Reshaping its energy industry

Mexico may be at the cusp of one of its biggest transformations in decades

Claudia Sheinbaum, the country’s new president, is already reshaping its energy industry.

by Umair Irfan

Earlier this month, Mexico inaugurated Claudia Sheinbaum Pardo as its first woman president after she won a commanding election victory with close to 60 percent of the vote.

Sheinbaum, 62, is a climate scientist by training, though she’s held public office for more than a decade, including a stint as mayor of Mexico City. Politically, she’s closely aligned with her predecessor, Andrés Manuel López Obrador, and in her inaugural address, she promised to carry forward much of his populist agenda by expanding social welfare programs, maintaining price controls on fuels, and building at least a million new homes.

But she also broke with López Obrador in important ways, emphasizing a stronger commitment to mitigating climate change and pledging to transition Mexico’s energy sector toward cleaner energy.

“She didn’t win the election on a climate platform; she won the election promising continuity with [López Obrador’s] policies, which weren’t necessarily climate friendly,” said Oscar Ocampo, an energy researcher at the Mexican Institute for Competitiveness (IMCO). “However, she cares deeply about accelerating the energy transition, about reducing Mexico’s greenhouse gas emissions.”

The new president has been clear about her agenda: Sheinbaum has promised to keep some of López Obrador’s policies in place, and in her inaugural address she said private electricity generation will remain capped at 46 percent. “All of us need strong public energy companies that guarantee clean energy at low prices for current and future generations,” she said.

But Sheinbaum also promised new investments in power transmission and distribution. She pledged to transition the economy toward cleaner energy, increase efficiency, reduce greenhouse gas emissions, and shrink the country’s reliance on oil production as well.

While it’s a break from her mentor, this energy to-do list lines up perfectly with Sheinbaum’s resume. She studied Mexico’s energy consumption as a researcher at the US’s Lawrence Berkeley National Laboratory, examining energy efficiency tactics and carbon dioxide reductions in sectors like Mexico’s metals industry. She also co-authored a chapter on climate change mitigation in the major 2014 report from the Intergovernmental Panel on Climate Change. And it’s also clear that helping the planet shift away from fossil fuels has long been a political priority for her, too: During her tenure as mayor, she oversaw the installation of a new solar power plant, expanded green spaces, and implemented air quality improvement programs.

But Sheinbaum is taking over the presidency at a time when Mexico’s energy sector, a pillar of its economy and a point of national pride, is facing intense pressure for reform as its national oil company bears immense debt and its aging power grid buckles under rising demand.

The changes it makes will have repercussions for the United States and the rest of the world.

Mexico is home to 130 million people. It’s the 12th-largest economy in the world and, as of 2021, was the 13th-largest greenhouse gas emitter. Mexico is also a major trading partner with the United States, particularly when it comes to energy products like oil and natural gas.

However, this year, Mexican oil production fell to its lowest levels in 45 years while its biggest customer, the US, has become the largest oil producer in history. Meanwhile, Mexico is becoming more reliant on US natural gas, mainly for power generation.

In recent years, Mexico has also seen some of the effects of climate disasters landing on dense populations. A scorching, record-breaking heat wave this summer led to rolling blackouts as power generation failed to keep up with cooling demand. Much of the country remains in a multiyear drought, causing water levels to recede and leading to a steep drop in hydroelectric power generation. Hurricane Otis last fall rapidly intensified and struck Mexico’s Yucatán Peninsula at Category 5 strength, killing at least 27 people and wreaking catastrophic destruction; just a week into Sheinbaum’s tenure as president, Hurricane Milton slammed the region again, causing flooding and power outages.

Sheinbaum will likely face more climate disasters and mounting international pressure to rein in fossil fuels. But she has to navigate the tension between her ambitions for energy nationalism — claiming fuel and electricity as national resources for public benefits — and the need for more outside private investment. Mexico is also balancing the appeal of cheap energy from coal, oil, and natural gas with its commitments to decarbonize.

However, with supermajorities in both legislative chambers for her Morena party, Sheinbaum now has more tools to enact her agenda than any leader for 30 years. Her team is already getting to work. This month, Mexico’s senate approved a constitutional amendment to favor power generated by CFE, the state-owned electric utility. It puts more control in the government’s hands and could end up extending a lifeline to Mexico’s dirtiest power plants. But if CFE makes its own investments in renewables, it could give clean energy an edge.

Sheinbaum could thus make a vast expansion of zero-emissions energy her legacy. Mexico has enormous untapped potential for wind, solar, geothermal, and hydropower, a growing appetite for energy, and with the new administration, the political will to shift to cleaner sources.

The question is whether Mexico can get the cash to fulfill its energy dreams.

Mexico’s energy conundrum, explained

Energy is a big part of Mexico’s national identity. Mexico’s government still commemorates March 18 as the anniversary of the day they nationalized their oil industry. Pemex, Mexico’s national oil company, provides almost 20 percent of the Mexican government’s revenue.

Since taking office in 2018, López Obrador’s aim was to boost Mexico’s “energy sovereignty” and to bring more of the sector under state control to benefit Mexicans, with little emphasis on meeting climate change goals. In 2022, Mexico committed to cutting its greenhouse gas emissions 35 percent by 2030. While it’s a larger percentage than previous targets, Mexico also revised its baseline upward, so it’s actually a weaker goal than the one promised in 2016, leading to more emissions. Mexico is already falling behind this target, and its emissions are on track to rise over the next five years.

López Obrador has had a dim view of renewables. His administration canceled auctions for private wind and solar power while expanding the national fleet of natural gas-fired power plants. Renewables — solar, wind, hydro — provide just over 24 percent of Mexico’s electricity, falling far short of the national target of 35 percent by 2024. Meanwhile, 61 percent of electricity comes from natural gas. Ocampo explained that López Obrador viewed renewable energy as a private industry that was eating away market share from CFE and Pemex.

“It’s not that he didn’t care about the environment, but he did not like competition,” Ocampo said.

However, Mexico’s power grid has been struggling in recent years to keep up with demand while hitting the limits of how much new supply it can add on.

Mexico’s reliance on natural gas has also proven to be a vulnerability. When winter storm Uri chilled Texas in 2021 and froze gas pipelines, it led to blackouts in Mexico. And facing low prices and fuel theft, the state oil company is no longer the cash gusher it once was. Pemex now owes more than $100 billion to creditors, making it the most indebted oil company in the world. It has also become notorious for leaking methane into the atmosphere from its pipelines and drilling sites while putting off repairs. Methane is a greenhouse gas that has about 30 times the heat-trapping potential of carbon dioxide.

This adds up to high electricity prices. Until recently, most Mexicans were shielded from these problems with generous electricity and gasoline subsidies. “The end-consumer prices remain heavily subsidized and so as a result, the consumer does not see these problems,” said Diego Rivera Rivota, a researcher at the Center on Global Energy Policy at Columbia University.

But extreme weather has made these vulnerabilities impossible to ignore, and ordinary Mexicans are starting to feel the effects, like during this year’s deadly heat wave in May and June. “I was myself in Mexico City and I was without power for 12 hours plus, so that’s very real,” Rivera Rivota said.

So Mexico’s electricity and fuel network desperately needs upgrades just to keep running, whether or not it shifts toward cleaner energy. “The problem is, where is the money going to come from?” Rivera Rivota said. It will be politically challenging to end subsidies and raise consumer energy prices, so the remaining option for injecting more cash into the energy system is private investment.

But that too faces obstacles. López Obrador was trying to reduce, not increase, private interests in Mexico’s energy. Sheinbaum, for all of her goals to reduce greenhouse gas emissions, is also aware that moving the needle requires tact. She has sought to reassure investors who remain wary of her party’s push for greater government control in industries beyond energy and judicial reforms, making all federal judgeships elected positions rather than appointments.

“We will promote public and private investment. I say it clearly: Rest assured that the investments of shareholders, both national and foreign, will be safe in our country,” Sheinbaum said.

¿Viva la energía limpia revolución?

Despite all this, could Mexico launch a clean energy revolution? The good news for Mexico is it does have energy resources that check most of the boxes on its wish list: clean, abundant, cheap, within its borders, and ripe for investment. Mexico has some of the best conditions in the world to develop clean energy, and harnessing it would help it fulfill Sheinbaum’s energy nationalism ideals.

“The solar irradiation map for Mexico is just incredible,” said Riccardo Bracho, a researcher at the National Renewable Energy Laboratory in Colorado.

Bracho put it this way: Texas is at Mexico’s northern border. Texas has the largest wind energy capacity of any state in the US and installed more solar power last year than any other. That’s because Texas has some of the best wind and sunlight in the United States, as well as a freewheeling market that rewards cheap electricity, regardless of the source. South of the Rio Grande, it only gets sunnier and windier.

Bracho co-authored a 2022 report that found that Mexico has the potential to become a “clean energy powerhouse.” The country has a power potential of 24,918 gigawatts from solar photovoltaics, 3,669 GW from wind, 2.5 GW from geothermal, and 1.2 GW more from its current hydroelectric plants. Together, Mexico’s clean energy capacity would be enough to meet its electricity needs a hundred times over. Mexico could even export zero-emissions electricity to its neighbors, the United States and Central America.

Plummeting prices for wind and solar hardware are certainly working in favor of a shift to cleaner energy. But in Mexico, costs aren’t the only hang-up.

A big obstacle is Mexico’s fragile, overloaded power grid, which is struggling to keep up with the rising demand and growing congestion, making it harder to add distributed and intermittent power sources. The grid needs to reach more places and offer more interconnection points while replacing aging power lines and substations.

“New transmission needs to continue to expand more rapidly than what we’ve seen in the past,” Bracho said. How the government will distribute the costs of these upgrades across the public and private sectors isn’t certain.

For investors, it’s not clear how a privately owned power plant will compete with state-owned generators when the rules clearly favor the latter. Creating regulations that allow companies to build a strong business case will be critical for getting more clean energy into Mexico.

The world will be watching. Mexico will be among the countries gathering later this year in Baku, Azerbaijan, for the COP29 climate conference to hash out the next steps in the global effort to curb climate change. The agenda this year is for countries to set more ambitious targets for themselves, put more money behind them, and hold themselves publicly accountable. López Obrador was criticized at past climate meetings for doing little to advance Mexico’s climate change promises.

Bracho said that the Sheinbam administration does seem to be taking its climate ambitions seriously, particularly with the people she’s putting to work on the problem. “It’s a very good sign to see that the people that have been nominated for some of the critical posts are very technically capable people that could really take on this challenge and lead Mexico into this new greater development,” Bracho said. “A lot of great things could definitely happen.”