2022 Theme: Energy Crisis - Mexico Turns Its Back On Renewables
It is undeniable that we should write about emerging markets far more frequently. It is difficult to find the space (or time!) but it is still a shame and a glaring gap we wish we could rectify more often.
This should be especially the case for countries that are strategically or economically important to the US and the West.
It would be difficult to find a country more relevant along both these lines than Mexico.
Here is an attempt to correct at least some of that oversight.
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The riches flowing to various Middle Eastern states whose rulers have a passion for gilt falcon cages and mega-yachts is eye catching and important but the real battle over the climate might be actually happening elsewhere.
The consequential struggle over climate change is likely not happening in either the rich Western countries or the major oil producing authoritarian states. The former can afford to fund the transition and the latter will be both difficult to influence and predictably wedded to their cheap-per-barrel cost of oil as well as capable of transitioning if and when they need to.
The issue for many emerging markets is twofold:
High energy costs cause real pain to their citizens which encourages politicians to opt for fossil fuel subsidies. These are then super tough to remove politically.
It often encourages countries with fossil fuel resources to plow ever more funds into that sector, even against common sense.
Of the two, we have written in some frustration about the first before but not really discussed the second until now.
Mexico is a perfect case study of this problem. The North American country is, very regrettably, presently adopting the exact wrong policy mixture and doing so while incredibly making it more difficult for private companies to take advantage of the country's great potential for renewables.
By this we mean it is doubling down on fossil fuels and explicitly making it more difficult for private companies - foreign or domestic - to come in and build out the renewables capacity that the Mexican grid could easily have and the Mexican people desperately need.
The examples are both depressing and numerous:
Mexico has devoted four times the amount of Covid recovery capital to fossil fuel projects rather than renewables according to the very cool analysis carried out at Energy Policy Tracker.
The country's national oil company, Pemex, has been pouring scarce funds into fossil fuel projects like massive new oil refinery called Dos Bocas in the President's home state of Tabasco (ahem). According to government's own figures it will spend $6.2 billion to build 15 new fossil fuel-powered plants by 2024.
The country is favoring its national and especially state owned champions in the place of foreign, private companies such as Spain’s Iberdrola and Italy’s Enel that are desperately trying to build out more renewable energy capacity in the country.
The latter in particular as it will crowd out much needed private investment in a space that could be absolutely transformational for Mexico. The country makes 70% of its energy from fossil fuels but uniquely that proportion could go up (!) in the years ahead.
This is when Mexico could, by some estimates, have the cheapest solar energy in the world.
That isn't happening however because, against all common sense, Mexico's government is refusing to approve permits for new renewables projects.
In all there could be as many as 50 wind and solar projects submitted by private and foreign firms that are awaiting permits, with some applications dating to 2019, the last time any new permits for private energy companies were approved. In total, this represents a lost potential of ~7,000 megawatts of renewable energy - enough for a city of over 20 million.
All of this has now come to a head in a formal trade dispute between the US and Mexico where the US is alleging that Mexico is privileging the state-owned companies at the direct expense of foreign (in this case American) energy companies.
In particular, the President, Andrés Manuel López Obrador, is favoring the state electricity giant, CFE and against foreign and private firms, including those with permits approved.
The President responded to the formal lodging of the trade dispute by Mexico's neighbor, largest trade partner and largest investor by publicly jeering sarcastically, "Ooooh, I’m so scared."
In other words, the head of the Mexican state responded like a petulant child in the schoolyard.
Add it all up and the result is clear: Mexico is blowing a wonderful opportunity to remake its energy grid and energy mix and be able to provide cheaper, more plentiful and cleaner energy to its people and businesses.
In its place it will likely achieve the exact opposite. Mexico will have pricier power that will be both dirtier and more inefficient because the interests of state owned companies and utilities are being put ahead of its citizens by the myopic and outdated current administration.
This is bad and it reinforces once again how difficult it is to get even close neighbors and allies to do what we wish on energy. John Kerry, President Biden's special climate envoy, has flown 4 times to visit Mexico this year with the aim of negotiating/pleading/threatening the recalcitrant Mexican President to avoid exactly this outcome and yet all for naught.
It is all very frustrating and what makes it worse is that Mexico is hardly alone. All over Latin America a "red tide" of left leaning (or even far left) politicians are taking over and swiftly abandoning their climate promises and green bonafides in the face of the spike in energy costs.
At the same time they are also subsidizing fuel costs for the people they were elected to protect. This will prove costly and be difficult to remove in the future.
Mexico isn't the only country making foolish policy choices that will not solve their problems and will likely come back to haunt them, however....
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