Mexico’s Withdrawal from Gas and Electricity Markets

07 December 2021
By Dr. Jeff D. Makholm

In an article in the January 2022 issue of the Wiley journal Climate and Energy, NERA Managing Director Dr. Jeff D. Makholm explores possible implications of Mexico’s President Andrés Manuel López Obrador’s efforts to effectively re-nationalize the nation’s electricity and gas industry, which would dismantle 25 years of Mexican regulatory reforms aimed both at greater electrification (of a country with limited domestic energy options) and lowering energy costs generally. The regulatory reforms were originally implemented to attract investment into the natural gas and electricity sectors to expand energy services to industry and the public without overburdening public budgets. However, President López Obrador, who ran for President on a platform of Mexican self-sufficiency, has turned back those reforms by placing renewed authority in the state-owned electricity monopoly, the Comisión Federal de Electricidad (CFE), at the expense of the competitive electricity and gas markets overseen by Mexico’s independent regulators, the Comisión Reguladora de Energía (CRE).   

Dr. Makholm notes that any effective re-nationalization of Mexico’s energy industries, in the name of self-sufficiency, faces profound obstacles. Among the major economies of Latin America, Mexico has the smallest hydroelectric resources. Further, the country has seen a steady, decades-long decline in domestic natural gas production and its crude oil (Mayan crude) faces limited options in international markets because of its high sulfur content. It is for these reasons that Mexico, in the past decade, has sharply increased its low-cost US gas imports as the key element to further electrifying its economy. Mexico had also recently elicited, through competitive auctions, some of the lowest-cost renewable power projects in the world. These actions, which NERA has considered some of the best examples of functioning electricity markets in the world, would be undermined by re-nationalization.

Dr. Makholm also looks at the consequences to Mexico’s standing in the international investment community to the extent that re-nationalization harms the reasonable expectations of those who have already invested in Mexico’s energy markets. He describes Argentina’s unfortunate experience in damaging its international credit standing among those who would invest in energy projects, concluding that, halfway through his administration, it is difficult to see how President López Obrador’s plan of self-sufficiency actions can succeed without harming both the efficient provision of energy services to Mexico’s industrializing economy and the reasonably expected returns of those who invested in Mexican energy projects before he took office.

Makholm, Jeff D. (January, 2022). “Mexico’s Withdrawal from Gas and Electricity Markets,” 38/6, ©2022 Wiley Periodicals, Inc., a Wiley Company