Mexican energy shift hits Nuevo Leon industrial hub

Mexico's industrial hub of Nuevo Leon state may have the most to lose as the country's regulatory changes and possible energy reform rollbacks sour the outlook for private investment.

Since coming to power just over two years ago, the administration of President Andres Manuel Lopez Obrador ordered regulatory changes that seek to fortify state-owned Pemex and power utility CFE, while in many cases sidelining new private-sector investment in sectors ranging from oil to solar and wind power generation.

As a result, foreign and local energy companies are delaying or scrapping new power generation projects across the country. That includes projects planned for Nuevo Leon, which had a bright outlook as a destination for energy investment given its high solar radiation levels and proximity to the US border.

More broadly, freezing plans for new power generation could keep electricity costs high, putting industry at a disadvantage in the manufacturing-heavy state, says Regulo Salinas, head of the energy commission at Mexico's confederation of industrial chambers.

"This is a major worry that we have," said Salinas, who is also institutional director at Ternium Mexico, the steelmaker based in Nuevo Leon.

Delayed renewables

The uncertainty has delayed renewable energy projects valued at more than $900mn, said Jorge Gorozpe, head of energy development at Nuevo Leon's economy and labor ministry.

Private-sector companies had performed feasibility studies for numerous solar and wind projects in the state and had planned to take part in Mexico's fourth renewable energy auction in 2019. But the federal government cancelled that process, preventing investments from materializing.

Then last year, electrical grid operator Cenace restricted testing on new solar and wind project connections waiting to go into operation. The energy ministry also published rules imposing additional obligations on renewable power generators prior to launching operations, and allowing Cenace to prioritize CFE requests for grid access.

"They have changed the rules of the game several times," Gorozpe said. "There is no certainty that projects can be developed."

Companies have also been unable to move forward with plans to build natural gas-powered plants that have sought to take advantage of the cheaper commodity imported from neighboring Texas. Federal regulators have not been giving them operating permits under the timelines required by law, says Monterrey-based attorney Jorge Arrambide.

"I can think of 10 large electric power plant projects of over 100 MW each that are not moving forward in Nuevo Leon because of this," says Arrambide, who represents some of the companies overseeing these projects. "That translates to millions and millions of dollars of investment that are not panning out."

Impact on power costs

The longer-term economic impact of freezing these projects could potentially affect the overall competitiveness of Nuevo Leon's major industries, including steel, cement, appliances and auto manufacturing.

The 2014 energy reforms passed under Mexico's previous administration opened the power sector to private investment and set up rules that gave priority to the least expensive energy. That encouraged waves of investment in renewables and natural gas-fired plants that can provide cheaper power than CFE.

While those changes have already helped Nuevo Leon boost its power generation to 30,600GWh in 2019, the state had expected that figure to increase even further, which would significantly lower electricity costs, Gorozpe said.

Now, industrial firms are concerned the slowdown in energy investment will prevent more power supply from coming online, ultimately keeping power expensive.

"Given the lack of competition, we think the industrial sector will be paying higher electric costs than it should and higher than our competitors," Salinas said.

In October 2020, Mexico's retail industrial electricity prices were 10¢/kWh for power supplied to medium-sized plants, according to the country's energy regulatory commission (CRE). That was 49pc higher than the 6.72¢/kWh for retail industrial electricity in the US during that period, according to the US Energy Information Administration (EIA). It was 81pc higher than the 5.52¢/kWh for the west south central region, which includes Texas.

High power costs are particularly harmful for industry in Nuevo Leon because around 30pc of Mexico's total electricity is consumed by companies headquartered in the state, including their operations in other states, Salinas says.

Nuevo Leon led all Mexican states in manufacturing in 2019, followed by Coahuila and Mexico states, according to the country's national institute of statistics and geography (Inegi). The state accounts for 11pc of Mexico's manufacturing GDP and 9pc of its manufacturing exports, according to the state's economy and labor secretariat.

"It is a generalized problem, but the difference in the case of Nuevo Leon is that it has such a huge industrial presence," said Rosanety Barrios, former head of the industrial transformation policy unit at Mexico's energy ministry. "An administration that inhibits investment necessarily impacts that region."

By Jens Erik Gould

Mexico's industrial hub Mexico's industrial hub