Much has been said and written about the wide ranging reforms that the Mexican Congress passed during the last calendar year.
It is the opinion of some that the most significant reforms, i.e., the ones that will potentially have the most profound long-term effect on the country’s social and economic development are the ones that affect the country’s energy sector.
The most widely discussed issue related to this, thus far, has been changes that ensure the future ability for foreign companies to participate in the exploration for oil and natural gas on Mexican soil and territorial waters. These functions have been the specific and exclusive domain of domestic entities, essentially the Mexican national oil company, PEMEX, since all oil reserves, facilities, and foreign oil companies in Mexico were expropriated during the presidency of Lazaro Cardenas in 1938.
In the year preceding the nationalization of the oil industry, Mexico established the Comisión Federal de Electricidad, or, the CFE. Until the recent energy reform measures passed, under the Mexican Constitution the CFE was responsible for all activities related to the generation, distribution and transmission of electrical power in Mexico. As a result of the long time government monopolization of these activities, today Mexican commercial electricity rates run approximately twenty-five percent higher than those paid by commercial and industrial users in the United States. If not for subsidies paid out by the Mexican federal government to keep prices somewhat competitive, the country’s rates would have risen to upwards of seventy percent higher than those charged in the US during the period of the country’s most intense period of industrialization. As a result of non-competitive Mexican commercial electricity rates, many industries, especially those involved in the manufacture of goods that require large amounts of electricity as part of their production processes, have, most often, opted not to establish facilities in Mexico.
Although new energy reforms maintain Mexico’s exclusive ability to conduct the planning required to develop the nation’s electrical grid, and exercise control over its power system, they do provide for the participation of foreign and domestic private actors in certain activities for the purpose of making Mexican commercial electricity rates more competitive over time.
The Mexican government’s exclusive control over its electrical system will now be limited to the transmission and distribution of energy. Reforms have opened spaces for foreigners and private sector actors within Mexico to “generate, conduct, transform, distribute and store electrical energy.” It is now also possible for private companies and foreign capital to participate in the provision of services that upgrade and modernize Mexico’s transmission grid and distribution system, as well as to hold a stake in the financing of such efforts.
The Mexican government is counting on the private sector to bring technologies to the table that will enable it to attract new industrial investment to the country as a result of lowering Mexican commercial electricity rates. Foreign investment and technologies are essential. While Mexican authorities envision an estimated annual 4.1 percent growth in the annual demand for electricity in the near term, the CFE possesses resources that would enable the national power grid to expand at a much slower rate of 1.1 percent per year.
Changes made that have to do with oil and gas exploration are also expected to eventually have a positive downward impact on the rates charged to industrial users of electricity in Mexico.
Presently, approximately twenty percent of electricity generated in Mexico produced using oil and diesel. Using such resources to create power is between four and six times more expensive than utilizing natural gase. Since Mexico has significant natural gas deposits, which foreign companies can now participate in the exploration for, accessing and employing them for the production of power will also serve to bring down Mexican commercial electricity rates.
Mexico’s competitive disadvantage in the area of the cost of power utilized by manufacturers may soon be coming to an end. When this does eventually occur, industries and companies that, at one time, deemed setting up and maintaining production in Mexico to be cost prohibitive due to high Mexican commmercial electricity rates will have a new option available to them.