14 January 2021

 

Full Report: Mexico

Predictions

  • President’s response to massive power cut shows he will continue his campaign against renewable energy and in favour of fossil fuels
  • Despite lower costs, wind and solar power companies will continue to face hostile regulatory environment
  • AMLO’s support for fossil fuels will lead to increased friction with US and may discourage international investors

 

Event

Mexico suffered a massive power cut on 28 December, losing approximately 30% of national grid electricity supply. This affected 12 of Mexico’s 32 states and left 10 million Mexicans (8% of the population) without power. The state-owned Federal Electricity Commission (CFE) initially attributed the outage to a grassland fire between Tamaulipas and Nuevo Leon states which affected two power transmission lines. However, Tamaulipas state said no such fire had occurred and the CFE later admitted the cause was still under investigation. The national electricity generator and distributor nonetheless blamed renewable energy sources, highlighting that the outage occurred when wind and solar power, which is intermittent, were generating a record 28% of total national grid power. The CFE said that to improve reliability it would request that some privately owned renewable energy generators be decommissioned.

Context

The left-wing government of President Andres Manuel Lopez Obrador (AMLO) has consistently opposed renewable energy and instead backed expanding fossil fuel use. Notably, in May 2020, the government sought to shut out 28 completed solar and wind farms and a further 16 still under construction – collectively valued at USD 6.4 billion of investment – from the national grid arguing that lower electricity demand because of the coronavirus (COVID-19) pandemic made their intermittency a problem. The autonomous Federal Competition Commission has challenged that decision, which it said violated free competition and market access rules in the constitution. AMLO’s hostility to renewables reflects that as a long-time energy nationalist, he favours state-owned fossil fuel energy over largely private sector renewables. In addition, by encouraging oil-burning power plants, he aims to increase demand for crude oil, thereby financially boosting Pemex, the loss-making state oil company.

Mexico: Map of the cities affected by the power outage. President’s response to massive power cut shows he will continue his campaign against renewable energy and in favour of fossil fuels

Analysis

The government’s blaming of renewables is politically driven. While renewable power generation varies according to time of day, and fluctuating sunshine and wind strength, “grid balancing” techniques including the use of industrial batteries are widely used by the industry to solve the problem of intermittency. This latest incident therefore indicates that AMLO will continue his efforts to undermine the renewable energy sector. Although legal challenges may hamper government moves against renewables, AMLO’s tight control of government and majority in Congress, mean that his attacks on renewable power companies will continue. Fossil fuel-based energy nationalism however carries significant risks for AMLO. One is that his attempts to support Pemex, which is riddled with corruption, may still be insufficient to return it to profitability. Pemex is the world’s most indebted oil company (it owes USD110 billion) and is suffering a new cash crisis, which could feasibly drag down Mexico’s entire sovereign credit rating.

Outlook

Mexico’s energy debate will have important implications for its trade and diplomatic relations with the US, its most important economic partner. For instance, over-reliance on expensive domestically produced fossil fuels rather than increasingly cheaper renewables will make Mexican exports to the US and Canada steadily less competitive. This could discourage companies from moving factories to the country, especially if such firms are committed to reduce their carbon footprint. AMLO’s stance will also be increasingly at odds with that of the new Biden administration, which will heavily promote clean energy and environmental protections. As a result, environmental protections under the US, Mexico and Canada (USMCA) trade agreement could become a major cause of friction between Biden and AMLO. Meanwhile, Mexican opposition parties are aligning themselves against AMLO’s fossil fuel policy, with Marko Cortes, president of the right-wing opposition National Action Party, calling for an urgent redirection of policy “towards clean, modern and renewable energy”. This means that future Mexican administrations may take a much more supportive approach towards renewable energy and against fossil fuels.

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