By Leonardo Beltrán
On Sept. 1, 2021, President Andrés Manuel López Obrador delivered a speech on the occasion of the government’s third annual report on the state of the country, marking the end of the first half of his administration. The energy sector was at the top of the president’s address, underscoring the importance assigned to refining and power generation policies.
In the hydrocarbons sector, downstream and upstream policies are aligned. López Obrador reaffirmed the goal of increasing refining capacity to meet local demand. On exploration and production, the priority is to supply internal needs. However, let us recall that in the first half of 2021, PEMEX’s net energy exports represented 6.4 percent of Mexico’s trade balance and contributed US$4.7 billion to the superavit (economic surplus) observed in the country during this period. Therefore, if this policy remains throughout the latter half of the administration, in the midterm, refining will continue to be a hot area for business opportunities to support PEMEX’s projects, and there could be good prospects in upstream development for companies at the expense of PEMEX market share, unless there is openness to work in tandem with the private sector.
For the electricity sector, the focus was on strengthening the national state utility Federal Electricity Commission (CFE), via a constitutional reform to be sent to Congress, and the updating of CFE’s hydro assets to reduce power generation from fuel oil and coal. It is expected that the proposal will include the reformulation of the existing dispatchment rules to allow for the national utility to be first in line, in spite of the fact that CFE continues to be the dominant player in the wholesale electricity market. Given the results of the midterm elections in June, the new composition of the federal and state legislatures do not point to the conditions for a super-majority (two-thirds of the federal Congress in favor, and 50 percent plus one of the state legislatures voting for the change with two-thirds support in each of the state congresses) to support this reform. On power generation, hydro continues to be an attractive area for business development to procure the equipment needed to update the existing assets.
Another element to underscore was the prominence given to the relationship with Canada and the US where Lopez Obrador indicated that the trilateral agreement is moving ahead, and it represents production, jobs, better wages and growth in the north of the American continent. This statement not only reflects the importance of trade for Mexico and the region, but also the inherent synergies and opportunities that integration creates for North America. Moreover, with the resumption of the Mexico-United States High-Level Economic Dialogue (MX-US HLED) later this month, where one of the areas of cooperation is border infrastructure, there could be a window of opportunity to speed up economic and commercial integration.
The reemergence of bilateral economic integration is coming at a very opportune moment. Last month, the US Senate passed an infrastructure bill where one area of focus would be improving power systems, including by building thousands of miles of new, resilient transmission lines to facilitate the expansion of renewable energy. Furthermore, in its most recent levelized-cost of electricity (LCOE) outlook, Bloomberg New Energy Finance presents the prospective costs for solar and wind technologies up to 2050 worldwide, and in the lowest case scenario, the LCOE for both Mexico and the US (US$19.8 per megawatt/hour) would be 26 percent lower than the world average (US$28 per megawatt/hour).
On the border between Mexico and the US, there are 11 power interconnection lines, of which only two operate synchronously with California and the Western Electricity Coordinating Council.1 Thus, if we are to take advantage of this alignment of goals and incentives, — already agreed upon focus area for bilateral cooperation (border infrastructure); existing renewable energy targets in both jurisdictions, in line with national and international commitments to increase the uptake of renewable energy technologies to expand and speed up the transition to low carbon economies; and benefit from the world’s most competitive prices of clean energy technologies to improve the competitiveness of the region — one point on the agenda for President Lopez Obrador and US President Joe Biden, and, therefore, the upcoming September 2021 MX-US HLED, should prioritize discussion at energy integration and action items for the construction of a bilateral clean energy corridor.