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Mexico: Harnessing the Power of the Market—And the Elements

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The world leader in free trade is gunning for the top spot in renewable energy production, while at the same time breaking up domestic energy nationalization in favor of market forces. ¡Que rico!

Screen Shot 2019-02-27 at 8.55.00 AMDevelopment is set to catapult two billion people out of poverty in the next 20 years, and many of them will want and need electricity as they join the middle class. Indeed, experts predict that by 2035 global energy consumption will grow by 30 percent as global GDP doubles. Many of those same experts warn of the troubling environmental implications of such increases. When emerging economies all over the world seek to accommodate rising energy demand without compromising the environment, many will look to Mexico for answers. 

AN AMBITIOUS BEGINNING
Mexico occupies a unique position within the OECD: its markets are sophisticated, yet its per capita electricity consumption is less than 40 percent of the group average. It also faces serious obstacles in reaching a solvent and sustainable energy policy: residential and agricultural electricity consumers are currently subsidized to the tune of US$6 billion yearly, and overall demand is set to increase by 85 percent within 25 years. 

Luckily, the government is not content to wait for these challenges to solve themselves. Over the last several years, Mexico has launched a raft of energy reform projects hailed by the International Energy Agency as “the most ambitious energy system transformation worldwide.” The changes seek to inject new life into an ailing energy sector through the introduction of both market and environmental reforms. 

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Mexico is just the second country in the world to legislate a binding climate target; it may be the only one to do so at a time of major restructuring. 

For the first time since Mexico’s Federal Electricity Commission (CFE) was created in 1934, the industry will be open to private investment from both domestic and international actors. Until the reforms, CFE was a vertically integrated state monopoly providing service to more than 40 million customers, 90 percent of which are residential and commercial. Now, it must compete with private power plants and providers. The unbundling of CFE has proceeded with one end in sight: to lower consumer prices by incentivizing efficiency and innovation. 

As CFE is unbundled, new market mechanisms open the door for private energy producers and suppliers. “The drop in oil prices has redirected attention to the electricity industry,” says David Fatzinger, General Manager, Latin America, of InterGen, a builder of complex energy infrastructure. “Reforms are now focusing on electricity versus exploration.” A series of auctions for both mid-term and long-term generation provide economic opportunity while ensuring stable prices. Companies seeking to generate clean energy are favored under the new regime, which will grant Clean Energy Certificates with a lifetime of 20 years, as well as energy packages with 15-year lifespans.

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