Is Mexico Declaring War Against Clean Energy?

Mexico has ample opportunities to attract solar and wind energy investment, but recent legal and regulatory changes are scaring investors and derailing climate goals. Mexico’s government has worked to implement reforms that will hinder privately funded renewable energy projects. The rule changes allow the country’s state-run electricity company, the CFE, to turn away from less expensive electricity produced from solar and wind, and prioritize electricity produced by state-run facilities using fossil fuel sources. While Europe pursues net-zero targets and the U.S. and China look to promote electric cars, Mexico’s President Andres Manuel Lopez Obrador has promised voters that he’ll build a multi-billion-dollar refinery to allow drivers in Mexico to buy Mexican gasoline. It looks like energy nationalism is taking precedence over other priorities including climate change and job creation. Lopez Obrador, has also embraced coal as fuel for producing electricity, and has disparaged wind turbines for polluting the visual landscape in rural areas. Overall, it appears Lopez Obrador is prioritizing fossil fuels at the expense of renewable energy. The US Chamber of Commerce has called the rule changes, “deeply troubling.” Mexico’s National Chamber of the Manufacturing Industry (CANACINTRA) warns that the changes would result in “poor quality services [and] higher costs.” So far, some of the initiatives have been blocked by Mexico’s courts. Renewable energy companies have also threatened arbitration under the USMCA trade agreement Lopez Obrador signed with the US and Canada. (Lopez Obrador responded by lambasting Mexican lawyers working for foreign energy companies as traitors.) In general, Lopez Obrador has embraced a chaotic, capricious style of governance and has created new problems for private sector companies looking to invest in Mexico’s renewable energy sector. Mexico has abundant opportunities to embrace wind and solar energy, but new investment projects will face heightened levels of political risk and increasing uncertainty. In order to discuss the outlook for Mexico’s energy sector, I reached out to Jeremy Martin, the Vice-President of Energy & Sustainability at the Institute of the Americas, a San Diego-based think tank.

Nathaniel Parish Flannery: Over the last few years how has Mexico fit in with global trends for coal, fossil fuels, and renewables?

Jeremy Martin: Globally, the energy trend lines are clear. Net-zero and climate action are the imperatives driving policy choices and regulations the world over. Major global energy companies including Shell, BP, and Total are already acknowledging that our energy system is transitioning from being reliant upon fossil fuels to working towards the goal of being low-carbon and eventually zero-carbon. To wit, right now roughly two thirds of the world’s emissions are currently produced by countries that have now set in place net-zero targets. Timelines and approaches differ, but the ultimate goals and objectives do not. Obviously, the arrival of the Biden administration has breathed important life into global efforts and constructs such as the Paris Agreement. 

Right now, climate change and clean energy are a big priority for the Biden administration. Look no farther than this week’s “Leaders Summit on Climate” timed to coincide with Earth Day and during the administration’s first 100 days. No matter whether the bilateral agreements between the US and China and the US and Brazil fully materialize, that they have occurred and driven interaction between these key emitters should not be underestimated. 

But even before the last few months has seen a resuscitation of the global climate discourse, the rapid deployment of renewable energy is recorded fact. Despite the massive impacts of the COVID-19 pandemic, 2020 again saw renewable energy production surging, a trend the International Energy Agency (IEA) has noted that has been consistently observed over the last decade. Indeed, in OECD member nations, renewable production almost reached 32% of total production, while in the OECD’s European member states, coal continued declining as part of the mix and electricity generated from renewables outpaced fossil fuel generation for the second year in a row.   

In terms of how Mexico has fit the pattern in recent years, it is important to underscore that as a top 12 greenhouse gas emitter, until recently the country had pursued a leadership role in terms of climate policy and climate action. Between 2000 and 2018 successive Mexican governments demonstrated a desire for strong regional action on climate change and positioned Mexico as an international leader, particularly after hosting a United Nations Climate Change Conference in 2010 during Felipe Calderon’s presidency. More recently, during the Enrique Peña Nieto government, Mexico was the first developing country to submit its climate action plan ahead of the Paris Agreement on climate. 

Moreover, for the better part of 20 years, Mexico was acting not just out of altruism but due to its vulnerabilities to climate change and extreme weather, which leaders feared would exacerbate existing social and economic challenges.  

More specifically with regards to deployment of renewable energy and enhancing cleaner power production, Mexico passed a series of laws as part of a major overhaul of its energy sector. Most important, in this regard, was the Energy Transition Law, passed in 2015. The law was the final piece of the major energy reform efforts and sought to pursue decarbonization strategies for the electricity sector and transform Mexico’s energy sector by adopting clean energy technologies and targets. The law also included a much-heralded mechanism known as clean energy certificates, or CELs, similar to renewable energy credits in the United States. Power auctions were also developed as part of the new market model and structure, which greatly accelerated the decabornization of the country’s power sector and saw record-setting bids that included massive wind and solar investments and projects. 

Parish Flannery: How do the policies proposed by Mexico’s President Lopez Obrador compare to global trends? 

Martin: It will surprise no one reading this that, under President Andres Manuel Lopez Obrador, Mexico has started to buck most if not all of the foregoing global trends. Whether Mexico is proving to be the yang to the globe’s yin remains to be seen. But, clearly, the desire to prioritize state owned energy enterprises and domestic coal production and fuel oil for power generation are not in concert with its OECD peers or most of the world as we head toward economic recovery and design what has been called green recovery and building back better. 

Of particular divergence is Mexico’s posture toward coal-fired power generation. Most countries of the world, including notable hemispheric examples such as Chile, have set clear strategies for retiring and making obsolete coal in their power matrices. Indeed, decarbonizing the power sector to achieve the Paris Agreement goals has increasingly targeted coal as the some of the most attainable low-hanging fruit, particularly as the availability of increasingly inexpensive technologies such as wind and solar have proliferated. 

In summary, Mexico is quickly moving in the wrong direction on climate action by not seeking to further decarbonize its power sector and enhance deployment of ever-cheaper sources of domestic, renewable energy. It is not just bucking but almost completely ignoring global trends.

Parish Flannery: Overall, what is your assessment of President Lopez Obrador’s discourse and strategy on energy issues?

Martin: For much of his political career, Lopez Obrador’s views on energy have been anachronistic. Earlier in his political career, energy and oil were synonyms. He came of age in semi-democratic, statist, energy nationalist era that lasted from the end of the Great Depression through the 2000 election. As he made clear in his biography, everything revolved around his home-state’s black gold and the mythical state firm in control of it, Pemex. But, of late, I have been offering a new fairly succinct assessment of how to view Lopez Obrador’s energy policy and strategy: climate be damned, emissions be damned and environment be damned. 

There is, of course, great irony in the horrific damage to Mexico’s emission footprint at the time of a global respiratory illness pandemic.

At one point early in Lopez Obrador’s tenure, around the time when his administration had halted the fourth planned power auction, he confirmed suspicions that he would seek to derail elements of the Pena Nieto energy reform, but in manner that would be more chipping away than complete overhaul. At the time and perhaps further into his first year in office, the efforts were adding up to a plan to reestablish a larger state role in energy policy and market, something that, again, was not terribly surprising, particularly in the case of Pemex. Or, we thought just as he wanted to champion Pemex, Mexico’s beleaguered state-owned oil company, Lopez Obrador and the director of state power firm CFE aimed to reassert the role of the state in the power market. 

But now, he and his administration have ditched the chisel and brought out the jackhammer and proceeded to declare what can only be seen as a war on renewable energy. Yes, the ongoing desire to reassert primacy for the state-owned enterprises remains, but it has moved beyond market share to clear efforts to pursue more coal in the mix, offer a life-line for Pemex’s fuel oil output and revive existing state-operated large outdated hydroelectric dams rather than allow private investment in new renewable and clean energy projects. 

A series of policy edicts, measures and now a legislative effort, the Electricity Industry Law, have set the clear signposts in the struggle over the Mexican power sector, who is in control, what fuel sources are prioritized and how the market will advance. 

It has moved to an all-out attack on renewable energy players and the role of clean energy for the nation’s energy matrix and economy. But it’s a politically calculated one as the president asserted that the Mexican citizens will no longer subsidize Wal-Mart or OXXO’s electricity consumption; the days of their “lower rates” are over.   

To be clear, the charges of intermittency and subsidies are a ploy, but they appear to be politically savvy and popular ones. Indeed, while the energy sector is not necessarily an issue that will change votes one way or another, but Lopez Obrador has used politically charged messaging to use the energy debate to shape the narrative that his government is rolling back the corrupt deals favoring elites and multinationals, deals that he says make them wealthy at the expense of the average citizen. 

The good news is that institutions are functioning and responding. Mexico’s judiciary and the independence of its legal system is providing a key avenue for reviewing the orders, legislation and just about everything his government touches when it comes to the energy sector. Moreover, the legal challenges being leveled and considered will also have a strong role in the broader policy space. But here again, the president doesn’t mince words and insists that the legislation was “not unconstitutional.”

Lopez Obrador does not ever miss the chance or opportunity of shaping the messaging and debating points of the energy sector in his daily mañanera press conference. 

But, it is not even remotely a stretch to say that investor confidence in Mexico has been dashed and the ruminations of arbitration and legal claims are growing by the day. The message of opposition to private participation in the market particularly in the renewable energy space has been sent and received loud and clear as has the disregard for climate action, let alone commitments under the Paris Agreement or, worse perhaps, as part of the USMCA trade agreement that demands fair and open market access for investors in Mexico.

So far, Lopez Obrador’s strategy has been hostile to the renewable energy sector. If his administration continues on the race to the bottom, Mexico will face lawsuits, lose out on investment, and fall behind in the world-wide shift away from fossil fuels towards low-carbon solutions. Emissions and cost of power will increase, jobs may be jeopardized, air quality will worsen, and Mexico’s commitments to the Paris Accord will become impossible, all to the detriment of Mexico’s citizens. 

Additional reading: Is President Lopez Obrador Destroying Mexico?