MEXICO: An Introduction to Corporate/Commercial: Monterrey

Business climate in northern Mexico

The northern region of Mexico remains a leading hub for development, attracting significant new investments and reinvestments from global companies and key national industrial players, largely driven by nearshoring activities. However, various factors have contributed to a slowdown in this growth in recent months.

A key challenge has been the access to and availability of energy resources, particularly in the northern and more industrialised states. The Mexican Federal Government, in charge of the energy sector, has failed to sufficiently invest in electrical infrastructure across the country, impacting the price of energy and the operations of numerous companies across several industries.

Despite this, the resilience of the business community in Mexico is evident, as the private sector continues to find innovative ways to create favourable conditions for national and foreign investment. This includes facilitating access to energy (including through private-sector, on-site generation) and developing electric infrastructure (often without substantial government support).

Status of the Energy Sector

Mexico’s energy sector is currently facing a somewhat uncertain scenario. The electoral victory of Claudia Sheinbaum, from the Morena party, implies the potential continuity of public policies, but the country’s needs evidently require changes. Moreover, the upcoming elections in the United States of America will also be determining, especially concerning USMCA’s energy chapter and tariffs on commodities exported from Mexico.

While no major changes are expected in the current energy policy, the incoming administration seems to be more open-minded to the sector. Actions to strengthen the Federal Electricity Commission (CFE) and the Mexican petroleum company (Pemex)—two government-owned entities—will be at the forefront. However, private participation in the electricity sector—particularly in electricity transmission and in on-site power generation to satisfy consumer needs (isolated supply)—seems to be in discussions, which would signify a new direction for energy policy.

Mexico and its government face a defining moment with the chance to seize nearshoring opportunities. One of the most critical requirements is access to energy, which remains insufficient in the country, especially in the regions where nearshoring is expected to have the greatest impact: the northern and central (Bajío) regions.

Sheinbaum inherits a landscape that has been undergoing a significant transformation since her political party came into power in 2018. Investment in renewable energy faced a hard stop which began with the cancellation of long-term auctions. Likewise, electricity transmission has seen less investment than required for modernisation and expansion, particularly affected by the cancellation of high-voltage projects at the start of AMLO’s administration. The yearly growth in the construction of substations has been just 1.25%, far below the required 8%, while the annual growth in new transmission lines has been 0.77%, whereas it should be at least 8%.

The outgoing administration also halted exploration and production rounds, reduced the granting of permits in the hydrocarbons sector, and pushed for the re-establishment of Pemex’s dominance in the industry. Although natural gas importation and national production increased, the Mexican natural gas grid control centre (CENAGAS) projects that demand increase will stabilise over the future decade.

What’s ahead?

Constitutional Reforms

Constitutional reforms are expected to be discussed soon, although the timing is unclear. If enacted as presented by AMLO in February 2018, these would imply the following main changes to the sector:

(i) the elimination of the sector’s technical regulators, the Energy Regulatory Commission (CRE), and the National Hydrocarbons Commission (CNH), and the reincorporation of their activities into the Ministry of Energy, thus formalising the current factual control the government has over them;

(ii) enabling CFE to determine regulated tariffs and reinstate the current independent system operator, CENACE, back into CFE; and

(iii) actions to prioritise CFE’s electricity generation. Sheinbaum publicly favours the idea of discussing these proposals after she comes into power.

However, current President AMLO seems to have been pushing for them to be discussed in September 2024—his last month in the administration.

Electricity

Sheinbaum’s team have expressed their desire to capitalise on nearshoring for the benefit of Mexico. Her administration will need to invest heavily in electricity transmission (high-voltage long-distance grids), so that clean energy “trapped” in the northwest, Oaxaca, and other locations may reach consumers. Likewise, the national distribution grid (medium to low voltage) requires enhancement to connect most of the industry landing in Mexico, particularly in the northern areas of the country, such as Nuevo León and Coahuila. The incoming President’s team has indicated openness to private participation in transmission projects, but the schemes to be used have yet to be detailed.

Mexico faces two main challenges in power generation:

(i) the grid has operated with low reserve margins, causing blackouts and technical troubles, insufficient transmission capacity, lack of strategic location of the generation, and the need to modernise or substitute old power plants and substations; and

(ii) companies are looking for clean energy to reach their goals towards climate change, while Mexico has abruptly halted clean energy generation.

The incoming administration will have to implement schemes that allow private companies to develop projects and participate with the CFE in the foregoing. Another important initiative would be the development of power storage infrastructure and regulation, especially if Sheinbaum’s political pledge to energy transition is followed through. The special regulations for power storage have not been approved and the draft undergoing regulatory improvement authorisation is still too rigid. It should be noted that regulations would clarify that storage for power generation requires a permit as it will be classified as generation, whereas storage for consumption (load centres) will not require a permit, which will be positive for the industrial sector.

Any of the above changes would have a mid-term impact. As actions are implemented, on-site generation and private grids will continue to be short-term measures. Industrial parks and commercial interest groups in the north of Mexico and the Bajío region are resorting to aggregating loads to facilitate the arrival of their clients by advancing on capacity procurement instead of leaving users to procure their own electricity. On this matter, the government should prioritise accelerating the granting of on-site generation permits.

Oil and Gas

Regarding natural gas, CFE plans to continue increasing its use as it seeks to expand its gas-fired installed capacity. Similarly to the abovementioned needs, due to the nearshoring opportunities, the country also requires significant investment and development of its natural gas infrastructure; therefore, new gas pipelines are expected to be developed both by the public and private sectors to meet this growing demand.

Unlike AMLO’s government, Sheinbaum’s does not seem to have petroleum as the centre of its energy policy, and although actions towards protecting Pemex are expected, the issuance of new permits for midstream and downstream activities may resume once the constitutional reforms are discussed. This will potentially unlock many industrial and commercial projects.

Conclusion

Ahead of a peaceful transition of federal power within the same political party, Mexico is expected to continue its growth along similar public policies, including in the energy sector. However, now that incentives and real circumstances have been more clearly identified, there is room for the new administration to better use and develop the energy industry—including electricity and oil & gas sectors—to fully maximise nearshoring opportunities.