Facing strong pressure from PEMEX’s debts and inefficiencies, Mexico finds itself at an inflection point, potentially giving way for renewables. President Obrador, however, has a different vision of the future. How will the country react?
By Rodrigo Camara Rowe
It’s no surprise that countries around the world are turning to renewable energy. With the ever-pressing menace of global warming and the decreasing costs of energy production linked to renewable sources, the fossil fuel industry is lagging behind not only in terms of growth pace, but also in terms of reliability and dependence. Numerous countries have pledged to significantly cut greenhouse gas emissions (the main underlying cause of global warming) and this has become easier than ever with continuous innovations in the renewables industry. One country who has much to gain by not only slowing down the effects of global warming but also by tapping into the renewables market, is Mexico. Positioned in an ideal geographical region for the generation of energy via solar, wind, and hydroelectric power, Mexico has been recognized internationally as an ideal candidate for leadership in the renewables market in Latin America. Mexico, however, has recently faced some challenges to transform its energy industry a shade greener.
Historically, Mexico has been a country largely dependent on oil and its top player, PEMEX, from which the country has undoubtedly reaped hefty profits. PEMEX, the state-owned oil company, was held very dear by the government until it started to decline in performance, due to a lack of innovation and a deficient company structure. Then, facing a catastrophic financial crisis, the oil giant slowly started needing money from the government in the form of tax breaks and cash injections, among others. PEMEX was slowly losing its relevance in the Mexican economy not only because it was no longer the top player, but also because the country’s economy had diversified since the latter half of the 20th century.
With a monopoly on both the oil and energy industry, the government realized that if higher efficiency was to be achieved and climate concerns addressed, then this monopoly had to dissolve. This was consumed in 2014 when the then Mexican president, Enrique Peña Nieto, opened the gates of the energy market to the public: the state would no longer hold a monopoly over the straggling industry. Private investors and big companies were finally able to tap into this market rich in opportunities and market failures. The Energy Regulatory Commission (CRE) would be in charge of distributing licenses to companies, so they could lawfully generate and distribute electricity, allowing for a more efficient market. The future of the Mexican energy market looked promising. That is, until Andrés Manuel López Obrador (AMLO) was elected as the new Mexican president in 2018.
Having grown up during a time when PEMEX was the government’s crown jewel and especially in his home state, where black gold was abundant and allowed for significant economic growth, AMLO’s stance on oil was clear: oil is the future. In this new century, however, oil and fossil fuels are rapidly losing relevance, as the world’s eyes are set on renewable energy sources. President Obrador seems to disagree with most of the world and ignores all trends of the transition to renewable energy. As soon as he took office, AMLO cancelled all auctions for energy generation and distribution licenses, preventing private companies from getting further involved in the market. He later tried to modify the Energy Industry Law (LIE), so that power generated by the Federal Electricity Commission would be given priority and there would be no need for auctions by the CRE. This bill was passed earlier this year by both houses of Congress in Mexico, but was suspended by a federal judge on the grounds that it would prevent free markets from operating correctly. Had it not been suspended, the implications of these modifications would have been significant. Firstly, under the new USMCA Agreement, Mexico is not allowed to give preferential treatment to state-owned companies. Should AMLO’s party win over a ⅔ majority in both houses in the coming June elections, his party would likely get away with the alterations to the LIE. Should this come to happen, it is not impossible to consider that Mexico will have to face penalties and new duties on Mexican goods, which will be most felt by the average Mexican. Further, it could even escalate to a foreign-investment scare, caused by uncertainty in the ability of private investments to succeed without being opposed by government regulation. Secondly, the extent to which private firms could tap into the energy market would have been clearly cut off, further delaying the transition to a renewable energy infrastructure. At a time where higher efficiency in the energy industry and a greater weight on renewables are desperately needed in Mexico, AMLO’s ambitions are continually generating uncertainty and polarization.
With an already damaged international reputation because of PEMEX’s financial meltdown, Mexico will soon have to gauge the full implications of AMLO’s agenda on the energy sector. In a country where almost ¼ of all electricity generated comes from renewable energy sources, the 180º turn to an oil-based energy sector brings implications that are hard to fully comprehend. Whether AMLO will remain adamant with his plans for these industries is yet to be determined. One is left to wonder, will President Obrador stop ignoring global trends toward renewables or, more importantly, what will happen if he doesn’t? □
- Image source
- Arnold-Parra, S. (2021, April 19). The War For Control Of Mexico’s Energy Industry. OilPrice.com. https://oilprice.com/Energy/Energy-General/The-War-For-Control-Of-Mexicos-Energy-Industry.html
- Flannery, N. P. (2021, April 22). Political Risk Analysis: Is Mexico Declaring War Against Clean Energy? Forbes. https://www.forbes.com/sites/nathanielparishflannery/2021/04/22/political-risk-analysis-is-mexico-declaring-war-against-clean-energy/?sh=6ca876da701a