Will the energy reform distance Mexico from the US?

Amid a series of high-profile visits of several US officials to Mexico regarding the energy reform, tensions seem to be rising.

If approved, the reform would reshape Mexico’s energy sector.

Concerns are also growing among North American officials as Mexico veers away from its goals to integrate clean energy sources into the energy matrix, as the reform would displace wind and solar output in favor of state-owned thermoelectric generation and hurt the competitiveness of the manufacturing sector.

BNamericas spoke with Pablo Zárate, CEO of FTI Consulting, about the reform’s potential impact on the US-Mexico relationship and on economic integration between both countries.

According to Zárate, the US has made it clear it opposes the changes, because they could damage the opportunity of US companies in Mexico to meet low emissions goals as environmental, social, and governance (ESG) criteria become more important in the international market.

Ruling Morena party needs the support of two-thirds of members in both chambers of congress to approve the constitutional initiative.

BNamericas: To what extent does the constitutional reform being discussed in congress have the potential to strain trade relations between Mexico and the US?

Zárate: The reform [points] toward the discrimination of private participants in the energy market to the extent that the spirit is to artificially guarantee a market share for [federal energy company] CFE, displacing the private sector.

This naturally impacts any private producer, contravening the meaning and letter of practically all the trade agreements that Mexico has with different countries. Mexico has a long tradition of trade agreements. It is something that of course deeply impacts not some but all participants that are not CFE.

Displacing private companies with greater CFE participation implies increasing the dispatch of inefficient CFE plants. That does not mean CFE does not have efficient plants. The inefficient plants, which currently do not dispatch as much, are going to dispatch more.

These plants have fossil fuel technologies and pollute more. It is very clear from the report of the National Renewable Energy Laboratory (NREL) that such a reform could increase emissions by up to 65% and generation costs by up to 56%. What does that mean? It makes net-zero goals practically unfeasible for companies that have an integrated value chain in North America with a significant presence in Mexico.

Competitiveness goals are affected, because if you increase generation costs in this way, North American products, many of which have a very important manufacturing component in Mexico, become more expensive. It impacts the goals of regional integration, of regional sustainability.

I think [US energy secretary Jennifer] Granholm put it very clearly. She said the goals we have are being affected just as the possibilities we have for working together are enormous. The US government has expressed serious concerns, “real concerns,” and of course there are important impacts for investors.

BNamericas: What is your analysis of the efforts and visits that have taken place recently between US and Mexican officials regarding this reform?

Zárate: Three points are very important. Statements by the secretary [for western hemisphere affairs Brian] Nichols, statements by secretary Granholm, and statements by [US ambassador to Mexico] Ken Salazar. They all said there are real concerns about Mexico's electricity reform.

The position of the US government in this regard is very clear. The Mexican government has liked to play with this notion that they agree, but the statements leave no doubt about the position of the US government, and to this we must add the NREL report.

BNamericas: Will this affect Mexico’s opportunity to integrate more deeply with North America, given that the US has distanced itself from countries like China?

Zárate: [There was] the opportunity that Mexico becomes the investment destination of choice amid geopolitical changes and the need for strategic nearshoring … Mexico had a historic opportunity to consolidate itself as the investment destination of choice.

But not only was it not taking that opportunity to create value and grow rapidly, but it is moving in the opposite direction. The investment indicators, the ability to do business in Mexico, the ratings agency reports, among others, show that it is rather emerging as a country where it is difficult to do business, where it is difficult to trust the rule of law, and that has an impact on the entire chain, and which unfortunately multiplies over time.

BNamericas: Senators are seeking amendments to the constitutional reform proposal to make it more acceptable to the opposition and to protect Mexico from potential arbitration cases. Which changes could be made?

Zárate: I think the Mexican government has tried to focus on all the things it dislikes about the current model. But there are many inaccuracies, radicalizations, and politicizations in this analysis and diagnosis.

What the government has not done is explain to Mexicans how its reform improves things. How are you going to make energy cheaper when they intend to dispatch from more expensive plants? How is it going to be cleaner when they intend to dispatch from plants that have a much higher carbon footprint?

I believe that, as the discussion focuses on these parameters of exactly what the government is proposing, and not on distaste for the past, it is clear that the reform is technically unfeasible.

It is not a question of how peripheral elements of the reform are adjusted to make it more acceptable. It is about the fact that the heart of the reform, being discriminatory against cheaper and cleaner technologies, is contrary to the moment and to where countries have to move to become more competitive in the era of sustainability.

I would like to believe that we have not reached the point where the technical [aspect] is totally and completely divorced from the political, because that would mean bad news for a country.