Experts differ on Mexico power market's long-term prospects after Lopez Obrador

Houston — Experts on Mexico's power market express pessimism about its short-term prospects under President Andres Manuel Lopez Obrador for opening up the market for enhanced competition and renewables, but the experts differ about whether the long-run economics ought to compel a transition.

Lopez Obrador began a six-year term as Mexico's president in December 2018, having vehemently opposed predecessor Enrique Pena Nieto's efforts to bring competition and foreign investment into Mexico's energy sector. The new president canceled the fourth clean energy auction, despite the previous three auctions yielding contracts for 7 GW of wind and solar capacity at an average price of about $21/MWh.

"We have certainly had a very challenging 12 to 18 months, and we certainly a challenging couple of more years ahead of us," said Rebecca Bollenbach, a partner at Essintia Advisory Partner, a consultancy focused on energy and other commodities markets.

Bollenbach on July 16 moderated the Gulf Coast Power Association's special briefing, "Deregulation Under Fire: The Politics and Pressures Shaping Mexico's 2020 Power Sector."

Lopez Obrador's actions "seek to limit foreign direct investment for energy infrastructure that brings lower-cost fuels at prices that compete with traditional business models," said John Hilfiker, a North American senior energy analyst at S&P Global Platts Analytics.

"The government of Mexico will now face challenges to back-up intermittent renewable generation from solar and wind but their finances are so poor that they will seek to push-out competition," Hilfiker said in a July 20 email. "Ratepayers will not being getting the lowest-cost option, and [it] removes money that could've been allocated elsewhere."

With another 3.5 years to affect Mexico's energy market, AMLO's presidency may see "a breaking point from aging infrastructure, lack of investment in transmission and insufficient hydrocarbon production from the national oil company Pemex," Hilfiker said.

'Hard to be optimistic'

GCPA briefing panelist Alejandro Blanco Moreno, co-founder of TradeOn Energy, a brokerage and consultancy focused on Mexico's wholesale electricity market, pointed out that while the number of participants in that market grew from 14 in 2016 to 173 in 2019, growth has stagnated with just 179 qualified as of the first half of 2020.

Jeff Pavlovic, a founding partner of Bravos Energia, which represents generation assets in the Mexican wholesale power market, was one of the panelsts in July 16 GCPA event. Pavlovic is a former high official in Mexico's Energy Secretariat and Federal Electricity Commission.

"In the short term, it's hard to be optimistic, but the reason we [at Bravos Energia] are still here is because we think in the long run, the right decisions will have to prevail," Pavlovic said. "In the long run reality will force the market back into decisions ... that are good for the country."

But Tulane Energy Institute associate director Eric Smith on July 20 cast doubt on long-term prospects as well, once Lopez Obrador's mandatory one-term presidency ends.

"I do not think his successor will have any better conditions as Mexico is -- if anything, it will be more dependent on US natural gas and refined products than during [Lopez Obrador's] administration," Smith said in an email.

Smith expects the situation to "remain relatively static," even after the likely election of a more centrist successor "who will be more friendly to offshore oil and gas and who may be more friendly when it comes to renewable power generation," but new investment capital may be slow to show up, as Lopez Obrador's election proves that changes can be reversed.