The Fight for Mexico's Energy Future

private development. We're going and they did, and so did many others. In fact, Mexico became one of the hottest markets for clean energy development. Newly opened Mexico attracted billions in investment, driven by three highly successful auctions that are tied to more than eight gigawatts of new wind and solar capacity. But policy under President Andreas Manuel Lopez o Berdor, or AMLO as he's known, has taken a u turn.

Since taking office in late twenty eighteen, AMLO has canceled Mexico's renewable energy auctions and sideline national clean energy targets, and recent regulation goes further, asserting that renewables threatened Mexico's power grid, placing at risk o for four point five gigawats, wind and solar currently under development. To tell us more, we've got James Ellis, head of Latin America for BENF and based in Sampolo and joining us from Mexico City.

We've got BENF Medals analysts Sharon Mostrie. You can hear Sharon talk medals with us in a recent episode on unconventional lithium, but today she'll give us a perspectives on the energy sector in Mexico. Our discussion is based on report titled No Winners in Amulos Clean Energy Feud. BENOF users can get this report on banf dot com, the

benof mobile app, and the Bloomberg terminal. As a reminder, BENIF does not provide investment or strategy advice, and you can hear the full dist claimer at the end of the show. I'm Mark Taylor and you're listening to Switch on the BENF podcast. James, Sharon, Welcome, Mark, Hi Mike, thank you for inviting us, Thanks for coming in. James is going to point the first question to you. We're going to talk today about the president of Mexico and

some things that are going on with his office. Can you describe for us who he is and and kind of what he stands for. So, Mexico's president is currently Andres Manuel Lopez, known pretty widely as MLO. I think he has a very interesting political identity. He's been a fixture in Mexico's political scene for quite some time, previously been mayor of Mexico City. He came to the presidency in a landslide election and took office in December of that year, and has since done a number of things.

He has very very strong supporters and very strong detractors. And among the interesting things he's done and controversial things, I should also add, are many have to do with the energy sector. Sharon, was he mayor when you were growing up in Mexico City? Yeah, he was mayor when I was little. Still remember a lot of of the things he did for the city. He has also run

for president. This would have been his third time when he won, so he was always a very like prominent controversial figure and I remember being little when he ran the first time. It's worth adding as well that he started a new party called Morena not that long ago and Morena also had a very large showing in congressional elections and currently has a majority in the Senate the

Chamber of Deputies. Is there there's kind of an analog anywhere else, like the U s is is eqilualent to like a Tea party or a Trump movement or something like that. I don't know if there's a US equivalent. He reminds me of Trump in some in some sense, like his way of doing politics is very focused on himself, like it's it's not necessarily done in an ego less way, if that makes sense. I think it's pretty remarkable what

he achieved. What what James was just saying, he he basically formed this party or or brought it to the center of Mexican politics in a couple of years out of basically nowhere. He got a huge control over Mexican politics all around. Can we give some context or a backdrop to the whole situation, Sharon, Can you explain to us kind of what's going on with the with COVID nineteen in Mexico and how that relates to actually the energy sector. Mexico still hasn't been able to curb the pandemic.

We we still have kind of record increases in cases each day. The government unfortunately didn't take it very seriously in the beginning and made it similar to the US kind of a political thing rather than just a health crisis. The impact on the energy side is obviously a lot of things had to close down, so demand decreased, and that was then used as well, what spain for changing

energy policies. So decrease in demand because people are kind of staying home and businesses are shut down has been used as a tool to explain away or explain some changes that the government was to make. Is that fair? Yeah? So, given this, what has Amilo's response been as it relates

to energy. What's really interesting is that MLO has used the COVID nineteen pandemic to push through some regulation that gets at some of his objectives that he was already trying to achieve before the COVID nineteen pandemic, ever, happened.

At the end of April, Mexico's market operator Sanata issued a resolution that indefinitely suspended tests for all renewable plants across the country, and that was pretty interesting because it basically effectively barred any new projects, any new intermittent projects, which means wind and solar in Mexico's case, from connecting to the grid at all. Its specifically said intermittent projects.

That's correct. Yeah, it denied authorization for future tests, and it also subordinated dispatch of existing wind and solar plants to cefe's firm capacity over the course of the crisis. Kind of question. So we'll get into this. But CFE, the Mexican State on Utility, owns a considerable amount of geothermal? Did it mention intermittent because CFE owns geothermal resources, so it's redowables without geo. I think it's entirely possible. I mean CFE, what they don't have is wind and solar.

And what I think all observers of the situation you can agree on is that AMLO very much wants to limit private participation in Mexico's energy sector. Period they only have two percent of Mexico's total wind and solar capacity. See if he only has about two percent of that very little, So this has basically been interpreted as efforts to achieve that objective by using the pandemic Sharon, why

is energy so political? In Mexico? Energy has a history of being a very important political topic in Mexico since like after the Mexican Revolution, so like the nine thirties, and for a while the oil and gas and the electricity sector were nationalized, and until recently with the presidency

before Amino, they were private tizes. So MN did not want to kind of go back on those reforms explicitly, but has been undermining them with the kinds of things that Jamsilo is just mentioning for the layer and making it really hard for private companies to participate in the energy space. But it's so political because there are just people in the government who want energy to remain controlled

by a government. I don't understand why. I think it's it's in a pretty old ideology where where basically Mexico perceives private companies as coming into the country to extract kind of value and resources without giving anything back, and specifically with energy, it's thought of as a strategic thing that the government should control. What James was mentioning is basically what I'm always trying to achieve is to conserve the main power within the energy sector in Mexico in

the hands of public companies. A lot of detractors of what I'm low is doing. Will argue that it's actually employed to continue with a government who has kept public companies running while taking advantage of them as public officers. And and there's a lot of corruption going on in both CFE and BMICS, So it's a complicated issue where officials kind of argue that nationalization is is for the security of the country and the benefit of the people.

So it's kind of a populist tactic, but the detractors will say, no, it's just kind of a way to get money and to further corruption. I think that as as Sharon explained, I mean, energy is a is a controversial topic. The energy, the market opening reforms of the Penya and Yeto government, the one that preceded AMBLO. It involved passing constitutional amendments. It's an inherently controversial issue. I think.

In Mexico, what we've seen recently and why that's interesting is using the low demands scenario that's kind of resulting from the pandemic to guarantee the state's share or to guarantee that state that that may be you know, the slightly older or or inefficient, more fossil fuel based fleet of the CFE, to guarantee that those plants continue to run instead of instead of intermittent plants is really what's interesting.

And as I mentioned, those intermittent plants are very much the product of private investment that the energy reforms ushered in. So they're saying that on current projections of low demand scenario, they don't need more power and so they're cutting off the top. Well, that's I would say, what it looks like the uh SO, both the Senase resolution and then there was also the Ministry of Energy published a policy in the in the official federal gazette that sort of

tried to make these changes permanent. They both spoke to the same thing, which is safeguarding the reliability of Mexico's power system. That that that's what it was really about nominally, But what it is really about, I think is is and and it's quite quite clear to everyone. It's really about a Sharon laid out there. It's about safeguarding the

role of the public sector and strategic industries. Just to add to that, it's important to point out that most of the generation that the CFE owns is fossil fuel, so usually they they kind of marginal, and especially the oil field plans they would run now in the summer where COVID has had the most impact. So part of what they're doing is it's very connected to PEMICS and the fact that i AM reduce the demand for the

oil that pemics produced. But this oil can be used in the generators of the CF so it's kind of to put to use that excess oil that be MIX has. There's this kind of new organization of how you can deploy energy assets within the market in Mexico and giving priority to fossil fuel generators so that they could use this excess oil is also part of this story. So just to clarify for those it might not be familiar, pemmics, I guess the is the National Oil Company of Mexico.

Is that right? And i AM is the International Maritime Organization Organization. Yeah, which basically it reduced the amount of sulfur you can have an oil used in shipping, and that tends to be the oil that BEMIS produces. So now they have reduced demand for oil, so there's a reduced demand for this and now they can say, okay, we can just burn this for power generation in Mexico.

So James, you said to see if he only owns two to three percent of the intermittent capacity or wind and solar capacity in Mexico, what companies when they opened up the barn doors, as it were, to open up the end of energy industry in Mexico, what companies came in who participated in the auctions. So the largest owners currently of wind and solar capacity in Mexico are our European developers. We're talking about a nell I, guerdroa Axon, a UK based investor Actors owns a number of developer

platforms as well, and so on. But in general, the auctions that Mexico held over seventeen there were three of them. They were highly successful, transparent and competitive internationally. They were considered to be successes, and they really attracted a wide variety of players. As you said, just a few years ago, Mexico was very much top of mind if you were thinking about exciting new markets for development of clean energy.

And why this story is so interesting is that it has been a complete one eight From a policy point of view, and as you said before, you think this is a push for supply security or nationalization of the energy sector. I think that m low is this government is fundamentally opposed to the energy reforms that were passed

by the last government. They are not in favor of private participation in the in the energy sector on either the oil and gas side or or the electricity side, and they're looking to safeguard what role the state has and and then possibly build on that. And you can point to many steps that the government took but before

since Amlo took office that bolster this perspective. Okay, In addition to cancel they canceled the renewable energy Auction program, which by the way, as I mentioned, were considered to be successful and transparent, competitive secured, competitively priced power for the cfe's residential supply arm. By the time that the prices kind of fell every auction, and by the time they got to the third the average average off taker price was was under twenty dollars per megal at hour.

Over the course of the past year and a half, the government has also sought to dilute the market for renewable energy credits, has basically sideline national clean energy targets and then also kind of taken steps to even even undercut benefits that legacy wind and solar projects and received, which predates energy or form, so there's sort of like a long I guess I would say there's a there's a pretty long paper trail here of looking to limit

private participation in the energy sector, and unfortunately that very much has brought wind and solar into the crosshairs. Shared as a resident of Mexico City, have you noticed any changes in in either supply reliability and has there been blackouts or has there been any differences to your day to day life as electually been more expensive. No, I

wouldn't say I've noticed any huge differences yet. There haven't been any blackouts, and the prices in Mexico are are quite subsidized, so I haven't noticed a rise in the last few months. I wanted to add to James's comment, which is, yeah, the government has been very creative and in the way it is trying to consolidate power for

the CFE and for by mix. But just to like put it into perspective of the two sides, one side will say that this nationalization of energy is good for prices and ultimately saves a taxpayer money even if we don't notice it in our bills, because it reduces the

subsidies that that the government has to give um. The other side will say that's that's false, like, actually, these intermittent sources are are a lot cheaper to run, and it makes no sense to say that prices will be higher with renewables versus versus gas or oil plants because

just their marginal clusts are a lot higher. It's also important to say, like some people think this nationalization tactic for security reasons is also because a lot of the gas that Mexico would use for most of its fossil fuel plants within the Cifee is imported. So ultimately we still rely on like for foreign resources to power the

national power company. So really, what what would need to happen is if the national company wants to be fully sovereign and and independent of you know, US gas imports, it would have to invest in renewables itself for or generate gas within Mexico, which it seems unlikely. Why hasn't

see if he invested in renewables. I don't know that I could give, you know, not not being party to see if he sort of strategic decision making, I don't know if I could like fully, you know, give a full answer to that But what we can say from from from looking at like for example, the Mexican government independent audit of CFE a few years ago, and for looking looking at its sort of public financial accounts and also it's lack of investment in renewable energy and generally

aging generation portfolio, is that it sort of lacks a plan or mandate to to to revamp itself. It is sort of a classic on large on competitive public entity that nevertheless is the backbone of Mexico's generation capacity. It's has a market share by capacity, so the CFE is fundamental to to to the sector. But it's also sort of a bit, I think a little bit in UM caught between two competing visions for for for what Mexico's energy sector should be. These these famous energy reforms begun

in unbundled the utility UM. But as Sharon said, supply to two households is one of the areas that remains in the that that it kind of retains monopoly of over as well as transmission and distribution, and its generation segment was broke down into six different, six different entities. But ultimately, when it comes to I mean, when it comes to costs, Mexicans Mexican citizens do pay lower, low

by regional standards prices for power and that's due to subsidy. UM. In each of the past two years, that's total about four billion U S dollars from that's been the transferred from the government to CFE. So even if you don't feel it in your power bill, then costs are born somewhere in the in the sense of higher system costs, and then government subsidy, which ultimately flows through the taxes I suppose at some point. So it couldn't compromise be

for both these competing visions. Be Yeah, let these quote unquote reforms go through UH and more control goes to CFE, but allowed developers to come in and develop wind and solar projects. That see if he would then buy right, So see if he becomes a competitive utility buying competitive power, but it doesn't have to develop the know how or the you know, doesn't have to build the projects themselves,

wouldn't that work? Yeah? I I well, I think one, as you said, we don't know, but I think that's absolutely a that that that that would be a a positive and constructive step. Um, there's no reason why they can't tender why they couldn't tend their projects, uh and and sort of and and and begin the process of revamping their portfolio and its diversifying into into new clean technologies.

I mean this is common in several other countries that have national power companies, where you just tend to the project and then buy it once it's build. Yeah, you know, Sharon I think brought in a really fundamental theme before when when when she was talking about bringing in the national company the I m O regulation what to do with this excess fuel oil? And that is that um AMBLO has this sort of old school view I suppose of what it means to be what what what it

what it means to be sovereign? Maybe, and that is based on Mexico should seek to return to it's it's it's higher producing days in terms of oil and gas. It should refine all it's all of its own crude into into refined products, and it should basically you know that the should do be able to do everything itself. I don't think anybody has ever gotten a sense that the at the high highest levels of this government that

they actually understand the value of renewables. I think they actually view renewables as a and by by renewables, I mean winded soul, and mostly they view it as an expensive alternative possibly also sort of laced with with corruption, corruption, and time to the private sector. So there's clearly misunderstanding. Okay, so my my quote unquote compromise is not going to work.

What is actually happening then in Mexico, the latest regulatory and policy steps the government has taken are very vulnerable to legal challenge, and in fact, since this sort of latest attack I guess you could say on renewables has happened, there's been three separate in junks at the federal court and even the Supreme Court level that have suspended their implementation. So what that means is that basically all this um kind of like anti renewable policy is sort of on

hold and pending. It doesn't mean it's completely shot down, but the fact that that a lot of what Amilo has tried to do in the electricity sector has not been successful in moving forward kind of underscores the strength with which energy reform was passed. I mean, there are conflicts with what he's trying to do, both with the

constitutional amendments as well as with the implementing legislation. So yeah, the regulatory rollback that is currently conceived is faces a lot of headwinds going forward, and it's unclear if any of this stuff will actually remain standing. To add to that, it's actually been quite hardening to see an institutional checks and balances play out with this particular issue in Mexico.

So the two injunctions that James was referring to, one reason they were given was they would undermine competition and further monopoly, which would be the CFE. And then the other reason is actually quite historical. It was given for reasons to protect the environment. So the Supreme Court legitimized environmental issues as a reason to stop these new regulations

going forward. If I'm a private company that it looked at Mexico ten years ago, I think we might be in a situation where it seemed like a good idea at the time. Have private company has been kind of spooked by what's going on there or are they still interested in Mexico as in the market opportunity. You know, I think they're still interested in Mexico as a market opportunity.

But I also think it would be naive to think that these latest policies and the overall sort of approach of the animal administration to the sector hasn't seriously undermined investor confidence. So I think jects that are in the queue in the pipeline, that are financed under construction, they are by and large moving ahead. I think that if you go a step out, it might be the projects that are more in conceptual phase. It might be more what I guess what I mean is new or potential investment.

I would expect to take a serious hit from this kind of the view from the ground. Since the start of Aminos presidency, his speech has has been very clear about his lack of support for the private sector, both foreign companies and national companies, and that has seriously slowed down investment in the country in general. I think the energy sector kind of took a while to see this

get to them. But if it follows the same trajectory as other investors and their confidence in Mexico, both national investors and foreign investors, but in other sectors, then I would expect for there to be a slowdown in the energy space as well, just because it's really hard to deal with a government that is so inconsistent and and that makes it a lot more risky too to invest in these huge projects and the presidency in Mexico markets, it's it's just worth worth noting as well. UM is

a single six year term. An MLS is just about two years in, so there's you know, there's four more years of UH to see where things go. And I would imagine you know, a material a material amount of investment will be will be delayed or or you know, maybe some investors will think twice and hit pause UM on on new projects. But we're talking about just to put numbers to this, we're talking about there's about almost five giga lots of wind and solar that's under development

currently UM. Then there's about almost eleven gig lots of wind and solar that is UH that is commissioned. So a lot has has gone into the ground, but there's still a lot that's kind of in limbo. Absolutely, And part of the reason why a lot has gone into the ground is that Mexico has a very strong history of renewables UM that that that pre date this UH. This discussion by long ways with wind development has been particularly strong in Mexico, predating energy reform. In fact, final question,

is there a winner in all of this. We think it's very hard to see a winner in all this simply because, as has already been amply demonstrated, the government in the private sector are going to lock horns every time a new policy or regulation comes out that that is that is sort of easily open to legal challenge um and, which all of these have been. So what we're likely looking at because we do think that it's it's quite likely that EMIL will continue to challenge the

private sector and therefore renewables. We think it's likely that we're going to see continuing um and and probably mutually damaging legal legal fights. So UM stay tuned. We definitely will and we'll definitely have to have you back on the show to talk about it. Sharon James, thanks for joining. Thank you, thanks so much. Mark. Bloomberguin e F is a service provided by Bloomberg Finance LP and its affiliates.

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