Mexico: Renewables and Energy Transition - Policy and Latest Developments
This is an Insight article, written by a selected partner as part of Latin Lawyer's co-published content. Read more on Insight
The renewable energy sector in Mexico has been experiencing growth and investment opportunities in the past decades, although it has slowed down in these past five years due to different factors, mainly due to the hurdles that arose during and after the covid-19 pandemic, global and regional geopolitics, and a change in the renewables energy sector policy in Mexico.
Mexico has set ambitious targets for renewable energy capacity expansion for 35 per cent clean energy by 2024 in line with its international commitments to combat climate change, as well as consistent with its local laws, which include the General Climate Change Law and the Energy Transition Law. However, the sector continues to face some challenges related to regulatory uncertainties and changes in energy policy.
Since December 2018, when the President Andrés Manuel López Obrador took possession as President of Mexico, he has vigorously tried to unwind the México´s 2013 Energy Reform, which – among others – deregulated and opened the power sector permitting private corporations to participate on its value and supply chain (ie, generation, supply and commercialisation) except for the transmission and distribution of power. His attempts in doing so have been echoed since then.
Nevertheless, there are numerous opportunities for a clean energy transition in Mexico, if we focus on the vast and renewable natural resources our country has. Mexico boasts abundant sunlight, making solar power a promising opportunity for investors. Coastal and hilly regions offer strong wind resources, attracting investment in wind farms. Mexico has untapped hydropower potential, especially in southern regions. Geothermal sources are prevalent in Mexico, providing opportunities for clean energy generation. There are also many other opportunities to invest in energy storage solutions to stabilise renewable energy grids, as well as new technology, such as green hydrogen and green gas.
However, the sector also faces challenges and threats that must be addressed to continue the path to a cleaner, secure and sustainable energy transition.
Current threats that need to be tackled to boost a sustainable transition.
It is important to distinguish between the different types of local, regional and global threats that could hinder the sustainable energy transition in a country.
- corruption: widespread corruption can hinder the development of the energy sector and discourage foreign investments;
- regulatory burdens: municipal, state and federal governmental policies and regulatory burdens, and unclear regulatory processes;
- infrastructure: insufficient infrastructure can limit energy production and distribution;
- environmental concerns: pollution and environmental damage from energy production can lead to regulatory challenges and community opposition; and
- security: security issues, such as theft, vandalism and cartels can disrupt operations.
- geopolitical tensions: political instability in neighboring countries can affect energy supply chains and trade agreements;
- climate change: regional climate events, such as hurricanes, winter storms, fires and droughts, can disrupt energy production and distribution; and
- economic dependency: reliance on energy imports from specific regions can pose economic and supply risks, if those regions face economic, environmental or social challenges.
- market fluctuations: global energy price fluctuations can impact the energy exports and imports;
- trade policies: changes in international trade policies and tariffs can affect energy exports and imports; and
- current demand for traditional fuels: global efforts to transition to cleaner energy sources could be impacted by the current and sustained demand for traditional and fossil fuels energy exports and imports.
In Mexico, there has been a gridlock in the investment and development of new mid/large scale renewable and clean energy projects by the private sector throughout the country. Companies (developers and off-takers) are looking for ‘inside the fence’ alternatives to attend their energy requirements (mainly renewable and clean energy to be consistent with their sustainability goals). Another key factor for the development of inside the fence projects is to avoid and mitigate the congestion risks associated with the lack of transmission infrastructure.
There is an important demand by off-takers for clean and renewable energy power projects through the wholesale electricity market (WEM) and not enough being offered. Administrative procedures, permits and interconnection processes are slowly being reactivated by energy regulators, mainly by the Energy Regulatory Commission (CRE) to attend such demand in the WEM with private power plants, mainly clean and renewable energy. New clean energy power plants will allow to attend the demand of clean energy certificates (CELs), which are currently highly in demand from private off-takers.
There are other threats that we have identified that must be addressed to accelerate a sustainable energy transition. For instance, ensuring a reliable and non-discriminatory integration of renewables into the existing energy grid, attracting adequate investment and financing for clean energy projects in the country, and ensuring a competitive market with the inclusion of private local and international players.
ESG strategies to enhance sustainable energy transition.
For the development of new energy projects, the inclusion of a well thought-out ESG strategy is increasingly relevant for the success and long run of the project. Community engagement, water rights, clean energy, anti-corruption and labour standards demand pay special attention. To strictly comply with the applicable laws for the development of projects (especially environmental and social requirements) is not enough, a real and comprehensive engagement with the communities is now required to obtain measurable benefits that empower such local communities and protect the environment.
Private companies (developers and consumers) are looking to move forward and boost transition to sustainable alternatives. Renewable energy, green gas, biogas, green hydrogen, will pave the way towards the sustainable requirements that the private sector now demands.
We have seen considerable progress in the efforts of all stakeholders involved in the investment and development of energy projects to implement ambitious and coherent environmental, social and corporate governance policies with regards to their projects. These responsible investments and development strategies are being applied by companies fully aware that a successful business is the one that brings real benefits to its communities, to the environment and all internal and external stakeholders of such business, in addition to strictly abiding by the applicable legal provisions.
Due to the escalating climate crises, we have seen a global rise in the development of clean and renewable energy projects to reduce carbon dioxide emissions and boost the transition to cleaner and more efficient technologies, and Mexico is no exception. A well-timed integration of ESG practices in the investment and development of renewable projects in Mexico has played a major role and made the difference between successful projects and those facing obstacles due to social resistance and lack of adequate environmental protection strategies to achieve a successful development and operation.
To enhance Mexican sustainable energy transition and independence strategies, the country should focus on reducing local vulnerabilities, diversifying its energy mix and fostering regional cooperation. This should involve investing in clean and renewable energy, improving infrastructure, and establishing robust trade agreements to mitigate global threats, such as climate change.
The role of nearshoring in this transition.
Nearshoring is a business practice that has been increasing in the past decades. It is not a new concept for Mexico, since we have had for many decades now a steady growing maquila business in the norther boarder, which attends important market needs in the US. Nearshoring could be understood as the business strategy to move manufacturing and supply chains close to where the target markets are located.
Nearshoring can positively influence the path to a sustainable transition. We are currently seeing a strong demand by the companies investing in Mexico to obtain secure, reliable and clean energy for their expansions and new projects in the country, in line with their ambitious ESG goals.
The nearshored companies in Mexico will reduce their energy consumption associated with long-distance transportation through energy efficient strategies, thereby reducing their carbon footprint. We are also seeing the increase of sustainable supply chains, since companies are prioritising local suppliers with sustainable and environmentally friendly practices, which include the use of renewable energy sources in their facilities. We also observe that important transnational enterprises are requiring that the government establish clear energy policies and incentives that promote and facilitate the use of clean and renewable energy, before investing in Mexico: therefore, we may expect regulatory alignment to enhance a sustainable energy transition to enable nearshoring in Mexico.