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Mexico’s energy transition could be aided by US climate push

04 June 2021 Kevin Adler

President Joe Biden's bold actions on climate change could transform US-Mexico trade relations by opening the door for greater cooperation on energy technology, investment, and training, policy experts said in a webinar organized by think tanks the Inter-American Dialogue, the Center for US-Mexican Studies at the University of California, San Diego, and the Atlantic Council.

However, on the eve of national elections on 6 June, Mexico's internal politics continue to favor hydrocarbon production and the use of fossil fuels in the power generation sector, which could discourage international partners needed to implement the full range of innovations.

Coming out of Biden's climate summit on 22-23 April, countries accounting for approximately 75% of annual global GHG emissions now have net-zero commitments for 2050, or 2060 in the case of China, said Carlos Pascual, IHS Markit senior vice president global energy. This has moved the issue of climate change center stage for not only the energy industry, but for industrial economies overall. "Climate change is a fundamental part of it … [but] this is part of a bigger global process … [a] question of what kind of energy systems will be necessary to support future development of the world in order to be sustainable and competitive," he said.

For the US and Mexico, this transformation affects both their trade with each other and also their internal decisions.

According to the US Census Bureau, Mexico was the largest trading partner for the US in 2020, with $159.3 billion of goods and services crossing the border, slightly ahead of Canada and China. Energy accounted for more than $15 billion of that trade, with the US exporting 1.04 million barrels of oil equivalent/day of natural gas and refined products in 2020, according to the Energy Information Administration, worth about $11 billion. Mexico exported more than $4 billion in crude to the US in 2020.

"The oil and gas trade is still important for the two countries," even as global trends indicate declining demand long-term for oil, said Lisa Viscidi, director of the energy, climate change, and extractive industries program at the Inter-American Dialogue. "There are opportunities for collaboration…. Both countries are major producers of hydrocarbons, and it's in both of their interests to develop and share technology that can actually reduce their emissions and get more out of their oil and gas resources."

From Mexico's perspective, it can take advantage of US gas by expanding its pipeline infrastructure to move more gas to power generation sites, Viscidi said.

Pascual sees the opportunities even more expansively. Mexico manufactures nearly 4 million vehicles per year (less in 2020 due to the COVID-19 pandemic), second only to the US in the Western Hemisphere, and Pascual said this will be affected by the rapid shift to electric vehicles.

In addition, he said that any manufactured goods, as well as oil and gas, will eventually be judged on how much carbon goes into making them—which suggests that investments in renewable energy and carbon reduction from fossil fuels will be critical for the competitiveness of future exports from Mexico. For the oil industry itself, Pascual suggested that carbon capture, use and storage will be "fundamental to [being able to] use oil and gas and to extend the life of producing fields."

Mexico at a crossroads

While the US government is accelerating its own carbon reductions, Mexico is on a slower path. The country's nationally determined contribution (NDC), submitted under the Paris Climate Agreement, is for a 22% reduction of GHG emissions by 2030 from a 2005 baseline, from a projected 991 million mt of CO2-equivalent to 781 million mt. In the NDC, Mexico also said it could achieve a 36% reduction by 2030 if an international price for carbon is established, tariffs are adjusted for carbon content, and it has access to low-cost funding to increase its investment in low-carbon solutions.

Mexico's pledge also includes a reduction by 51% of black carbon emissions. Black carbon is fine particulate matter produced by incomplete combustion of fossil fuels and biomass, and it is both a public health problem itself and a contributor to global warming.

But the energy transition to reach those goals has been slow since the election of Andrés Manuel López Obrador (known as "AMLO") as president in December 2018. AMLO has tightened the relationship between the government and the national oil company PEMEX and the national power company Comision Federal de Electricidad (CFE), explained Jeremy Martin, vice president of energy and sustainability studies, Institute of the Americas, in a webinar last year.

PEMEX and CFE have large investments in fossil fuels, and those appear to be favored since AMLO took office. At the time, Mexico had held three auctions for renewable power generation that had yielded power purchase agreements of nearly $9 billion for 65 solar and wind projects, Martin said. A fourth auction was scheduled for 2019, but AMLO paused and later canceled it.

In April 2020, the government issued a new study and guidelines related to power system reliability. According to Martin, the analysis questionably "argued that renewables undermine the reliability of the national electrical system," due to their intermittency. This was followed in May by an executive order by AMLO that CFE has priority access to send power through the grid, rather than private operators of fossil fuel or renewable facilities. Subsequently, CFE has said it is seeking to increase the tariffs it charges renewable generators for access to the grid, possibly by a multiple of eight.

With Mexico's mid-term elections coming this weekend, AMLO's MORENA Party has reiterated its support for PEMEX and CFE in its platform, according to the Wilson Center. The Labor Party also supports continued state operation of PEMEX and CFE, but several of the other parties contesting the election propose a liberalization of the energy sector and higher rates of investment in renewables.

The difficulties that renewable power generators are facing are a step back in not only producing clean power, but also in cost to consumers, said John McNeece, senior fellow for energy and trade, Center for US-Mexican Studies. In a paper published last year, "Economic and Strategic Arguments for Renewable Energy in Mexico," McNeece noted that the most recent auction for renewable power, which was held in 2017, led to winning bids that averaged $20.57/MWh ($0.02057/kWh), which were at the time among the lowest-ever bids anywhere in the world.

To cite one comparison, McNeece said a Lazard study conducted at the same time on the lifecycle cost of energy for gas-fired generation found that gas turbines would cost $44-$68/MWh over a 20-year period, assuming a gas price of $3.45/MMBtu.

"Mexico has extraordinary wind and solar resources," he said in a webinar to discuss his report, especially with high solar intensity across most of the country that enables above-average operational efficiency. "Low-cost and reliable energy plus storage … can wean Mexico off natural gas for electricity. This will reduce emissions and improve Mexico's balance of trade," he said.

It may be that Mexico needs both gas-fired power and renewables to meet rising demand. Mexico has low per-capita electricity consumption, McNeece observed, of 2.4 MWh in 2018, according to the International Energy Agency. Chile was at 4.1 MWh, and Argentina 3 MWh.

The goals of serving growing demand, reducing emissions, and strengthening energy independence all point to adding renewables, said Duncan Wood, director of the Mexico Institute at the Wilson Center. For example, Mexico imports 67% of its gas currently, almost all of that from the US, according to Wood.

"When AMLO came into office, all of us were fully informed about his concerns with the oil and gas sector. But when he began to use the language of energy sovereignty, it seemed it might provide an opening to talk about expansion of renewable energy…. What better way to attain the concept of energy sovereignty?" Wood said.

Pascual said the key issue is whether Mexico and the US can come to a common understanding of the positive benefits for jobs and competitiveness from connecting economic strategy and a low-carbon economy. "The Biden administration has shown the US is willing to reach out to Mexico … it's what you have to do to compete in the world," Pascual said. "If it can be understood in those terms, I think there's potential for cooperation."

Posted 04 June 2021 by Kevin Adler, Editor, Climate & Sustainability Group, IHS Markit

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