Mexico’s government has had a bad corona run. The pandemic hit the country when the economy was already shrinking. But instead of profiting from the resulting drop in electricity demand of 9 percent in order to speed up the expansion of renewables and the much needed modernization of his country’s energy sector, President Lopez Obrador – widely referred to as AMLO – is instead sticking to the country’s outdated and failing CO2-heavy energy system. Rebecca Bertram takes a look.
According to the International Energy Agency, global oil demand is rapidly decreasing and expected to fall by 9.3 million barrels a day in 2020. Yet Mexico continues to bet on oil, the only country refusing to sign a recent OPEC agreement for cutting global oil production by 10 million barrels a day in order to stabilize markets.
The reason for Mexico’s pro-oil policy is twofold: For one, AMLO comes from the oil-rich state of Tabasco bordering the Gulf of Mexico and has strong personal ties to the industry. For another, and more importantly, one of his key election campaign promises was to reinforce the country’s energy independence and reverse the 15 year-long trend of declining domestic oil production. Mexico’s reluctance to accept OPEC’s plan to reduce global oil production thus came as no surprise.
It does not, however, explain why AMLO is now going after renewables in his quest to save Pemex, Mexico’s state-owned energy company. Yet last month, his government announced two policies for the management of the electricity grid this time without consulting all stakeholders, a practice customary even in Mexico.
These two new policies are particularly damaging to the development of renewables. The first gives supply security priority over economic efficiency. With renewables producing at the lowest electricity price in the country’s last auction in 2017 this shift will have dire consequences for the sector’s future growth. Still too many policy makers across the globe give too much importance to renewables’ intermittency even though modern electricity infrastructure is now able to absorb differences in electricity generation. The second policy increases the operational reserves of back-up plants, which in turn reduces the need for alternative electricity sources. Both new policies combine to significantly hinder the integration of renewable energy in the Mexican energy mix.
Anti-renewables strategies by the current Mexican administration are nothing new. An auction for renewable energy permits scheduled for the end of 2018 was cancelled without setting a new date, and inspections that are necessary to get solar and wind energy parks operating have been suspended until further notice, ostensibly due to the corona pandemic. As the Economist reports in its May issue, wind energy in Mexico had high hopes of tripling its capacity to 15 gigawatts by the year 2024 but under current conditions is likely to reach just half of that figure.
AMLO’s policies are predominantly directed at propping up Mexico’s struggling oil company Pemex. Yet Pemex’ troubles are not new and unlikely to go away just by keeping renewables at bay. The state-owned company has been in the red for years due to long-term financial and operating problems and financial analysts now openly refer to its stocks as junk. Instead of undertaking the necessary reforms and investing in new business opportunities, the company has largely remained stuck in its backward business model. Its sky-high debt and the government’s determination to increase its money-losing refining business will likely lead to greater losses in the future even if global oil prices were to recover after the pandemic.
In Mexico’s already stagnant economy, it simply makes no sense to increase oil production when international oil prices and energy demand are down. Instead of investing in an old and outdated energy system and a troubled company, a responsible government seeking a way out of the present crisis should modernize the energy sector and encourage greater variability in its energy mix.
Unfortunately for Mexico and the world, AMLO’s government is failing that test.