Electricity, Mexico’s quiet disaster
Electric supply is the number one concern for business—over crime, water, or red tape.
At the height of the pandemic, extortion got so bad that the cost of avocados went up by 8%. Enough to bankrupt companies and send workers running from the threat of crime. Even then, actual gun to their head, businesses still said that their greatest concern when setting up in Mexico was electricity.
Industry has so little trust in the Mexican electrical grid that industrial real estate companies are expected to provide an onsite supply. “The average blackout a few years ago was two minutes long,” said Santiago Villagómez, CEO of Energía Real, a solar panel financing company. “Today it’s 11.” Without a backup, critical machines fail, electronic systems crash, goods and business models are ruined.
But ask the government how it feels about demands around electricity, and it too feels hard done by. Mexican electricity is heavily subsidised, businesses and individual consumers do not pay their bills, and the State-owned electricity company, known as CFE, is expected to keep supplies cheap and constant while being bled of the funds to do so, Walter Julián Ángel Jiménez, the commissioner at Mexico’s Energy Regulatory Commission (CRE), told The Mexico Political Economist. “But, when have capitalists ever wanted to spend their own money?” he said.
Electricity seems like a strange arena for all-out class-warfare to have erupted, yet here we are.
On the surface it comes down to a struggle between a left-wing nationalist State and a pro-free market private sector. Scratch below the rhetoric, and what has Mexican electricity in a real tangle is a poorly crafted regulatory framework that enforces contradictory incentives onto government and industry. The result is renewable electricity generation that ends up burning more fossil fuels; more electric plants and a less reliable grid; and atomised private generation that is cheaper than electricity production at scale.
Worst of all, far from allowing the government and business to fight from opposing trenches, the current system has tied them into a forced interdependence, where one cannot survive without the other. It is a marriage made in hell with no possibility of divorce.
Everybody hates electricity in Mexico
Mexico has an installed capacity of over 90,000 megawatts (MW) spread over solar, wind, natural gas, and even diesel-fired plants all across the country. In 2023, the country consumed less than half of what that installed capacity could provide.
There are perfectly understandable reasons for which all of a country’s power might not be available in its entirety. At the beginning of the supply chain (generation), companies may need to shut off a plant for any number of reasons. CFE will have about 16% of its own offline at any one time due to maintenance or technical issues. In the next step,(transmission), the laws of physics take their toll and power is lost as electricity goes from the power plants to their destinations. When the electricity arrives at a town, factory, or wherever it’s needed, its voltage is lowered so that it can get to its final consumer through the cables that hang over Mexico’s roads and pavements (distribution). Here is a further loss through “non-technical losses”; a euphemism used by the government to refer to things like electricity theft. Last year, the Mexican grid lost about 12.2% of its electricity—pretty poor, since international standards contemplate a loss of 4-5%.
Add up these issues all along this (simplified) electricity supply chain—generation, transmission, distribution—and you get nowhere near the system’s total of 90,000 MW capacity. The terrible truth is that Mexico only produces 48,000 MW, as power plants sit idle all across the country.
The grid is unable to take any more. To businesses, the answer is obvious; build more transmission lines from the existing generators to the parts of the country that need it. There is only one massive impediment: politics.
In 2013, the government of Enrique Peña Nieto (2012-2018), in a liberalising push, reformed the energy sector to allow private companies further than ever into the electricity market. The pushback was intense. For most of the 20th century, Mexicans were told electricity was a public utility that belonged to them—with the government as its custodian and administrator. The reform was seen by the opposition as a betrayal; the privatisation of Mexican energy.
So, the Peña Nieto administration threw its opponents a bone. It tried to quell environmentalists’ ire by adding subsidies for renewables. The nationalists were kept at bay by giving the private sector the right to enter the electricity market—but only for generation. Transmission and distribution would remain the exclusive domain of CFE.
The compromise was a disaster.
CFE’s war against private energy
That same opposition that pushed against the 2013 reforms eventually rolled into government led by then-president Andrés Manuel López Obrador (2018-2024). Conflict with the energy companies that entered the Mexican market broke out immediately. Today, it is difficult to speak to either side without getting into an accusatory to and fro.
“When López Obrador arrived, even though they didn’t say it, tacitly, the government stopped giving out [energy generation] permits,” Villagómez told The Mexico Political Economist. It was a move to ease competition on the State energy company, since the 2013 reforms prioritised renewables, undercutting CFE’s older, often fossil fuel-fired plants.
But the private sector doesn’t want more power plants. “We can’t get energy to where we want it,” Héctor Villarreal, co-founder at Industrial Proximity Services, told The Mexico Political Economist. “We don’t need more generation capacity, we need investment in distribution and transmission.”
That investment is not forthcoming though. In López Obrador’s first five years in power, the grid grew by only 0.17%, according to Villagómez. It’s not that CFE, which holds the monopoly over transmission, didn't want to, claims the government. It’s that CFE couldn’t—and the 2013 laws are to blame.
“The 2013 reform was meant to run CFE into the ground,” claimed Ángel Jiménez. “The company provided about 30% of the country’s energy when we got to power. Had we continued with that system, today we’d be at 18%.” The system the commissioner referred to was a deliberate scheme to make the public energy sector unviable, forcing the privatisation of CFE once it went bankrupt.
The way it worked, according to Ángel Jiménez, started with his predecessors at the Energy Commission giving out electricity generation permits willy-nilly. These could be very far from demand but the expectation was that CFE would have to build massive transmission infrastructure needed to plug the plant into the grid. “They might have given a company a permit to build a solar farm in Sonora where it’s always sunny. But there’s nothing there!” he said. “Then, CFE would have to come in and build that infrastructure, leaving it in the red financially.”
Companies will reply that it's not their fault that CFE got the transmission monopoly. But, Ángel Jiménez believes this is a ruse. He estimates that 60% of the profit is in generation anyway, while transmission is expensive, time-consuming, and legally tricky. Companies can pay CFE to build a transmission line, but they’d have to gift it to CFE before shipping a volt of energy. Unsurprisingly companies aren’t too keen on this.
The final blow, according to Ángel Jiménez, was that while the private sector is simply expected to maximise profits, the State-owned electricity company is required to keep the entire system afloat.
This tension was at its starkest when the López Obrador administration tried to introduce regulations that would deprioritise renewable producers and revert to a first-come first-served system, whether it is fossil fuel produced or otherwise. The move was cast as a blow to green energy.
The government insisted the public see it from a different perspective:
In Mexico’s electric system, the cheapest energy gets sold first. Today, the private sector’s renewables are so cheap that they’re prioritised. But CFE—as the ultimate guarantor of energy in Mexico—must have plants running on standby, idly pumping tonnes of greenhouse emissions into the air to ensure that the lights don’t go out if the sun stops shining or the wind stops blowing. “Again, CFE is subsidising the private sector’s intermittency and not being remunerated for it,” said Ángel Jiménez.
Whether this system came about thanks to a crafty plan to covertly privatise Mexican electricity or thanks to a botched compromise to balance national sovereignty and free market policies, Mexico has been left dependent on a State-run company whose capacity to bring energy to consumers has been cut away from under it.
Renewable relationships: Sheinbaum’s electricity plans
“Then, about a year ago, out of the blue, they started approving generation permits,” said Villagómez. “But they were small ones—under 10 MW—which means they were for self-supply. First it was Audi, then Microsoft… It coincided with [then-presidential candidate] Claudia [Sheinbaum’s] priorities.”
Much has been said about president Shienbaum’s energy credentials. But, it doesn’t really matter if the increase in permits to produce energy off-grid and “behind the metre” didn’t come about at her behest. More likely, the shift came as an acknowledgement that the previous electricity status quo was untenable.
Mexico must practically double its electric output within the next 15 years, so things can’t stay as they are. By the look of things, the president has chosen her approach: Distributed generation.
Current legislation states that anyone is free to privately produce energy under 0.5 MW. That’s fine for a school or a logistics centre, but not for a standard supermarket consuming about 1.5 MW. A self-supply permit from the government increases this limit. For instance, Audi’s recent permit allows it to produce up to 4.2 MW which it will do through solar power—enough to keep the machines running but stopping short of competing with CFE.
Today there are over 400,000 self-supply permits with an installed capacity of 3,341 MW. The government’s plan will be to increase the electricity generated by self-suppliers by up to 3.8% annually over the next 15 years—well above the rest of the country’s electricity demand growth of 2.4%.
This kills three birds with one stone. It keeps business off Sheinbaum’s back, given that CFE won’t be able to provide the necessary transmission lines in the short term, as they usually take between 3 to 5 years to build. It also—somewhat sneakily—keeps in line with a recent energy reform which states that CFE should generate 54% of the country’s energy. Self-supply does this by removing a good chunk of generation and consumption from the grid entirely. And, finally—and even more sneakily—it contributes to Sheinbaum’s green energy targets, since many of these self-supply permits are for solar farms which will not count towards the CFE’s metrics on the grid, but which will be included in the country’s total energy production count—which will need to be 45% renewable.
The strategy is a short to medium term stopgap. For big firms, self-generation might work, but private individuals and smaller companies may not have the money or the space to install a power plant or solar panels. Even if they did, individual self-supply would be extremely inefficient and wasteful versus the economies of scale of a sensibly positioned power plant.
The government is working on transmission projects, but these are slow. Meanwhile, the grid’s frailty not only makes it difficult to inject more energy into it, it makes it unable to cope with intermittent and renewable sources too. This is why, despite an increase in permits, big self-suppliers’ excess energy will still go to waste since it can’t go into the already saturated grid.
Technology may be coming to the rescue. Advances in batteries may allow self-suppliers and even the grid itself to more evenly distribute energy between peaks and troughs in consumption. “Until very recently you couldn’t store electricity,” said Villagómez. “Batteries are a game changer.”
In this, Ángel Jiménez agrees. He believes that batteries may lead us to realise that Mexico’s energy issues could be resolved by letting far less of energy go to waste, both through stricter efficiency measures and new technologies. He mentioned a privately-owned energy project, La Toba in Baja California Sur, Mexico’s largest hybrid solar and battery project, and his vision of the future.
“Storage is a temporary solution, though” the commissioner admitted. “Nothing replaces a new transmission line. But, as we introduce efficiency and storage into the system, we might eventually come to realise that we don’t need as much transmission as people say.”