Investor interest in Mexico’s emerging renewables market was at an all-time high when Andrés Manuel López Obrador came to power in December 2018. Less than halfway through the president’s first term, expectations have hit rock-bottom, the market is in tatters — and the coronavirus pandemic is making things worse.
The center-left nationalist government of AMLO, as the president is widely known, has focused on undoing market liberalization measures carried out by the previous government of Enrique Peña Nieto, taking steps to hand power back to the state-owned utility Comisión Federal de Electricidad (CFE), analysts say.
“The main driver of this government's energy policy is fortifying the state's position in the market,” said Brian Gaylord, principal analyst for Latin America and Southern Europe at Wood Mackenzie Power & Renewables. “Within the electricity sector, this means bolstering state utility CFE."
The "ultimate end goal" is undoing Mexico's 2013 energy market reform, which opened up the country's energy sector to private investment, Gaylord wrote in an email.
AMLO focused on the energy sector as soon as he came to power. Within days of his election victory, he canceled the country's hotly anticipated fourth clean energy auction.
Mexico's first three clean energy auctions, held in 2016-2017, were seen as an unqualified success, bringing major new solar and wind developers into the market and delivering stunningly low prices. Among the winners in those auctions were European renewables powerhouses Enel Green Power and EDF, American developers including SunPower, and China's JinkoSolar.
At the time that AMLO canceled the fourth auction, analysts believed this was just a temporary measure while the new administration got a feel for its surroundings. Later events have proved them wrong. Although there were hints last year that the auction might go ahead after all, no date has yet been set.
In June, AMLO accused renewable developers of fraudulent activity and threatened legal action against them. “We are not going to cover up acts of corruption,” he reportedly said, without detailing the companies or amounts involved.
Analysts believe Mexico will miss its target of 35 percent clean energy by 2024.
State moves to protect CFE’s 54 percent share of the Mexican electricity market have been “completely self-serving and in total disregard of environmental impact,” said Gaylord. “AMLO and CFE under [CEO] Manuel Bartlett have zero intention of making a good-faith effort to comply with Mexico's long-standing non-fossil-fuel generation targets.”
CFE’s only concrete plans for investing in renewables have been proposed upgrades to existing hydroelectric facilitates at a scale that is “likely technically infeasible,” plus “token investment” in geothermal capacity, Gaylord said.
In April, Moody’s cited energy policy as one of the factors in downgrading Mexico’s long-term foreign-currency and local-currency issuer ratings to Baa1 from A3. “The lack of clarity over the role private investment will have in the electricity sector also poses risk to investment in renewable projects and natural gas pipelines, since the government has yet to define an agenda,” said the agency.
COVID-19 impacting Mexican renewables
The problem for renewables goes beyond a lack of support for new developments. The government has tried to chip away at gains already made by the renewables sector under the previous administration, often with measures of dubious legality.
In late 2019, for example, state energy agency Sener signaled a change to the rules for Mexico’s clean energy certificates, which had hitherto been an important source of revenue for independent power producers.
The rule change would have meant CFE’s legacy plants could obtain the certificates too, “which would have eliminated a significant incentive for new clean capacity in the country,” Juan Pablo Londoño Agudelo, Wood Mackenzie power markets research analyst, said in an email.
And the coronavirus pandemic has given the administration a new excuse to go after renewables, Londoño Agudelo said. Claiming grid reliability concerns, it announced a halt to solar and wind interconnection tests, curtailment of renewable energy, and prioritization of hydro and fossil-fuel generation.
Elsewhere, the government has increased fees for self-supply projects and refused to invest in energy transmission infrastructure, including a planned upgrade that would have allowed wind-rich Oaxaca to add up to 3 gigawatts of new generation to the grid.
“Overall, AMLO's measures have been continually adding regulatory uncertainty to an already-opaque global context during the coronavirus outbreak, directly affecting projects under development and in operation,” said Londoño Agudelo.
Despite the gloom, Mexico's vast potential for low-cost renewable power continues to give market observers reason for long-term optimism. Even now, Baja California South and the Peninsula region offer substantial opportunities for solar and wind projects, Londoño Agudelo said. “These locations face limited access to energy while demand continues to rise."
That might favor developers looking to sign power-purchase agreements with large commercial and industrial customers. But in all likelihood, the market will not turn around until sometime after AMLO's term ends in 2024.