Mexico: Renewable On Hold

Renewables initiatives are languishing as a political feud grinds to a halt the sector’s growth plans.

When former Mexican president Enrique Peña Nieto opened the country’s energy sector for foreign direct investment after nearly eight decades of a state-owned monopoly, the renewable energy industry was one of the greatest beneficiaries. First, Nieto established that Mexico was to produce 35% of its power from renewable energy sources by 2024 and 50% by 2050.

Second, through long-term electricity auctions, the country harvested almost $9 billion in investments for the renewable industry, boosting its production capacity and slashing clean-energy prices. Siemens Gamesa, Iberdrola, Acciona Energia, Canadian Solar, Italian Enel Green Energy and Eletricite de France were among the companies that used the opportunity to invest in the Mexico’s vast, yet untapped, solar, wind and hydro matrix and privileged geographical location.

However, the liberalization of Mexico’s energy only lasted for Nieto’s mandate. President Andrés Manuel López Obrador took office in 2018 and promised to curtail most of those changes in favor of a nationalistic approach. While not reinstating former monopolies, López Obrador modified regulations to favor state-owned providers like petroleum company Pemex and electric utility Comision Federal de Electricidad (CFE), to the detriment of private foreign investment. He suspended pending auctions for new exploration and production licenses and launched a review of more than 100 previously awarded permits.

Those measures have mainly benefited the hydrocarbon industry, state-owned giants that make the bulk of their revenue from natural gas and crude oil. “This administration clearly favors investments toward CFE’s nonrenewable assets, directly impacting investment returns and opportunities for large-scale renewable projects,” says Valentina Izquierdo, senior research analyst for solar photovoltaics in Latin America at Wood Mackenzie.

López Obrador also canceled mid-and long-term auctions for so-called electricity-hedging agreements. The move allowed state-owned CFE and Pemex to meet their renewable goals by buying energy contracts from private companies through public auctions. Such auctions were one of the main sources of revenue for the country’s clean-energy companies. Those measures were followed by a flood of legal actions, both in domestic and international courts.

Now, with the country’s energy future stuck in an ongoing tug-of-war between private and state-owned companies, the renewable industry seems trapped in the doldrums. “The energy sector in Mexico must find the right balance regarding regulatory policy, with the need to achieve the renewable energy targets put forth by the government,” Kijana Mack, executive director at Mexico Energy Partners, says.

Ambitious Goals

In 2021, Mexico generated 86.27 terawatts, or 26.7% of its electricity, from clean-energy sources. Given that electricity demand is expected to grow by 12.7% by 2024, the country would require an additional 41.03 terawatts of clean energy to meet its self-imposed goal of 35% of energy from clean sources—a 47.7% increase from current levels.  Jeremy Martin, vice president of Energy and Sustainability at the Institute of the Americas, says flatly, “That 35% target is unreachable.”

According to the latest Program for the Development of the National Electric System (Prodesen), the country added roughly 30% less renewable energy capacity in 2021 than in 2020. The decline was mainly driven by a 46% drop in new solar energy capacity. At least a dozen wholly built solar and wind energy projects are sitting idle, waiting for regulatory approval to start operating. “The main near-term risks for [the renewables market] are the continued inability to receive generation permits and the financial impact that has on project sponsors and the asset values of the projects under development,” Mack says. 

On the other hand, the state-owned CFE has been building an ambitious portfolio of hydroelectric plants ahead of 2024, including the renewal of 13 hydroelectric units, the construction of three new generators, and the operation of six large-scale combined cycle units. However, it is unlikely that all those projects will be up and running before the 2024 deadline. Wood Mackenzie’s Izquierdo notes that even the latest Prodesen report acknowledges the country won’t meet its 35% clean-energy target until 2031—seven years behind schdule.

Untapped Potential

In the long term, however, the outlook for the country’s renewable industry is much brighter. “Mexico is ideally positioned to become a clean energy powerhouse given its world-class renewable energy resource potential and the low cost of renewable energy generation,” underlines the most recent report by the US National Renewable Energy Laboratory (NREL).

“Mexico has some of the world’s best wind and solar resources that have been only nominally tapped,” says Martin.“How to tap into Mexico’s renewable potential is more of a political dilemma.”

Currently, 40% of Mexico’s renewable energy in 2020 came from hydropower, 30% from wind, 21% from solar and the remaining 9% from geothermal and bioenergy sources. According to NREL, the greatest untapped potential is in solar, which could generate 77% of new renewable energy additions in the next decade. The remaining goes to wind (8.2%), geothermal (7.7%) and additional capacity from existing hydropower facilities (3.7%). 

In addition to sourcing, a robust renewable framework requires distribution capacity. “A lack of investment in transmission infrastructure continues to be a growing concern for developers as congestion risks the economics of renewable projects, particularly solar PV ones, and could even lead to curtailments,” Izquierdo notes.

The NREL report also adds that total production costs could save $1.1 billion compared to Mexico’s current scenario, while harvesting $17 billion in new investment opportunities and creating over 72,000 jobs. “Mexico, by way of its geographic location in North America and immense wind and solar potential, still has inertia driving possibilities and demand,” Martin says.

Foreign Pressures

Against the backdrop of rising energy prices due to the war in Ukraine, Mexico’s northern neighbors have doubled down on pressuring López Obrador to open the renewables industry this year. Recently, the US government accused Mexico of failing to meet its obligations under the US-Mexico-Canada Agreement (USMCA) by favoring state-owned CFE. “Mexico’s policies have largely cut off the US and other investment in the country’s clean energy infrastructure,” said US trade representative Katherine Tai.

In a recent note, Canada’s international trade ministry also publicized its discontent over the leftist leader’s stance: “Canada has consistently raised its concerns regarding Mexico’s change in energy policy. We agree with the United States that these policies are inconsistent with Mexico’s USMCA obligations.” Last August, US President Joe Biden met with López Obrador, with renewable energy policies on the agenda. The meeting’s joint statement underlined “the importance of investing in and promoting renewable sources of energy.”

Following the encounter, López Obrador told the press that he would allow foreign direct investment in the solar energy sector “as long as they partner with the CFE.” Earlier this year, he also cut a deal with 17 European-based companies, allowing them to invest in the country’s renewable sector under the same arrangement.  

“Deeper integration between the United States and Mexican electrical systems would create a unique opportunity for the two countries to jointly manage cross-border challenges, seize economic development potential and boost competitiveness while fostering energy security for both countries,” Martin says. 

Despite some apparent advances for the private sector, the industry remains guarded about the future of the country’s energy policies. In July, a Mexican district judge had delivered a key loss to López Obrador by declaring several changes proposed by the president to 2014’s Electric Industry Law unconstitutional. With legal and political wrangling in the background, Mexico’s green-energy transition remains in doubt.