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Biden victory could move Mexico to
rethink its current green energy strategy

- Paris deal seen as challenging for Mexico
- Mexico-US relationship likely to change "significantly"

By Sheky Espejo/Platts

Petroleumworld 10 02 2020

If Joe Biden wins the US presidency in November, he could hasten the country's migration to more renewable energy by enforcing the Paris Agreement and the energy chapter under the US-Mexico-Canada Agreement. Should this happen, Mexico may have to rethink its own current hydrocarbon-focused energy strategy.

If Donald Trump holds onto the White House, however, Mexico will continue to pursue its strategy of fossil fuel independence.

Under President Andres Manuel Lopez Obrador, Mexico is looking to reestablish its former energy monopolies and use them as an engine for economic growth. But a Biden victory is seen by some as a key potential catalyst that could force Mexico to change course and revisit a greener energy strategy.

A Biden administration would be expected to enforce Paris Agreement emissions targets as a first step, according to Biden insider Juan Gonzalez. Now a Principal at JSG Strategy, Gonzalez served as special advisor to Biden during his vice-presidency.

The December 2015 Paris Agreement has as a main goal of limiting the global temperature rise to no more than two degrees Celsius above pre-industrial levels during the century.

"Biden will invite Mexico to listen to science and work with it to help it invest in new technology to prepare for the challenges facing it during the next decades," Gonzalez said at Wilson Center seminar late last month.

Mexico and Paris Agreement

Mexico's national contribution to the Paris Agreement is seen as "insufficient," according the Climate Action Tracker, a government climate action watchdog. The group does not expect Mexico to achieve its commitments, highlighting the country's lack of ambition, its rollback of support for renewable energy and its response to the coronavirus pandemic. That combination has put the country's emissions on a "worryingly upward path," according to the group.

Mexico issued legislation in 2016 committing it to producing 35% of its total consumption using clean sources by 2024, 45% by 2036 and 50% by 2050. According to Mexico's Energy Secretariat, in 2019 the country had an installed capacity to generate 31% of its 60 GWH per day consumption using renewable energy, including nuclear, solar, wind and hydropower. However, Mexico's power consumption has since fallen due to the coronavirus pandemic, to as low 23.4 GWH per day in March, according to S&P Global Platts Analytics.

And recent moves by the Lopez Obrador administration to consolidate monopoly power within the country's utilities are seen as counterproductive to the USMCA trade deal.

Since December 2018, the administration has cancelled international tenders for transmission lines, power plants, and long-term energy supply contracts. It has also restricted the participation of private companies in power generation and delayed or even denied the permits needed for the operation of new facilities, S&P Global Platts has reported.

This is seen as potentially violating energy provisions of the USMCA deal, which protects investments made by international companies in Mexico following the 2013 reforms.

Game changer

Some sources said that a US push toward renewable energy amounts to a "death sentence" for fossil fuels, in particular for Latin America.

Severo Lopez-Mestre, a partner at Galo Energy and a former senior advisor at CFE from 2001-10, said a Biden election would make it very difficult for Mexico to sustain its plan, noting that Biden's promised $2 trillion injection into green technologies is more than twice Mexico's GDP.

Lopez-Mestre said the current administration must decide if it is willing to endure the friction that will be likely should Biden become president. "It will be a game-changer," he said.

International cooperation

Pablo Zarate, a managing director at FTI Consulting, said it was unclear how the US would enforce compliance with international commitments like the Paris Agreement, but that Mexico's strategy to stick to fossil fuels was already having repercussions. The European Union is discussing a carbon tax on imports which recognizes the inevitable environmental fallout of fossil-fueled energy production, something Mexico has been less willing to acknowledge, Zarate said.

"Having more scrutiny from the international community in environmental issues can help things to change," Zarate said, adding that Mexico is prone to changing its policies only when it is held accountable by the international legal framework to which it has adhered.

"This affects the competitiveness of products that are produced in countries where power generation is not sustainable, and this has environmental costs that must be recognized," he said.

Duncan Wood, director of the Wilson Center´s Mexico Institute, said the relationship between the countries will change "significantly" if Biden wins. Wood said Biden would bring a more multilateral, institutional approach to international affairs, as opposed to President Donald Trump´s preference for striking bilateral deals on a personal level. Wood doubts Biden would push the Mexican government to move to renewables through bilateral pressure.

"The best we could hope for is some sort of technical cooperation," he said, adding that change has to come from within Mexico.

Delaying transition

According to Lopez-Mistre, a more sustainable energy strategy is coming to Mexico, with or without a Biden administration, noting how popular environmentally friendly investments have become. Further, making Pemex and CFE engines for growth is not realistic and likely a mistake, Lopez-Mestre said.

"Pemex will not be the engine for growth that it was during the 1970s, given structural reasons like the capacity of the Mexican state to acquire new debt, the natural decline in Mexico's oil reserves, and global megatrends," he said.

Mexico's crude production declined consistently since 2004, when it peaked at 3.4 million b/d until 2018 when the current administration managed to stabilize it at around 1.7 million b/d. According to S&P Global Platts Analytics, the country´s output is expected to hover around 1.67 million b/d through 2025. Electric power is mainly generated with natural gas, 70% of which is imported from the US.

Wood agreed the strategy to rescue the former monopolies is not the best and said Mexico will need to make adjustments, as it cannot generate the energy it needs for its economy in the short term. Copyright ©2020 Petroleumworld.



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