‘At Its Limit’: Mexico’s Buckling Grid Threatens Nearshoring
(Bloomberg) — A booming economy and extreme temperatures are pushing power grids to the brink across Mexico, a crisis that’s growing worse with each new industrial park and warehouse.
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Unless incoming President Claudia Sheinbaum and Luz Elena Gonzalez, her new appointed energy minister, can do something about it, the excitement over Mexico’s nearshoring boom is headed for a reality check. Many manufacturers want to locate factories closer to the US to reduce their dependence on China, but only if there’s enough electricity. Already, during a longer-than-usual dry season, the country has experienced widespread blackouts.
Sheinbaum, a climate scientist with a PhD in energy engineering, has pledged $13.6 billion in energy investment, and said she sees a role for the private sector as a minority partner in expanding wind and solar power generation and modernizing hydroelectric stations. She has also pledged to add gas-burning power plants and invest in transit and port infrastructure, according to a recent speech before Mexico’s chamber of business executives.
“Even if Sheinbaum invested all that money in a month or year, it will never be enough,” said Claudia Esteves, executive director of Mexico’s Association of Private Industrial Parks. “Everyone is suffering in some way from a single problem, which is a lack of investment in energy distribution and transmission to ensure a steady supply of quality electricity.”
Doubling the amount Sheinbaum has committed wouldn’t make a dent, according to Grupo Financiero Banorte. According to the bank, the grid needs at least $38 billion to meet demand over the next five years. Mexico’s energy ministry expects power demand to rise as much as 3% this year to 345 terawatts per hour. In the next five years, demand could exceed 400 terawatts per hour, Alejandro Padilla, chief economist at Banorte, said at an industry summit in San Antonio, Texas last month.
Investments are constrained because of what current President Andres Manuel Lopez Obrador did: He changed regulations to cement state control over the oil, gas and power sectors, stopped public tenders for new energy projects and set a cap on private sector involvement in power generation to 46%.
Sheinbaum has said she would maintain that practice, which would limit how much private money can help her cause. But she has also suggested tools like public-private partnerships could help.
Gonzalez, Mexico City’s former finance chief, worked closely with Sheinbaum during the incoming president’s tenure as mayor of the capital. She had been a proponent of expanding the tax base to allow for increased government revenue, and has said that the strategy could be adopted nationwide.
Read: Sheinbaum Names Ally Luz Elena Gonzalez as Energy Minister (1)
Mexico’s government must increase its investments in electricity generation and transmission to get the growth it wants, Rajan Vig, a Mexico City-based gas trader, said at the summit. “Nearshoring for now is still just a dream.”
Aging Infrastructure, Underinvestment
Chinese electric carmaker BYD Co., which is marketing its cars to Mexican consumers, is looking for a site to build a plant where it hopes to produce 150,000 units per year. For that, it needs “logistical infrastructure, gas infrastructure, water, and of course energy infrastructure,” among other factors like government support, said Jorge Vallejo, the company’s country head.
But Mexico’s power grids are overwhelmed by demand and “underdeveloped as a result of the decision to paralyze generation, transmission and distribution projects during the last six years,” experts from Emerging Markets Political Risk Analysis, including Alejandro Schtulmann, wrote in a note.
Despite their numerous struggles, public companies like the state-owned Petroleos Mexicanos and Comision Federal de Electricidad, or CFE, remain important national symbols and have been at the center of Lopez Obrador’s energy strategy, as well as now Sheinbaum’s.
CFE suffers from aging infrastructure and underinvestment, S&P Global Ratings analysts including Jose Coballasi wrote in a report. The company has focused on building gas-fired power plants at the expense of new transmission lines, which by law must be owned and operated by CFE.
“CFE has limited financial room to bolster its generation capacity, while it needs to invest in strengthening transmission capacity to mitigate the number of blackouts,” they wrote.
Read: MEXICO REACT: Sheinbaum’s Big Win Consolidates AMLO Policies (1)
A CFE spokesperson declined to comment. An adviser for President-elect Sheinbaum on energy did not respond to multiple requests for comment.
‘There Are No Alternatives’
Private money from international companies could be the key to further growth in the energy sector.
Foreign direct investment in Mexico’s energy sector slowed during AMLO’s administration, averaging about $2.8 billion per year from 2019 to 2023, less than half of its peak in 2017, when FDI in energy projects reached nearly $6.8 billion, according to Banco Bilbao Vizcaya Argentaria.
“The continued refusal of private investment in the electricity sector is no longer an option,” the Empra analysts added. “At this point, there are no alternatives to meet short-term electricity demand spikes.”
On the supply side, Mexico’s margin reserve, or excess capacity available during peak demand, is about 6%, according to Fitch Ratings Inc., compared to Texas’ roughly 34% margin for the summer of 2024.
When reserves dip below 3%, Mexico’s electricity regulator declares a state of emergency as the risk of blackouts — like the widespread ones Mexicans suffered in January, May and June — soars.
“The system is at its limit today,” said Velia Valdes, a Fitch Ratings analyst in Monterrey, Mexico, who covers the country’s power sector. “If Sheinbaum is going to do this, she needed to start yesterday.”
(Updates with details on energy minister appointment in second and eighth paragraphs)
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