Two possible cures for Mexico’s increasingly unsteady electric grid are to increase national natural gas production and allow for more private participation in the sector, according to recent reports from experts at Rice University’s Baker Institute for Public Policy and the Atlantic Council.
In May, Mexico suffered widespread blackouts in 21 of the country’s 32 states amid a heat wave and drought that left thousands of residents without power. The outages, the first of their kind in years, rattled the energy sector and sparked concern that Mexico’s aspirations for a nearshoring investment boom would be upended by an unreliable electricity supply.
Nearshoring – which refers to companies moving their production and supply chains from China to North America in order to more easily access the U.S. market – is considered to be a generational economic opportunity for Mexico. Its unstable power sector, however, “is likely to impede the country’s ability to take advantage of the historic opportunity,” according to a recent report authored by multiple experts at Rice University’s Baker Institute for Public Policy.
The report, The Power Problem: Nearshoring and Mexico’s Energy Sector, summarized the results of a workshop between experts at the Baker Institute’s Center for the U.S. and Mexico’s Tecnológico de Monterrey University. It offered suggestions for the national power sector under President-elect Claudia Sheinbaum and her incoming administration that could "actualize the promise of new investment in Mexico.”
“New policy directives must aim to … boost production of natural gas to support the expansion of power generation,” authors Tony Payan, Rodrigo Montes de Oca, Rolando Fuentes and Roberto Durán-Fernández said in the report.
“Looking ahead, if Mexico is to take advantage of nearshoring opportunities, the priorities for the next Mexican administration to meet these challenges are clear” and include more natural gas development at home.
Mexico’s dependence on U.S. natural gas to power the nation’s electricity has never been higher. Imports from the U.S. are accounting for more than 75% of Mexico’s gas market needs this summer, data from Wood Mackenzie show.
Wood Mackenzie analyst Ricardo Falcón told NGI’s Mexico GPI that import figures of around 7.1 Bcf/d over the first 15 days of August are “the highest ever recorded” for the period.
Additionally, Mexico’s natural gas production has taken a decided downward turn this year. Mexico’s natural gas production averaged 3.69 Bcf/d in July, down from 3.82 Bcf/d in June and 4.57 Bcf/d in July 2023. Production has fallen on a year/year basis each month since the start of 2024.
If Mexico does not seek to increase production of natural gas, “the country will not be able to provide the investment required in generation and transmission in the power sector over the next decades or to attract the kind of investment that it expects from nearshoring,” according to the Baker Institute report. As a result, “attracting nearshoring investment will be permanently constrained.”
Public-Private Partnerships
A recent Atlantic Council report, Pragmatism can improve Mexico’s energy outlook, also addressed the challenges the incoming Sheinbaum administration could face in attracting nearshoring investment in the sector.
“It is a crucial time in Mexican energy politics,” said authors David L. Goldwyn and Antonio Ortiz-Mena.
The report explained that foreign investors in the Mexican energy industry are cautious following policy decisions by outgoing President Andrés Manuel López Obrador. Investors also are monitoring the Comisión Federal de Electricidad’s (CFE) struggles “to power Mexico’s growing economy amid the burdens of extreme heat and other climate-exacerbated energy challenges.”
“It will be in the interest of both U.S. government and energy industry stakeholders to help Sheinbaum find a way to navigate among the Morena party’s different groups to develop a pragmatic policy approach that moves forward Mexico’s energy security and transition while maintaining a leading role for Petroleos Mexicanos (Pemex) and the CFE,” said Goldwyn and Ortiz-Mena. “Public-private partnerships of many forms can be part of the solution.”
In response to the recent power outages in Mexico, industry experts have been calling for more private sector investment to fortify the electricity grid and increase generation. This will create a delicate balancing act for Sheinbaum’s administration, which has insisted that the CFE maintain at least 54 percent of the nation’s power generation.
“Sheinbaum will be looking for able and willing partners to craft solutions that maximize the potential of foreign investment and job creation in Mexico,” Goldwyn and Ortiz-Mena wrote. “Sheinbaum has much to gain from reassuring investors, capitalizing on Mexico’s advantages in nearshoring, and addressing the country’s slow energy transition, and she can creatively design a framework that respects Morena’s political stance on energy while increasing investor confidence.”
