ability of countries to attract, develop, and retain talent. These rankings show that Mexico has a low level of human capital development, especially compared to other OECD countries.

One of the main factors that affect human capital formation in Mexico is the quality and relevance of education and training systems. According to UNESCO, Mexico had a literacy rate of 95.3% for adults and 98.5% for youth in 2018, which is below the average of 99% for OECD countries. Mexico also had a gross enrollment ratio of 37.5% for tertiary education in 2018, which is below the average of 70.6% for OECD countries. Moreover, according to INEGI, only 20.2% of Mexicans aged 25 years or older had completed tertiary education in 2020, which is below the average of 38% for OECD countries.

To overcome this challenge, it is crucial to improve the quality and relevance of education and training systems in Mexico, by aligning them with the current and future needs and demands of the telecom sector and the digital economy. Some of the actions that can be taken include updating curricula and standards, enhancing teacher training and evaluation, increasing access and equity, promoting lifelong learning and continuous education, strengthening links between academia and industry, fostering digital literacy and skills development, and encouraging innovation and entrepreneurship.

The collaboration with other sectors and countries

Another challenge for telecom innovation in Mexico is the collaboration with other sectors and countries that can provide synergies, complementarities, and opportunities for creating and adopting new technologies, applications, and services that enhance the performance, efficiency, and quality of telecommunication networks and systems. Collaboration refers to the process of working together with others to achieve common goals and objectives. Collaboration can also enable the sharing of resources, knowledge, experiences, and best practices.

According to the Global Innovation Index, Mexico ranked 55th out of 131 countries in innovation performance in 2020, which measures the level of innovation outputs and outcomes in a country. Mexico also ranked 61st out of 141 countries in innovation capability in 2019.

Mexico is a country with a high potential and interest for renewable energy development, as it has abundant natural resources, a growing energy demand, and a supportive policy framework. 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.

However, Mexico’s renewable energy sector also faces some challenges and barriers that need to be addressed and overcome. Some of these challenges are related to the effects of the COVID-19 pandemic, which has caused unprecedented disruptions and difficulties for both demand and supply sides. Other challenges are related to the regulatory and legal uncertainty that has been created by the policy changes proposed by President Andrés Manuel López Obrador (AMLO), who aims to reverse some of the key aspects of the previous energy reform of 2013 and strengthen the role and control of the state-owned companies, Pemex and CFE, over the oil, gas, and electricity markets.

In this blog post, we will review some of the main trends and opportunities for renewable energy development in Mexico in the coming years, as well as some of the strategies and actions that can be taken to overcome the existing challenges and risks.

The growing demand and interest from consumers

One of the trends that can boost 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.

For example, Walmart de México y Centroamérica announced in June 2021 that it signed a long-term power purchase agreement (PPA) with Engie México to supply 100% of its electricity consumption from renewable sources by 2025. The PPA covers more than 2,400 stores and facilities across Mexico with a total capacity of 440 MW. Another example is Grupo Bimbo, which announced in July 2021 that it achieved its goal of using 100% renewable electricity for its operations in Mexico. The company has installed more than 100 solar rooftops on its facilities and has signed PPAs with Enel Green Power México for wind power generation.

These examples show that there is a strong market potential and opportunity for renewable energy development in Mexico, especially for wind and solar power, which have become more competitive and attractive than conventional sources. According to IRENA, the levelized cost of electricity (LCOE) of onshore wind in Mexico decreased by 46% between 2010 and 2019, while the LCOE of utility-scale solar PV decreased by 79% in the same period. These technologies can also offer flexibility and reliability to the grid, as well as environmental and social benefits.

The potential for regional integration and cooperation

Another trend that can enhance 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.

Moreover, there are several projects and plans to increase and improve the cross-border transmission infrastructure between Mexico and its partners. For instance, the proposed Chamizal transmission line would connect El Paso, Texas, with Ciudad Juárez, Chihuahua, with a capacity of 1,000 MW and a length of 7.5 km. The project is expected to be completed by 2023 and would facilitate the integration of renewable energy sources in both sides of the border. Another example is the proposed HVDC transmission line between Manitoba, Canada, and Minnesota, US, with a capacity of 2,000 MW and a length of 560 km. The project is expected to be completed by 2025 and would enable the export of hydro power from Canada to the US Midwest market.

These projects and plans show that there is a great opportunity and potential for regional integration and cooperation in renewable energy development in North America, which can bring multiple benefits for the environment, the economy, and the security of the region. According to a study by NREL, increasing the cross-border transmission capacity between Mexico and the US by 5 GW could reduce CO2 emissions by 8.5 million tons per year, lower electricity costs by $1.2 billion per year, and increase renewable energy penetration by 4.5% by 2030.

The strategies and actions to overcome the challenges and risks

However, renewable energy development in Mexico also faces some challenges and risks that need to be addressed and overcome. Some of these challenges are related to 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.

To overcome this challenge, it is essential to maintain a clear and stable regulatory and legal framework that respects the rights and obligations of all parties involved in the renewable energy sector, as well as the commitments and agreements that Mexico has signed with its trade partners and international organizations. It is also important to foster a constructive dialogue and collaboration between the public and private sectors, as well as civil society and academia, to find common ground and solutions that can balance the interests and needs of all stakeholders.

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 this challenge, Mexico needs to invest in grid infrastructure, storage technologies, demand response mechanisms, and smart grid solutions.

Some of these investments are already underway or planned for the near future. For example, CFE announced in June 2021 that it will invest $2.3 billion USD in transmission and distribution projects between 2021 and 2024. Some of these projects include the expansion of substations, transmission lines, and interconnections with other countries. Another example is the pilot project of CENACE and ENGIE to install a battery energy storage system (BESS) with a capacity of 10 MW/20 MWh in Baja California Sur. The project aims to improve grid reliability and resilience by providing frequency regulation services.

These investments show that there is a need and an opportunity for innovation and modernization of Mexico’s electricity grid, which can enable a higher integration of renewable energy sources. According to a study by IRENA, increasing Mexico’s renewable energy share to 46% by 2030 would require an additional investment of $110 billion USD in grid infrastructure, storage technologies, demand response mechanisms, and smart grid solutions. However, this investment would also generate multiple benefits for the environment, the economy, and society.

Conclusion

Renewable energy development is one of the most important and strategic sectors for Mexico’s energy transition and sustainable development. Renewable energy sources can offer multiple advantages for reducing greenhouse gas emissions, diversifying energy supply, creating jobs, and improving access to electricity. However, renewable energy development also faces some challenges and risks that need to be addressed and overcome. Some of these challenges are related to the regulatory and legal uncertainty created by AMLO’s policy changes. Other challenges are related to the technical and operational integration of variable and intermittent sources into the grid.

To overcome these challenges and seize the opportunities for renewable energy development in Mexico, it is essential to maintain a clear and stable regulatory and legal framework that respects the rights and obligations of all parties involved in the sector.

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.