Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process.
Claudia Sheinbaum's National Energy Plan seeks to achieve "shared prosperity," emphasizing the importance of inclusive economic growth that reduces inequality and promotes general well-being. But the absence of a roadmap for improving natural gas supply leaves questions for how to fuel that growth.
Several of the government's economic features support the program in general. Mexico’s economic growth in recent years, high international reserves and substantial foreign direct investment reflects a resilient economy. The new strategy aims to expand public policies oriented to distribute income more equitably through social programs and money transfers that reach most Mexican households.
"Shared prosperity" is a guiding principle of Sheinbaum's plan, focusing on ensuring that economic growth benefits all sectors of society. To achieve this, the state will be the prominent investor in infrastructure projects. It addresses the nearshoring phenomenon with a comprehensive strategy that creates a conducive environment for foreign investment and economic growth. Her team outlined 22 "development poles” across Mexico for their potential to support various key industries, including semiconductors, electronics, energy, logistics, tourism, agroindustry, infrastructure, electromobility and the pharmaceutical industry.
Accordingly, the energy sector would play a crucial role in this development strategy. The proposals include an ambitious energy transition program that seeks to improve the country's energy self-sufficiency and promote the use of clean and renewable energies. The National Energy Plan focuses on developing solar plants, wind farms, hydroelectric power stations and geothermal energy projects. By diversifying the energy mix and increasing the share of renewables, the plan seeks to reduce Mexico's dependence on fossil fuels and mitigate the impacts of climate change. A significant feature of the plan is the production and use of green hydrogen.
The plan implies significant projected investments for the modernization of the electricity grid, for a total of 55 billion pesos, or about $3 billion. By the end of next year, 44 projects are expected to reinforce transmission lines. These projects would be crucial for ensuring the reliability and efficiency of the electricity grid. The upgraded infrastructure would also support the growing demand for electricity in both urban and rural areas, enhancing the overall stability of the power system.
Claudia Sheinbaum's plan for Mexico's energy sector presents challenges and contradictions. The truth is the reality of the energy sector's current state casts doubts on its feasibility. The plan's assumption of a solid and resilient energy system does not fully align with the existing issues faced by state firms Petróleos Mexicanos (Pemex) and Comisión Federal de Electricidad (CFE).
Sheinbaum's plan asserts that the state would maintain a 54% share in electricity generation, with clear rules established for the remaining 46% under private generation to ensure national welfare and interests. But today, CFE's technology matrix could not achieve that threshold without relying on obsolete plants that burn heavy fuel oil, diesel and coal. In contrast, most of today's renewable installed capacity belongs to private investors. Her intentions in the strategic vision do not align with the short-term available resources.
Pemex and CFE are struggling with significant financial and operational challenges that undermine the ability to anchor or develop massive clean generation projects. Pemex, burdened with substantial debt and operational inefficiencies, has been grappling with maintaining its oil and natural gas production levels, and its financial weakness is a real menace to the federal government budget. Similarly, CFE faces reliability issues within the power system, compounded by aging infrastructure and the lack of power capacity in the past six years. The philosophical confusion about the roles and responsibilities of CFE and power system operator Cenace deterred the necessary investments to modernize the grid and improve its resilience.
One key element missing in the strategy is a necessary catch-up period to rebalance the power market. The recent electricity supply disruptions showed that investments did not happen at an appropriate pace over the past five years. Delays for new combined-cycle natural gas plants do not help.
The plan's emphasis on maintaining a dominant state role in energy generation while sidelining private sector involvement could also lead to inefficiencies and stifle innovation. By imposing strict price caps and regulatory constraints, the plan risks deterring investment decisions regardless of the certainty of the new rules. Political legitimacy is not equivalent to trust when a potential investor considers having Mexico's government as a partner.
Additionally, the global economic environment adds another layer of complexity. Mexico's economic performance relies on the energy sector's financial health. Any economic fluctuations, such as inflationary pressures or shifts in global energy markets, can significantly impact the feasibility of Sheinbaum's energy strategies. Fiscal pressures are imminent, given the aging population and the absence of tax reform on the public agenda.
Despite the ambitious nature of Sheinbaum's plan, it lacks a clear emphasis on the critical role that natural gas could play in achieving its energy goals.
Integrating natural gas into the National Energy Plan aligns with the need for a diversified energy mix. While renewables are crucial for long-term sustainability, natural gas can provide the necessary backup and stability for a reliable energy supply. This integration would prevent over-reliance on any energy source and create a more balanced and resilient energy system. As more intermittent renewable sources feed into the system, a more pronounced focus on expanding and optimizing natural gas infrastructure could enhance Mexico's energy system's overall resilience and sustainability.
Furthermore, natural gas can be pivotal in the nearshoring strategy by ensuring the 22 development poles have a reliable and efficient energy supply. Delivering natural gas to these poles can facilitate industrial growth, trigger job creation, and promote skills development. Natural gas can provide a stable energy source and is compatible with developing isolated electric networks with small-scale power generation where the national grid is congested.
The backbone of the national electric system is natural gas, but the logistics of this fuel supply continue to pose significant limitations. Mexico's dependence on natural gas imports, primarily from the United States, highlights vulnerabilities in the supply chain. Infrastructure constraints, such as inadequate pipeline flexibility in the zones near the Baja and Yucatan peninsulas, have persisted. No storage is available, and the lack of redundancies in critical areas are leading to potential disruptions in the energy supply.
Recently, CFE and Engie SA announced the second stage of the Cuxtal expansion, which would work to improve gas transportation capacity in the Yucatan. The Southeast Gateway is being built to deliver gas to Dos Bocas. So, policymakers and operators are taking for granted Yucatan's reliability in a few years. However, a pipeline connecting both projects is still missing. Nobody is sponsoring or developing a line from Dos Bocas to Cuxtal, at least not according to public information.
The missing link would be a major vulnerability in the energy system. Addressing natural gas as a central element to energy policy is crucial. Mexico is importing some 7 Bcf/d of natural gas to keep its economy running. Undeniably, Mexico depends on Texas for its daily welfare and functioning.
While Claudia Sheinbaum's energy plan is ambitious and rooted in ideals of national sovereignty and public welfare, its success depends on addressing the existing challenges within Mexico's energy sector. By placing a greater emphasis on the role of natural gas, optimizing infrastructure, fostering private-sector collaboration, and ensuring regulatory certainty, the plan can achieve a more balanced and feasible approach to the energy transition. A more realistic strategy enhances budget preparations, investing schedules, and industry coordination. It also provides a better technical basis for achieving sustainability goals. The integration of natural gas as a critical element in the program would improve investors' confidence and ensure the stability, reliability, and resilience of Mexico's energy future. Blackouts are simply not compatible with the concept of shared prosperity and inclusive growth.
Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February 2019 served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.
