Widespread blackouts in early May across 21 of Mexico’s 32 states are a troubling sign ahead of summer months, which is when the nation’s electricity demand peaks, according to three industry experts who spoke with NGI’s Mexico GPI.
“I think it’s going to be a spring and summer of constant blackouts. Not daily, but frequently,” Eduardo Prud’homme, head of Mexico energy consultancy Gadex, told NGI’s Mexico GPI. “Given Mexico’s demand profile, I think the country’s going to be very vulnerable this summer.”
On nine of the first 13 days of May, Mexico’s power system operator Cenace issued an alert that the national electricity grid was at risk of outages. Meanwhile, natural gas imports from the United States to help combat the problem have surged and surpassed 7 Bcf/d in May to date.
Heat, Drought
While Mexico’s rainy season typically begins in May, the first two weeks of the month have seen unseasonably hot weather, minimal precipitation, and prolonged droughts across the country.
As a result, electricity demand has boomed and exceeded the capacity of multiple power plants across the country. When electricity demand reaches a threshold, these plants automatically disconnect from the grid as a protective measure, which triggers outages in certain regions of the country.
“The fundamental reason for the blackouts had to do with the increased demand that exceeded Cenace’s forecasted capacity for the day and the lack of regional generation to meet that increase, which activated the protective measures of the plants so that they weren’t affected,” Guillermo García Alcocer, economist, professor and former chair at Mexico’s Comision Reguladora de Energia, or CRE, told NGI’s Mexico GPI. “The Mexico electricity system is stressed” and is particularly vulnerable during the peak demand of summer months, he said.
While the national heatwave and drought — which has also affected hydroelectric power generation — explain the recent blackouts, it remains unclear how the Mexican government would plan to avoid larger scale outages during the upcoming months, said Arturo Carranza, director of Energy Projects at Akza Advisors and former advisor at Mexico’s Comisión Federal de Electricidad (CFE).
“It’s clear that the increase in demand has to do with the high temperature in the country, though what hasn’t been sufficiently explained are the reasons for why some of the power plants went out of operation,” he told NGI’s Mexico GPI. “It is up to the authorities to clarify why this happened to minimize, as best as possible, further situations that could result in massive blackouts.”
After taking office in 2018, President Andrés Manuel López Obrador implemented a radical overhaul to the national energy industry with a primary tenet to return the CFE to its status as the country’s main electricity provider.
Part of this redesign included limiting the role of the industry’s regulatory bodies and instructing the CRE to award fewer permits for private companies to generate electricity in the national power grid. This decision to authorize less power generation projects over the last six years is directly linked to the outages and insufficient energy supply observed in the country in May, according to experts.
“One of the causes for the blackouts registered in 21 states of the country is the restrictive regulatory policy that the CRE has put in place in the last five years,” Carranza said. “The negation of generation permits has created a bottleneck to increase installed electricity capacity and, above all, to be able to count on power plants that can cover in an efficient way the spikes in demand that occur in atypical situations.”
Prud’homme agreed that the recent blackouts were directly correlated to the cancellation and denial of permits by the CRE. He said multiple companies seeking to generate power with natural gas were denied authorizations from the regulatory body during the current administration.
As a result, the country’s installed capacity for electricity has been left unequipped to support spikes in power demand.
Carranza said more investment was needed in the transmission and generation segments. “This means that it is necessary for the 12 new generation plants that the CFE is constructing to be completed, which will add 9 GW to the system. It also means that there is an urgent need for the CFE to execute a bidding round to auction and assign the more than 60 pending transmission and transformation projects.”
Future Risks
While the recent heatwave and power outages represent a short-term issue for Mexico this summer, on a more macro scale, the lack of available electricity supply could also significantly dent the country’s long-term economic growth prospects. This comes at a time when dozens of foreign companies are looking to relocate to the nation as part of what is being called nearshoring.
“Increased investment in the electricity system would improve the country’s ability to meet the demand that will accompany nearshoring,” García Alcocer said. “The denial of CRE permits should be considered a limitation for the country’s growth and its ability to meet future demand.”
According to Abraham Zamora, President of the Mexican Energy Association (AME), Mexico would need to generate an additional 37 GW of electricity over the next five years, which could require an estimated investment of $41.5 billion, to meet rising power demand.
On Monday (May 13), AME, which is made up of 40 companies that generate 89% of Mexico’s private installed electricity capacity, reiterated its “full willingness and commitment to closely collaborate with the Mexican government to increase the electricity generation capacity in the country.
“The collaboration between the public and private sector has always been key in the search for solutions to situations like the ones we’re facing today in the energy sector,” AME said. “We support any measures and regulatory solutions and technical coordination that allows the country to utilize all the electricity generation options already constructed and ready to enter into operation, so that the country can face the seasonal increase in electricity demand.”
In the meantime, as Mexico continues to struggle to meet national demand, the country’s reliance on U.S. natural gas imports is likely to continue to increase, according to experts.
