Is Mexican energy policy on the verge of a profound change?

The administration of President Andrés Manuel López Obrador (AMLO) deeply changed Mexico’s energy policy, limiting regulatory independence and room for private investment.

Relatedly, it strengthened the positions of public utility CFE and federal oil company Pemex.

As presidential elections are slated for next year, Morena’s internal campaign to elect the candidate is about to peak. The race will be decided on September 6 between former foreign minister Marcelo Ebrard and former Mexico City mayor Claudia Sheinbaum.

The party still controls both houses of congress and the governorships of 19 states and Mexico City. In all national polls, Morena leads by 10-30 points, so the party’s candidate will likely become president.

Seven candidates are competing for the opposition alliance made up of the PRI, PAN and PRD. They will pick a winner based on polls in September.

BNamericas talks with Oscar Ocampo, energy coordinator at competition think tank IMCO, to learn about the stakes for energy investors.

BNamericas: The current government has turned the electric power sector upside down. Will we see similarly profound changes after next year's elections?

Ocampo: Regardless of whether Morena wins or the opposition wins, there will have to be a change in energy policy. Of course, depending on who wins, the magnitude of this change will differ.

If Morena continues, some issues are unlikely to change. New oil rounds or new electricity auctions will hardly happen, but authorities will have to open up to some kind of private investment in electricity generation, for example, simply because supply may not suffice in three or four years, even though it is enough right now.

This administration started with two key aspects. On the one hand, a public finance cushion that allowed it to close the door to private energy investment and realize a series of capitalizations for Pemex and support CFE investments.

But the next administration won’t have that cushion for these investments, and neither will it have the cushion this administration enjoyed as result of the [preceeding] Peña Nieto governments market reforms leading to the greatest increase in installed capacity in the country's history.

The lack of new investment was compensated with that momentum from previous years, and the next government will not have that luxury. Consequently, not investing is no longer an option. This administration could afford limited investments, with CFE’s combined cycle projects. The next government can’t afford that luxury.

Crucially, this administration arrived in the era of cheap money, but that scenario has also changed, so it’s another liquidity cushion the next administration won’t have.

In this ecosystem of high rates, where the State does not have those additional resources to invest, and where the momentum of new generation capacity no longer exists, the new government faces a situation in which it must open the door to private investment.

These won’t necessarily have to be 100% private parks, but public-private partnerships. Some opening mechanism, at least for electricity generation, will be needed.

Regarding hydrocarbons, it is difficult to relaunch the rounds. If the opposition wins, they will probably open, but if anyone from Morena wins, it is very difficult to think about that or about new electricity auctions.

We can expect more natural gas investments, though. This administration has recently announced that will resume part of the natural gas storage policy of the Peña Nieto government, and we have the pipelines, which must continue to expand under the next administration, and that is where investment goes to.

BNamericas: What could this opening look like in a second Morena government?

Ocampo: The president said [the Sonora renewable energy plan] will be open to US and Canadian investment under USMCA [trade rules] for generation.

Iberdrola has just been granted its first permit in four and a half years. So there are some signs of opening. Regarding natural gas, public-private partnerships, which this government originally prohibited, have become increasingly common, and it is likely that we will see them expand to power generation, where CFE enters as a partner.

This government is not so much directly averse to investment or renewable energy; its fundamental aversion is to competition. So those would be the mechanisms that could be presented.

BNamericas: Why would a relaunch of energy rounds be so difficult once López Obrador leaves office?

Ocampo: Part of the myth, the doctrine, the political platform of Morena and the red lines the president defined is not touching these rounds. At the end of the day, it is a sensitive political issue for Morena. It can’t be discussed, and it is difficult to see that the issue could be raised, even if a more moderate Morena candidate arrived.

The president has been very clear regarding oil and has drawn a sharp line, and he is defining the national project for any Morena candidate, so I think there will be a veto toward touching that topic.

For electric power, I see less rigidity due to a fundamental difference, which is that oil is a non-renewable resource, a resource that you either have or do not have, while electricity is a technological process, and that encourages more openness. Along the same lines, Mexico faces a challenge to satisfy electricity demand that it does not face with hydrocarbons: if you produce oil or not, you may have more or less oil income, but you will not run out of fuel, because you can import. With electricity, you either invest or run a real risk of not being able to satisfy demand toward the end of the next six-year term.

BNamericas: Ebrard and Sheinbaum lead the polls to succeed AMLO. Do their energy sector approaches differ?

Ocampo: Both have been open regarding renewable energies and sought to promote them. The vision of Sheinbaum and her team is more statist, while Ebrard could be seen as more pro-market. Both are aware of the need to invest in clean technologies.

BNamericas: Could they open areas which the current administration neglected, such as green hydrogen and batteries?

Ocampo: I would dare to say yes, and for a very specific reason: in new technologies such as green hydrogen, storage, and so on, whoever remains in power will have much more room to maneuver. Building solar, wind or combined cycle parks with private companies is a much more politicized issue, much more sensitive, with this administration.

New technologies have the advantage that they do not have this problem, they do not come loaded with hyperpoliticization, they are not so sensitive. And as these are emerging markets, I believe many more degrees of freedom are available to develop plans and projects. It is likely that either of the two candidates will seek to promote this area, either through CFE or private companies.

BNamericas: The AMLO administration has exerted political control over regulators like CRE and grid control center Cenace. Could this picture change under a new Morena government?

Ocampo: I think that last year's constitutional reform proposal, which implied that CFE absorb Cenace and that the energy ministry absorb CRE, is no longer part of the public debate and it will be difficult to resume.

I don't know how much commitment each candidate shows regarding the independence of CRE and Cenace, but I believe we will not see further escalation. 

This government strongly attacked previous CRE commissioners, but we’ll hardly see something like that again.

Now, it is difficult to know the level of commitment toward regulatory independence, perhaps it is still too early to anticipate, but I do not think that the trend toward absorbing, recentralization will continue.

BNamericas: How likely are leadership changes at Pemex and CFE?

Ocampo: Changes are highly likely. At the end of the day, CFE and Pemex management positions are cabinet posts, political appointments and, when the head of the executive changes, the head of Pemex and CFE changes, as well as second-tier executives, overseeing finance, operations, investments.

So, without a doubt, changes will happen at level one, that is, the top level, and at levels two and three.