Energy Shortages Pose Threat to Mexico’s Growth
Genevieve Signoret & Delia Paredes
(Hay una versión en español de este artículo aquí.)
Because the United States and China are engaged in a trade war, a narrative has emerged that in our opinion prior to June 2 was a major force driving up the Mexican peso against competing currencies. It argues that Mexico’s growth rates will skyrocket in coming years owing to nearshoring—the phenomenon whereby foreign companies eager to seize on U.S. antipathy toward China set up manufacturing plants here to produce and ship goods to the United States.
We’ve been pointing out serious problems with this narrative. Among them is the fact that Mexico today suffers from power shortages.
Said shortages extend to power plants, transmission lines, substations, and transformers, explained energy sector expert Gonzalo Monroy in a recent episode of the podcast Peras y Manzanas with Valeria Moy, titled “Late in the Energy Transition.”
We see growth prospects for Mexico hinging on how energy policy will play out. To show you why, we summarize facts and opinions laid out by Monroy in that interview.
Why the shortage?
One of the first energy-related measures taken by Andrés Manuel López Obrador after assuming power in 2018 was to cancel two major projects: La Venta, underway to bring energy produced in Oaxaca into the grid, and a project to link Sonora with Baja California.
In 2020, López Obrador’s administration erected administrative barriers[1] to private project interconnection, chiefly ones involving renewable energy. These measures triggered legal challenges. The Surpreme Court’s first suspended the projects. Then, in 2021, it ruled to grant the plaintiffs writs of amparo on the basis that the barriers had “violated the constitutional order”.
Supreme Court rulings generally are published on Fridays. This one came out on a Monday. The Saturday prior, the president sent a bill to change the terms of the electricity law his administration had been violating. He warned lawmakers, “Change not one single comma.” They obeyed.
Opponents of the new law responded by challenging its constitutionality. To win such a challenge, a supermajority—eight out of the High Court’s twelve eleven justices—must concur. In this instance, only seven did. Subsequently however and using the same arguments as in the prior case, new plaintiffs sought a writ of amparo. For the Mexican Supreme Court to grant such a writ, a simple majority suffices. And so it came to pass that, in 2023, “with general effects”, the Court granted the amparo and suspended AMLO’s reform.
Demand, meanwhile, had kept growing
In the meantime, of course, demand for power in Mexico had kept growing—from 2019 to 2024 at an average annual rate Monroy estimates to be 2%. Capacity, however, remained stalled at 2019 levels.
Ergo, blackouts
An insufficient supply of energy invariably results in blackouts.
In 2019, shortly after the aforementioned interconnection lines were canceled, a heatwave triggered blackouts in Baja California and Yucatán.
In February 2021, when Winter Storm Uri hit Texas, natural gas prices skyrocketed to over $150.00 per million BTU from their pre-Uri level of $3.50, forcing the Federal Electricity Commission (Comisión Federal de Electricidad, CFE) to stop purchasing natural gas. But Mexico has no strategic gas reserve. So all the northern states, from Tamaulipas to Chihuahua, went without power for five days.
Then, in December 2021, owing to a transmission failure that triggered a domino effect, 22 states suffered a bout of recurring blackouts.
1,000 MW of capacity sits idle
Monroy estimates that, by simply interconnecting two of the (renewable) power plants still under suspension, the CFE could add 1,000 MW of new power to the grid in just eight to fourteen[2] weeks.
The multi-billion―dollar question
To add those 1,000 MW to the grid would require rolling back López Obrador’s energy policy. What foreign companies considering setting up in Mexico and investors like us wonder is, what will President-elect Claudia Sheinbaum’s energy policy be?
Monroy estimates that new power plant construction takes at least 18 months. Demand continues to expand. To build out the infrastructure Mexico needs, the expert estimates, would take four to five years of nonstop construction at a cost of $2.5 to $3.0 billion per year. Plans put forward by Morena, however, mention investing just $3.0 billion in new capacity over the entire six-year term.
So now you know why, when folks ask us, “What’s your outlook for GDP growth in Mexico over the next few years?” we respond, “First you tell us: what will Sheinbaum’s energy policy look like?”
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Corrected on August 31, 2024.
[1] See Política de Confiabilidad and Acuerdo del Cenace.
[2] I n the podcast, Monroy mentions “eight to twelve.” However, in a later conversation with Genevieve, he stated that he had recently updated his estimate to “eight to fourteen.”