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June 6 elections decisive for Mexico's power sector

Highlights

Share of Mexico's generation at stake

Over 80 GW of power capacity in limbo

Changes in dispatch to displace natural gas

Mexico's June 6 elections will be decisive for the future of the energy sector as President Andres Manuel Lopez Obrador seeks to gain enough support to revise the country's constitution and put a formal end to the country's energy liberalization.

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At stake in the power sector is a share of Mexico's generation, which is currently controlled by state utility Comision Federal de Electricidad (CFE).

Currently, there are over 1,000 permits issued to private companies to generate more than 80 GW of electricity awaiting to be executed, according to data from the Energy Regulatory Commission (CRE).

Those permits were awarded during the prior administration, which opened the sector to private investment after decades of state monopoly.

Those permits more than cover current power demand, which fell to 44 GW in 2020 from 47 GW in 2019 because of the coronavirus pandemic, Energy Secretariat (SENER) shows.

SENER data shows Mexico currently has 80 GW of installed generation capacity, with natural gas fueling over 50% of that power. Total demand of natural gas in Mexico was 8.2 Bcf/d; imports from the US were 6.2 Bcf/d, data from S&P Global Platts Analytics shows.

The private sector has made big bets in Mexico's energy future, hoping to modernize the country's infrastructure and secure some of CFE's market share.

But Lopez Obrador has argued that with capacity exceeding demand, private company participation is not necessary. His administration has prevented companies holding permits from proceeding with their plans.

For instance, roughly 30 GW of capacity was planned to cover retired CFE capacity, but those retirements were put on hold.

The northeast region in particular, comprising the states of Coahuila, Nuevo Leon and Tamaulipas, has the potential to generate 30% of Mexico's power needs with solar and wind energy, according to Rogelio Montemayor Seguy, president of the energy cluster of the state of Coahuila, which is home to many local and foreign companies.

"That enormous potential is being wasted with the current restrictions to private generation," Montemayor Seguy said during a May 17 panel organized by IMEF, one of Mexico's largest financial nonprofit organizations.

Changing rules

In an attempt to maintain CFE's market dominance, Lopez Obrador has tried to change the rules that the grid operator CENACE uses to dispatch electricity, which is based on costs.

Authorities tried to give priority to power plants owned by CFE that run on coal, diesel and fuel oil over the solar, wind and gas-powered power plants, which lower cost and are mostly owned by private participants.

The government has also toughened rules for companies to generate their own power, looking to regain them as CFE clients.

While this move, and others, have been halted in Mexico's courts, if Lopez Obrador gains enough support from congressional and gubernatorial candidates in the June 6 elections, they could be made permanent.

"The president has been very consistent in his discourse and has kept his promises. The president has said he wants to do this, and so nobody should feel surprised of what he has attempted in the energy sector," said Rodrigo Montes de Oca, a research scholar at the Baker Institute Center for the United States and Mexico.

According to S&P Global Platts Analytics, the changes in the order of dispatch could potentially displace over 500 MMcf/d of natural gas in Mexico's power sector.

"This would come from just high sulfur fuel oil and diesel CFE generation assets, which have produced 2.8 GW in April 2021 only, which is up 18% from the same time last year but down 42% from 2019 levels" said John Hilfiker, a senior energy analyst at Platts.

That displacement would cut demand for natural gas, some of which is imported from the US.

Platts Analytics expects Mexican gas demand to grow by 16% from 2021 to 1.3 Bcf/d in 2026. However, roughly half of the demand is reliant on the CFE's plans to develop over 4 GW of natural gas-fired generating capacity.

Possible stagnation

Some market watchers expect the president's MORENA party and its allies to keep their current majority in congress and to win over half of the governorships up for grabs. However, they do not expect the coalition to win the two-third majority needed to change Mexico's constitution, as the election is divided in key states of the country.

If the president does not win a majority, his attack on energy liberalization will not escalate any further, but the sector will likely remain stagnant for at least three more years, said Paul Alejandro Sanchez Campos, a Mexico-based energy consultant

"The attack on the industry will go on. I do not see the president changing his discourse and allowing the participation of private companies in the sector," said Sanchez Campos

Under this scenario, CFE will not have any incentive to improve its plants and there will not be investments, said Paolo Salerno, managing partner at energy law firm Salerno & Associates, in a recent seminar.

"The problem with this is that the users lose; they lose in the economic way, in the environmental way and in a competitive way," Salerno said.

Lopez Obrador Administration Moves to Undo Mexico's Energy Liberalization

2018
December
Federal government cancels fourth electricity auction for international firms to generate and sell power to state power company CFE; puts future auctions on hold indefinitely.
December
Federal government cancels upstream oil and gas auctions for international producers; puts future auctions on hold indefinitely.
2019
January
CFE cancels tender for renewable energy transmission line, curbing growth of private solar and wind parks in Southeast Mexico.
October
Energy Secretariat (SENER) allows old CFE hydropower plants to issue clean energy certificates, reducing the price of the certificates used as a market mechanism to build new plants, and effectively killing the incentive for private companies to participate.
December
Energy Regulatory Commission (CRE) allows Pemex to continue marketing high sulfur diesel until 2025, giving the producer an advantage over competitors who must comply with low sulfur regulations.
December
CRE allows Pemex to set wholesale refined products prices, allowing Pemex to regain market share.
2020
April
SENER halts requests for social and environmental impact studies, delaying new private energy projects, such as pipelines, terminals, and solar and wind parks.
May
Mexican grid operator CENACE halts all new planned private power plants from starting operations as demand collapsed due to the pandemic.
May
SENER publishes its "reliability" policy, giving CFE priority in the dispatch of energy over private power producers, citing instability issues in the grid.
June
CFE hikes transmission tariffs to private renewable generators, reducing the incentive to build independent power plants.
July
CFE cancels tenders for construction of four power plants where over 30 private companies had expressed interest, puts future tenders on hold indefinitely.
October
CRE modifies the rules for independent power users that generate their own electricity, limiting their growth and likely forcing those companies to use CFE as a provider.
December
SENER tightens requirements for private companies that import and export refined products, giving Pemex a competitive advantage.
2021
May
Federal government modifies hydrocarbons law, among other things tightening rules for companies that import, export, and distribute refined products.
May
Mexican Congress overturns set of regulations aimed at reducing Pemex' market share in refined products, allowing Pemex to set wholesale products prices.