How Mexico's energy transition depends on a Sheinbaum balancing act

With three months to go before Claudia Sheinbaum takes office as Mexico’s first woman president, observers of the country’s energy market say she will have little choice but to take a more welcoming attitude than her predecessor to private sector investment in the industry.

Over the last six years the administration of outgoing President Andrés Manuel López Obrador, Sheinbaum’s political mentor, has focused on strengthening the roles of national oil company Pemex and state-owned utility CFE. 

But with local demand for energy now threatening to outstrip supply, and both Pemex and CFE strapped for cash, Sheinbaum will have to turn to the private sector to develop new supplies of oil, natural gas and electricity.

“There is a limit to how much Mexico’s national champions can do with respect to taking the risk and funding the investment required to grow the country’s energy infrastructure,” says Adrian Lara, principal analyst for Latin American upstream at energy consultancy Wood Mackenzie.

“We think that a key and necessary change must be the redefining and aligning of the role of private investment, across all segments in the energy sector,” Lara told BNamericas.

Powering up

The need for private investment is most urgent in the country’s ageing power sector, which experienced major blackouts during the heatwaves of May. 

Energy sector analysts say that the industry’s current tribulations are largely the result of López Obrador’s decision to increase the market share of CFE at the expense of private players and to obstruct renewable energy investments from the private sector.

If Mexico is to take full advantage of the nearshoring opportunity, it needs to attract investors who can deliver a more reliable, cleaner and cheaper supply of electricity than CFE can provide.

“One of the biggest challenges for the next administration will be to secure that the 54/46 market share instituted in favor of CFE does not further inhibit new appetite for investment in frontier technologies and renewable energy sources,” says Ricardo Falcón, research manager for natural gas markets at Wood Mackenzie in Mexico City.

Sheinbaum, who takes over on October 1, has pledged to increase clean energy generation. To fulfil this commitment, her administration will need to provide private sector players with more regulatory certainty and scale back the favoritism shown to CFE.

One option for regulatory reform is to reactivate the long-term auctions for renewable energy generation that were abandoned by López Obrador. 

However, a revival of energy auctions could face resistance from the more left-wing elements of Sheinbaum’s Morena party. In that case, CFE will need to develop alternative mechanisms for project financing and pursue strategic partnerships with the private sector, Falcón says.

At the same time, the new government will need to modernize and expand transmission networks to improve the reliability of the electricity grid and integrate new sources of renewable energy.

“The next administration may open room for private investment in much-needed power line reinforcements and new transmission infrastructure,” Falcón told BNamericas. “However, being treated by law as a public service, transmission will remain centralized by the state in the planning, execution and operating areas.” 

The nearshoring imperative

Only if the new government changes course will Mexico be able to meet the expected rise in electricity demand, which is being driven both by increasing investment in nearshoring and rising temperatures.

“Supply chain integration with the US markets has been and will continue to be a longer-term strategy which can allow for successful investments in Mexico, but this will require acting now to grow future power-related infrastructure,” Lara says.

Less than one month after the elections that brought her to power, Sheinbaum has not yet unveiled key appointments to her energy team. Once these appointments have been made public, all eyes in the country’s energy industry will turn to the political reforms that will be debated by congress in September with a Morena majority in both houses following the June 2 elections.

“How a Morena-dominated congress approaches politically sensitive reforms, what priorities it assigns in the 2025 budgeting process, and how closely it works with the reshuffled energy institutions, will be decisive.” Falcón says.  

“These critical milestones will set the tone of the Sheinbaum administration's energy agenda. She will need to perform a delicate balancing act to preserve the status quo around strengthening state-run companies while pushing for more progressive policy changes toward accelerating Mexico’s energy transition.”