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23 June 2022

Mexican concession to renewables – border projects to supply US

Mexico has signed commitments with seventeen US energy companies to develop 1,854 MW of wind and solar capacity near the US border, along with transmission lines leading to California. In related news from last week, the US Ambassador stated that the US and Mexico are “working through” $30 billion in investment in the Mexican energy sector on the part of US companies. The Mexican President also received the US Climate envoy at the national Palace earlier this month, and claimed that Mexico still wants to reach 35% renewable energy come 2024, for whatever those words are worth?

This seems like a partial volte-face for the government of Andres Manuel Lopez Obrador (AMLO), in power since 2018, which has been attempting to revert its predecessor’s 2013 privatization of the energy sector.  So far the government has limited renewables investment to less than half of what it should be. The impression one gets is that the AMLO government is losing ground in its war versus renewables, but only very grudgingly. So it approves domestic solar projects such as a 1 GW complex proposed to be built by state utility CFE while the opposition chooses to garner support by promising free residential solar installations, and now the government approves a near 2 GW set of renewable projects in co-operation with its declared enemy – US developers – but they’re planned to export to the US, not interfere in the Mexican market.

AMLO is an old-style Latin American socialist who has long distrusted the US and Western corporations which develop renewable energy projects in his country, and has called their presence in Mexico’s energy sector a form of colonialism or piracy. Meanwhile he has been attempting to revive the fortunes of the heavily indebted national oil and gas monopoly PEMEX and state-owned utility CFE, trying to restore their fossil fuel glory days with only token amounts of renewable investment involved.

That agenda was always a tough ask given the old, run-down state of much of the oil and gas infrastructure and the uncertain future for new-built oil and gas assets, but the decisive moment came in April, when Mexico’s Congress voted down AMLO’s latest energy sector reform, applied as a constitutional amendment as many have been in Mexico. The defeated reform, which received 275 votes out of 500 in a 12-hour session but needed a two-thirds majority, would have restored 54% or more of the power market to CFE while shifting independent regulators back under government control.

Crucially, the reform would also have granted FCE the right to prioritize generation as it saw fit – meaning selling its and PEMEX’s electricity, which is a mix of fossil fuels, nuclear, and hydro, while curtailing solar and wind to do so. This was also viewed as violating the USMCA trade agreement, with US and Canadian developers lodging complaints with all three governments. AMLO asserted that those who voted against his reforms were backing those who had “plundered Mexico”.

So clearly AMLO is not backing down much – and in late May the Comision Reguladora de Energia (CRE) announced it would fine Iberdrola’s local arm $466 million for “self-supply practices from its power plant based on illegal contracts,” a decision since supported by AMLO. The fine is based on the Electricity Industry Law (LIE) of 2021 which among other things allowed the CRE to revise self-supply contracts in some cases. AMLO’s energy campaign has more to it than a single defeated constitutional reform – he has been energetic in his staffing of regulators and passing of such amendments, sparking plenty of court cases along the way. And besides more subtle changes, the previous government’s renewables auctions were discontinued.

AMLO has been unable to conduct fundamental reforms because his victory in the 2021 midterm election was not overwhelming. But looking forward to 2024 – Mexico has 6-year election cycles – things are looking solid enough for the Mexican left, with AMLO’s MORENA winning four out of six governorships and 22 out of 32 states in regional elections this month. A presidential recall vote AMLO himself staged to demonstrate his support before that had only 18% turnout, so it did not prove much, but winning 90% of the votes did at least show that the most motivated voters favor him. So if one had to guess, the left will win again in 2024 – and while the one-term limit on means AMLO cannot run himself, he will pick a successor, one which may have similar views on energy strategy.

That could leave Mexico’s renewable development proceeding at a fraction of its proper pace for another three years after 2024, until the 2027 midterms, or until Chinese renewables developers pick up the slack, since those would likely not arouse the same “resource nationalist” animus. Additionally, the Mexican left itself will change over time, as is happening across Latin America thanks to US cultural influence, putting more emphasis on modern social values and causes like environmentalism, and less on traditional economic socialism. That will see parties like the Citizen’s Movement, which won 7% of the vote in 2021 and voted against AMLO’s energy reform, grow stronger over time.

The other thing to consider with the news of this 1.8 GW set of projects is geography. Just south of Arizona, Mexico has a region emptier and sunnier than Arizona, which is the most irradiated state in the US. Mexican renewable export to the US, especially California, was thus inevitable, though it is a surprise to see it proposed this early.