Fitch sees investment, infrastructure challenges for Mexican energy sector

As Mexico’s president-elect Claudia Sheinbaum prepares to take office, Fitch Ratings has warned that the country's energy sector requires significant private sector investment to meet rising demand for electricity.

During his six-year term outgoing President Andrés Manuel López Obrador (AMLO) reduced the role of the private sector in the electricity market and increased the share of the state-owned utility CFE.

A former climate scientist and ALMO’s handpicked successor, Sheinbaum will begin her term on October 1 and has vowed to continue the nationalist agenda of ruling party Morena, which is not seen as business-friendly.

Fitch said that challenges facing the energy sector "include fostering a regulatory environment that encourages private investment in the electricity industry, particularly in light of preliminary election outcomes."

Private sector participation is crucial for the development of new power stations in Mexico, said the ratings agency.

Fitch expects energy demand to continue growing, given the economic acceleration in Mexico, mainly due to nearshoring, and higher temperatures during the summer. It said that the trend of rising energy demand and insufficient investment is straining the country’s energy system, which could lead to power disconnections in certain areas.

The agency said that it is imperative to expand and modernize Mexico's power grid. This will make it easier to incorporate the output of renewable energy plants such as wind farms into the grid.

It also sees a pressing need to establish infrastructure for the storage and transportation of natural gas. Gas-generated electricity accounted for 70% of Mexico's generation in 2023, making the country vulnerable to shortages and fluctuations in natural gas prices and FX rates. 

Fitch warned that without government support, CFE's investment needs, which are essential to meet increased energy demand, could weaken its capital structure.

A weakening of CFE's credit profile, coupled with diminished support from the Mexican government, could trigger a rating downgrade, the agency said.