The continuation of Mexico’s current energy policies into the next administration could put a heavy strain on public finances, according to new research by local think tank Centro de Investigación Económica y Presupuestaria (CIEP).
President-elect Claudia Sheinbaum is poised to take over in October from her predecessor and ally Andrés Manuel López Obrador, a fierce advocate of national oil company Petróleos Mexicanos (Pemex) and state power company Comisión Federal de Electricidad (CFE).
Pemex supplies 95% of Mexico’s domestic natural gas output, while CFE is the primary importer and marketer of natural gas via pipeline from the United States.
Sheinbaum and López Obrador’s Morena coalition rode a wave of popular support to decisive victories in legislative and gubernatorial races nationwide in the June general elections.
Since taking office in 2018, López Obrador has sought to “rescue” Pemex and CFE through tax breaks, capital injections and policy changes to favor the state-owned firms.
Financial support measures for Pemex, one of the world’s most indebted oil companies, have proven especially burdensome for taxpayers, according to CIEP. Researchers found that by repeatedly slashing Pemex’s production sharing taxes, and by injecting capital into the firm, Lopez Obrador’s government has generated estimated fiscal costs of 1.8 trillion pesos, or $102 billion.
“It’s expected that the incoming government will give continuity to this energy policy, which implies opportunity costs for public finances, displacing social spending,” CIEP researchers said.
In the power sector, López Obrador has sought to solidify CFE’s dominance amid increased competition from private sector generators.
Through attempted policy changes that were halted by the courts, the government sought to mandate that CFE power plants receive priority in the dispatch order regardless of the availability of cheaper generation resources.
CFE’s general director Manuel Bartlett, a López Obrador appointee, said recently that CFE currently generates 54% of the country’s electricity and has invested nearly $20 billion in new generation, transmission and distribution projects under the current government. That figure includes the purchase of more than 8.5 GW of generating capacity from Spain’s Iberdrola SA.
Natural gas-fired generation supplies about 60% of Mexico’s electricity, with pipeline imports from the United States accounting for more than 70% of Mexico’s internal gas supply. CFE is continuing to expand its network of pipelines and its fleet of gas-fired power plants, namely in the Baja California and Yucatán peninsulas.
CIEP estimated that continued financial support for Pemex and CFE, while maintaining subsidies for residential electricity rates and making the necessary upgrades to Mexico’s transmission and distribution network, could cost the next government nearly 2.2 trillion pesos, or $125 billion, equal to about 1% of Mexico’s gross domestic product.
That would include 1.37 trillion pesos in tax breaks and capital injections for Pemex, 246 billion pesos for CFE to maintain its 54% share of the electricity market, 57.7 billion pesos to strengthen the transmission and distribution network and 517 billion pesos for electricity subsidies.
Researchers also noted that about 38% of Pemex’s total debt load is expected to mature during the next administration, placing added pressure on the 100% state-owned company.
López Obrador’s energy policies have often frustrated some private sector energy firms that were drawn to Mexico after constitutional reforms liberalized the energy sector under López Obrador’s predecessor, Enrique Peña Nieto.
Other firms, namely pipeline developers such as Sempra, TC Energy Corp., Grupo Carso and Esentia Energy Systems, have forged strong alliances with CFE as the state-owned firm has continued expanding gas supply for its power plants.
