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The recent natural gas price increase in the United States is
inevitably spreading to Mexico's gas and power markets. A
lower-than-expected supply response in the United States, combined
with strong natural gas demand for both domestic and export
markets, has led Henry Hub prices to nearly double year to date.
Mexico is currently importing about 65% of its total gas needs from
the United States and has limited resilience to the price
fluctuation in its northern neighbor. This situation was evidenced
in February 2021 when storm Uri severely disrupted gas supply in
Texas and prices spiked.
The national natural gas price index (IPGN) in Mexico broke the
$6/MMBtu mark in April 2022 and might be close to $8/MMBtu in May
based on price increases in the main US reference hubs. Most
importantly, the US gas market is expected to continue operating in
a tight situation through 2023 resulting in an extended period of
high gas price benchmarks for Mexico.
Mexico's power prices are also following an upward trend as
gas-fired generation represents about 65% of the total power
supply, making it the most important fuel in the power mix and
settling the marginal cost most of the year. Given the ongoing
period of high gas prices, fuel switching is a possibility that can
help replace some gas generation, as seen in February 2021 when
combined cycle generation dropped to its lowest level since 2018.
The main challenge is the economic limit as alternative fuels, such
as coal or fuel oil, have also increased in price and cannot
provide relief. Year to date, coal generation has increased by 30%
suggesting some fuel switching already. Conventional thermal
generation is at levels like those seen during August 2021, the
peak demand month in 2021. On the contrary, wind and solar
generation from January through May 2022 is down 6% year on year
according to the system operator's data.
Regardless of the supply mix, Mexico's power sector will
continue to experience high power prices in the wholesale market
likely hurting end consumers. Particularly concerning is the
situation of the Federal Electricity Commission-Basic Supplier
(CFE-BS), as a government decree imposed a link from retail tariff
increases to inflation rates. According to the Regulatory Energy
Commission (CRE), CFE-BS bought about 30% of its total power needs
at spot power prices since January 2022. This situation combined
with the use of high-cost CFE-owned power plants is expected to
increase financial pressures on CFE and likely require additional
subsidies from the government to keep retail tariffs from
rising.
The natural gas price increase adds to an already complex policy
environment in Mexico's gas and power sectors. Although the risk of
a major power sector reform has now dissipated because of the
rejection of the President's constitutional power sector reform,
the 2021 changes to the power industry law (LIE), currently halted,
are hurting business sentiment in the power industry.
Despite a recent announcement from CFE to build new gas-fired
capacity throughout the country, the potential risk of power demand
growth accelerating and outpacing new power generation builds might
further constraint the Mexican economy, already affected by high
natural gas prices. The winter storm of February 2021 and the
ongoing tightness in the US gas market are two events that are
increasingly evidencing the exposure of Mexico's gas and power
markets to imported gas from the United States. The expected period
of high gas and, consequently, power prices could also reinforce
the competitiveness that other generation alternatives such as wind
and solar might offer to end-power consumers in a world where
renewable energy procurement is becoming more relevant across the
globe.
This article was posted as a follow-up to our most recent
research insight, "Mexico's natural gas and power prices
short-term update: Increasing pressures from high natural gas
prices in the United States, Mexico's main source of supply",
available to ConnectTM clients.
Alan Bravo is a research analyst in the power sector in
Mexico as part of the Gas, Power, and Climate Solutions
team.
David Crisostomo, director with the Gas, Power, and
Climate Solutions team, is an expert in Mexican gas and power
markets.
Posted on 17 June 2022
This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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