Manuela Uribe Ruan and Paul Gibson are US-based associates 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 follows through on pre-inauguration promises to encourage foreign investment in renewables, a largely untapped sector of the economy.
But while one door for energy investment appears to be opening as Sheinbaum’s presidency prepares to take off, another shows little sign of blossoming, with Mexico’s sizeable hydrocarbons market likely to remain dominated by the troubled state oil company Pemex.
Renewable energy sources could amply meet energy needs
Mexico is dependent on fossil fuels for this almost 80 percent of electricity generation, with wind and solar energy making up only 12 percent of the mix. This is the current reality, despite the country having property enormous potential to develop sustainable energy projects, according to the US government agency, the International Trade Administration. The Economist has even suggested that the potential capacities of solar, wind, geothermal and hydropower are sufficient to meet the country’s electricity needs. over a hundred times.
Sheinbaum’s record as a clean energy advocate and her expertise in climate science would indicate that she will be open to private investment to build green power capacity, not least because the new administration’s ability to finance new projects will be limited by its focus on reduce the sizeable budget deficit that continues to affect the economy, the largest since the 1980s.
There is no doubt that under Sheinbaum’s predecessor Andrés Manuel López Obrador (AMLO), investment in Mexico’s renewable energy sources lagged significantly. Sheinbaum, who won a landslide election victory in June, has signaled he wants to reverse this trend. Still, it is still too early to have an idea of the speed and scale of an eventual turnaround, as her Morena party may remain under the influence of its founder, AMLO, an arch-protectionist, despite having officially withdrawn from politics withdrawn.
Investors are confronted with increased risks in the area of the rule of law
In the general election that brought Sheinbaum to power, Morena won a supermajority in Congress, giving the party broad legislative power to rewrite the country’s constitution. Many potential investors will be alarmed by Morena’s first post-election legislative actions, which have increased already significant risks to the rule of law in the country and have raised concerns among the investment community in the past.
Corruption and impunity have long plagued the country’s judiciary, but recently introduced constitutional reforms will not only do little to address these red flags, but introduce yet another. New legal changes will require the election, rather than appointment, of nearly 7,000 federal judges – including those of Mexico’s Supreme Court. As a result, some observers believe that the amendment will undermine the independence of the judiciary. This could leave judicial decisions vulnerable to political influence, potentially leading to significant delays, retrials and legal uncertainties in cases involving human rights and private investment.
Mexico’s major neighbors, the US and Canada, have done so already warned that the judicial reforms could damage trade relations and investments. They may particularly threaten the post-pandemic near the coast that Mexico has been counting on, as well as the negotiations on the US-Mexico-Canada Agreement, USMCA, a crucial free trade agreement. Sheinbaum supported the constitutional reforms, but the viability of her green energy plans will be tested as court rulings begin to deter investors.
AMLO favored fossil fuels over clean energy
Low-carbon energy sources gained ground in the 2010s, prior to AMLO’s election as president in 2018, and under his leadership largely took a back seat to fossil fuels in the energy mix. Investors interested in acquiring a stake in the renewable energy sector were often thwarted, as he tended to oppose their entry, delay permitting projects and cancel auctions.
He was even more protective of Mexico’s oil sector, dominated by Pemex, which benefited from generous policies subsidiesdespite sky-high debts. Sheinbaum understands she will need to better manage the troubled energy giant to give it the bandwidth and political capital to pursue its ambition to produce renewable energy. “the characteristic” of her government.
Pemex, a heavy polluter, seemingly reflected Mexico’s abysmal record greenhouse gas emissions during AMLO’s term in office. The country has no net zero targetdespite being susceptible to heat waves, droughts and hurricanes that will increasingly pose a threat with continued global warming socio-economic threat to the country. The effects of climate change have already severely affected those in Mexico agriculture and has been encouraging migration.
With AMLO in control of Morena, Sheinbaum will be reluctant to challenge the state’s superiority in hydrocarbons, even if relaxing its effective monopoly would make economic sense and generate more tax revenue for a beleaguered ministry of Finances. Any attempt to undermine Pemex’s leadership position would most likely be opposed by Morena’s supermajority in Congress and risk undermining Sheinbaum’s position within her party.
Sheinbaum plans to restructure Pemex’s debt of more than $100 billion and consolidate its presence in the energy sector, potentially expanding its role into petrochemicals, fertilizer production and lithium and geothermal ventures. Despite its debts, the company remains a major player in the economy and symbolizes energy sovereignty for many Mexicans. In this regard, Sheinbaum will seek to strengthen the country’s refining capacity to promote energy self-sufficiency.
Sheinbaum was committed to decarbonizing the economy
Still, the renewable energy market offers Sheinbaum an opportunity to diversify the country’s energy sources, as the country has become too dependent on oil and gas, threatening energy security. This comes at a time when Pemex’s own production has fallen by almost 40 percent over the past six years. Furthermore, as a climate scientist committed to decarbonization, she is acutely aware of the costly climate-induced environmental problems facing Mexico. As mayor of Mexico City, she sought to promote clean energy initiatives, overseeing electrified transportation systems and a major solar panel project that generated power for thousands of homes.
During her presidential campaign, Sheinbaum pledged to increase renewable energy production, currently 15 percent of the energy market, by up to 50 percent over the course of her six-year term. She said she would significantly increase investments in solar and wind projects and modernizing hydroelectric power stations, as part of a national energy plan.
At the same time, she has promised to strengthen the public electricity company Comisión Federal de Electricidad (CFE). Private producers will be able to capture a larger share of the electricity market, but the state-owned utility’s role as the mainstay of electricity transmission and distribution will remain – with Sheinbaum wanting the company to turn to more sustainable sources for electricity generation.
New officials underline sustainability ambitions
Her cabinet appointments give an idea of her direction of travel. There are, as you might expect, political appointees loyal to Morena and AMLO, but Sheinbaum has indicated a willingness to professionalize her government by focusing on expertise over loyalty – especially in the areas she sees as priorities, with scientists and academics will have a role in the Ministry of Energy and CFE.
Particularly notable 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 emphasis on the environment and climate change. A biologist by training, Bárcena was undersecretary of the Ministry of Urban Development and Ecology (Mexico’s first Ministry of the Environment) in the 1980s. She brings decades of international experience in the environmental field. For her part, González is an economist specialized in finance and the environment who served as advisor to Mexico’s National Institute of Ecology and undersecretary of planning at SEMARNAT, the country’s Ministry of the Environment.
These appointments should ensure effective management of the sector and strengthen Pemex’s financial resilience, which must be safeguarded because if the country continues to accumulate debt, there will be less room to advance the sustainable energy agenda. Certainly, leading figures within Mexico’s green energy sector are supported by the new staff, which they say reflects a commitment to sustainability.
Sheinbaum is clearly setting the stage for an energy diversification initiative. But to realize large-scale investments in renewable energy, it will have to ensure that the business environment is not jeopardized by legal changes that threaten the independence of the courts. That could prove to be a difficult task, given the protectionist, anti-foreign investor tendencies in her party. She may need some early investments in green energy that have a significant impact to reassure skeptical members. Still, it appears that Mexico is turning a new energy chapter, although it remains to be seen how quickly the pages turn.
“Is Mexico ready to open the door to green energy investments?” was originally created and published by Investment monitora brand owned by GlobalData.
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