Manuela Uribe Ruan and Paul Gibson are US-based partners at global risk advisory firm The Risk Advisory Group. This article was first published on their website on October 1, 2024.
Renewable energy investors will be paying close attention to Claudia Sheinbaum’s emerging economic policies to see if Mexico’s new president will fulfill his pre-inauguration commitments to encourage foreign investment in sustainable energy sources, a largely untapped sector of the economy.
But while one door to energy investment appears to be opening as Sheinbaum’s presidency prepares to begin, another shows little sign of budging, with Mexico’s large oil and gas market likely to remain under the control of the struggling state oil company, Pemex, for the foreseeable future. .
Renewable energy sources can meet more than just energy needs
Mexico depends on fossil fuels Nearly 80 percent To generate electricity, wind and solar make up only 12% of the mix. This is the current reality despite owning the country Huge potential To develop renewable energy projects, according to the US Government Agency for International Trade. In fact, The Economist suggested that the potential capacities of solar, wind, geothermal and hydropower are sufficient to meet the country’s overall electricity needs. A hundred times.
Sheinbaum’s record as a clean energy advocate and her expertise in climate science suggest that she would be open to private investment to build green energy capacity, not least because the new government’s ability to finance new projects will be limited by its focus on clean energy. reduction Large budget deficits are crippling the economy, the largest since the 1980s.
There is no doubt that under Sheinbaum’s predecessor Andrés Manuel López Obrador, investment in renewables in Mexico lagged significantly. Sheinbaum, who won a landslide election victory last June, has signaled his desire to reverse this trend. However, it is too early to sense the speed and extent of any decline, as her Morena party may remain under the influence of its founder, AMLO, a staunch protectionist, despite his formal retirement from politics.
Investors face high rule of law risks
In the general election that brought Sheinbaum to power, Morena won a landslide in Congress, giving the party broad legislative power to rewrite the country’s constitution. Many potential investors may be concerned that Morena’s first post-election legislative actions have increased already significant rule-of-law risks in the country that have in the past raised concern among the investment community.
Corruption and impunity have long plagued the country’s judiciary, but recently passed constitutional reforms will not only do little to address these red flags, they will also introduce another. new Judicial amendments It will require the election, not the appointment, of nearly seven thousand federal judges – including those of Mexico’s Supreme Court. In doing so, some observers believe the amendment will undermine the independence of the judiciary. This may expose judicial decisions to political influence, which may cause significant delays, retrials and legal uncertainties in cases related to human rights and private investments.
Mexico’s two large neighbors, the United States and Canada, did so Already warned Judicial reforms may harm trade relations and investment. In particular, it may threaten the post-pandemic phase Close to the beach Which Mexico is counting on in addition to negotiating the United States-Mexico-Canada Agreement, USMCA, an important free trade agreement. Sheinbaum has supported constitutional reforms, but the viability of her green energy plans will be tested if court decisions begin to deter investors.
AMLO favored fossil fuels over clean energy
Low-carbon energy sources gained ground in the 2000s before AMLO was elected to the presidency in 2018, then under his leadership they largely retreated from fossil fuels in the energy mix. Investors interested in getting a stake in the renewable energy sector have often been discouraged, as their entry has tended to be resisted, project permits delayed and auctions cancelled.
It was even more protective of Mexico’s oil sector, dominated by Pemex, which benefited from generous aid. SubsidiesDespite the high debt. Sheinbaum knows she will need to manage the struggling energy giant better to give it the bandwidth and political capital to achieve its renewable energy ambition. “Distinctive feature” From its government.
Pemex, as a heavy polluter, appears to reflect Mexico’s dismal record Greenhouse gas emissions During AMLO’s term in office. The country has There is no net zero goalAlthough it is vulnerable to heat waves, droughts, and hurricanes, which will pose an increasing threat as global warming continues Social and economic threat To the country. The consequences of climate change have already seriously affected Mexico agriculture And it was Fueling migration.
With AMLO in control of Morena, Sheinbaum would be reluctant to challenge the state’s supremacy in oil and gas, although diluting its virtual monopoly would make economic sense, generating more tax revenue for the hard-pressed Finance Ministry. Any attempt to undermine Pemex’s market-leading position would likely face resistance from Morena’s supermajority in Congress, and risk undermining Sheinbaum’s standing within her own party.
Sheinbaum plans to restructure Pemex’s debt of more than $100 billion and strengthen its presence in the energy sector, with the potential to expand its role into petrochemicals, fertilizer production, lithium projects and geothermal energy. Despite its debts, the company remains a major player in the economy, and for many Mexicans it symbolizes energy sovereignty. Relatedly, Sheinbaum will look to boost the country’s refining capacity to promote energy self-sufficiency.
Sheinbaum is committed to decarbonization
However, the renewable energy market offers Sheinbaum an opportunity to diversify the country’s energy sources, after it has become heavily dependent on oil and gas, putting its energy security at risk. This comes at a time when Pemex’s production has declined by almost 40 percent in the past six years. Moreover, as a climate scientist, committed to decarbonisation, she is keenly aware of the costly climate-induced environmental problems afflicting Mexico. Indeed, as mayor of Mexico City, she sought to promote clean energy initiatives, overseeing electrified transportation systems and a massive solar panel project to power thousands of homes.
During her presidential campaign, Sheinbaum pledged to increase renewable energy production, which currently represents 15% of the energy market, by up to 50% over her six-year term. She said she would do so remarkably well Intensifying investment In solar and wind energy projects and the modernization of hydroelectric power plants, as part of the national energy plan.
At the same time, it pledged to strengthen the public electricity company Comisión Federal de Electricidad (CFE). Private producers will be allowed to take a larger share of the electricity market, but the role of state utilities as the mainstay of energy transmission and distribution will remain – Sheinbaum wants to rely on more renewable sources to generate electricity.
New officials emphasize sustainability ambitions
Her ministerial appointments give an idea of ​​the direction of her travel. There are, as you might expect, political appointees loyal to Morena and Amlo, but Sheinbaum has shown a willingness to professionalize her administration by emphasizing expertise, not loyalty—particularly in areas she considers priorities, with scholars and academics given roles in government. DOE and CFE.
Particularly noteworthy are the appointments of Alicia Bárcena as Minister of Environment and Natural Resources and Luz Elena González Escobar as Minister of Energy, indicating a new focus on the environment and climate change. A biologist by education, and Undersecretary of the Ministry of Urban Development and Environment (Mexico’s first Ministry of the Environment) in the 1980s, Bárcena brings with her decades of international experience in environmental matters. For her part, Gonzalez is an economist specializing in finance and the environment and was an advisor to the National Environment Institute of Mexico and Undersecretary of Planning in the Mexican Ministry of the Environment SEMARNAT.
These appointments must ensure effective management of the sector and enhance Pemex’s financial flexibility, which must be secured, because if it continues to accumulate debt there will be less room to advance its renewables agenda. The figures in the Mexican green energy sector are certainly buoyed by the new hires, which they point out reflects a Commitment to sustainability.
Clearly, Sheinbaum is paving the way for an energy diversification drive. But for investment in renewable energy to materialize at scale, it will need to ensure that the business environment is not jeopardized by judicial changes that threaten the independence of the courts. This may be a difficult task given the protectionist, anti-foreign investor tendencies within her party. It may need some early wins in green energy investing to make big impacts to reassure skeptical members. However, Mexico appears to be opening a new chapter in energy, although we will not see how quickly these pages will turn.
“Is Mexico ready to open up investment in green energy?” Originally created and published by Investment Monitorwhich is a trademark of GlobalData.
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