Summary: The national and international attention paid to Pemex and the oil sector has eclipsed the other half of the reform with a greater potential. In March, the government bought 2.1 GW for $2.6 billion, which will be installed by 2018. In September, it will seek to buy between $2.6 to $2.8 billion more. Starting in 2018, qualified consumers (big energy consumers that but directly in the new power market) will have to show that they consume at least 5% from clean sources.
Among Peña Nieto’s structural reforms, the energy reform was the brightest. The historic opening of the energy sector immediately created high expectations for one of Latin America’s largest oil exporters. Fast forward, oil prices collapsed and Mexico has only managed to generate commitments to invest $7 billion dollars in a 20-year time horizon.
But the national and international attention paid to Pemex and the oil sector has eclipsed the other half of the reform with a greater potential. Mexico also opened its power sector controlled by the state owned utility CFE. With the new regulation, the private sector will progressively increase its participation in power generation and commercialization. That’s not all. By law, Mexico has now to reduce its carbon emissions and has started to give incentives to the private sector to generate renewable energy.
In 2012, Mexico passed a comprehensive climate change act, which then led to the 2015 Energy Transition Act and to Mexico’s commitment at Paris Climate Change Conference. Mexico now has mandatory greenhouse gas emission reduction targets in local and international frameworks. Mexico has to cut by 50% its greenhouse gas emission by 2050 relative to 2000 baseline.
In order to reach the 2050 goal, the Mexican government will set annual targets that kicked off with a 5% reduction of gas emissions in 2018, rising to 5.8% by 2019. Since Mexico approved its climate change act in 2012, installed generation capacity and power generation of wind and solar energy have increased over 400% and 200%, respectively.
But the energy reform has added new incentives that will continue to drive renewable energy growth. The government has launched tenders to buy power generation coming from renewable sources. In March, the government bought 2.1 GW for $2.6 billion, which will be installed by 2018. In September, it will seek to buy between $2.6 to $2.8 billion more.
In the tenders, the state owned utility CFE is also buying clean energy certificates (CELs). Starting in 2018, qualified consumers (big energy consumers that directly buy energy in the new centralized power market) will have to show with CELs that they consume at least 5% of its electricity from clean energy sources. Setting this new obligation to CFE and large consumers, Mexican officials plan to progressively meet their greenhouse gas reduction commitments.
LATAM PM’s Take: Mexico’s electricity market is experiencing a drastic transformation going from a generation and commercialization monopoly to an open market that gives incentives to clean energy generation. GDP in power and transmission activities increased 7% y/y in 2Q16.
Mexico’s will offer attractive opportunities to investors because its targets will require investment. Even the cumulative foreign direct investment in power generation and transmission at $560 million in 1H16, up 370% y/y, falls short. PwC estimates that Mexico will require $5 billion annually in the next 15 years. This is why organizations such as Climate Change Initiative have already targeted Mexico as an issuer of green bonds with a great potential.