The Electricity Crisis in Mexico

The Electricity Crisis in Mexico

Mexico has been struggling to keep up with its own demand for electricity for decades. So far it’s been able to keep its head above water – but just barely. With little “operational margin” to work with, the Government owned electricity distribution monopoly has stayed mere steps ahead of demand. The CFE has spent hundreds of thousands of dollars per year refurbishing outdated hydro-electric plants (many of which were constructed as far back as the 1920s), building new generation plants, and seeking privately owned generators for its electricity buy-in program but soon that may not be enough.

In 2009 Mexican power plants generated 239 billion kilowatt hours (Bkwh). However, the public gobbled up 202 Bkwh – and since then the demand has continued to grow exponentially.

With an estimated 800,000 new customers every year, how long can the aging governmental agency keep pace without private assistance? Why, with new advances in generation technologies such as wind power and solar is Mexico still seeing record-breaking rate increases, shortages, and potentially beneficial programs die on the drafting tables? Is it time for the political and economic reform that’s been gaining momentum since the late 1990s?

Why is Mexico “Starving for Electricity”?

The answer lies (at least partially) with the old supply/demand axiom. Victor Carreon (of the Centro de Investigacion y Docencia Economicas or CIDE) and Armando Jimenez San Vicente (former Secretaria de Energia) have examined the puzzle thoroughly and both agree that “one of the main problems in the electricity sector in [Mexico] has been the demand growth rates, which some times have been greater than the growth rate in installed [production] capacity.”

Put more bluntly: Mexico produces just enough electricity to get by while the demand increases on a daily basis. Conservative estimates place the growing demand for available electricity at 6% per year with some creeping as high as 8% or more for the general populace and as much as 30% within specific industries. Such growth is taxing on an infrastructure that was constructed decades. Add the CFE budget cuts of 2011 into the mix and the problem approaches dangerous proportions. Facing 13% cuts across the board, the CFE will have its hands full simply maintaining the 430,000 miles of transmission lines and hundred or so company-owned hydroelectric facilities which supply the majority of the country’s renewable energy. Associated costs, as always, are passed on to the consumers.

When government subsidies for electricity ended in 2001, consumers were shocked. Some saw their rates jump as much as 70%. That hit was devastating to high volume consumers such as food manufacturers, farmers, and those involved in the tourist industry. And those prices have continued to rise ever since. In fact, in 2011 alone electricity prices jumped between 20% and 22% across the nation. They spiked almost 7% in just one month!

Those numbers are having a huge effect on the Mexican economy. This fall a group of business owners approached the capital hoping to make a public spectacle and shed some light on the need for energy reform. These business owners came from all around the country and various industries to make their individual plights heard:

  • Hoteliers from Cancun cracked open their books to show that electricity now accounted for at least 15% of their total operating costs

  • Food processors decried the 30% increase in electricity delivery charges

  • School administrators demonstrated that their daily operations are directly responsible for dramatic “seasonal” increases in energy rates

Meanwhile Mexico continues to sell electricity to multiple countries in South America and even the United States when its own populace is hurting from shortages.

A Good System Gone Bad

Everything points to something fundamentally wrong at the core of Mexico’s energy grid. Many experts including former President Vincente Fox see the root of Mexico’s looming energy crisis firmly imbedded within the government’s own monopoly on electricity transmission. As a protective measure the government nationalized the electric grid in 1960. Amendments to the country’s constitution gave the government direct, permanent, and non-transferrable control over electrical transmission and distribution. Two government-owned companies were created – Central Light and Power (LFC) which supplies to the Capital and the Federal Electricity Commission (CFE) which supplies everybody else – and they’ve been in control ever since.

Technology has advanced far enough that private players can now safely generate electricity on their own in capacities nobody would have ever dreamed about in 1960. CFE has refused to loosen its grip and several attempts to force its hand have met with defeat. Though special amendments to the Public Electricity Service Act enacted in 1992 allow private individuals and corporations to produce electricity but they must either consume that electricity themselves or sell it back to the CFE. Now, with shrinking budgets and growing expenditures (over 50% of the CFE’s budget goes to salaries and other expenses) the agencies have to look elsewhere for income. And “elsewhere” is often outside of Mexico’s borders.

This practice was originally enacted to allow some competition and cost-sharing but it has been corrupted by multinational corporations with deep pockets (such as mining companies or big box chain store companies). These companies often build their own production plants (usually wind turbines) and use the energy to support their own operations or sell their energy back at a profit. Meanwhile, in order to even get their project off the planning board, these corporations must come up with hundreds of thousands or even millions of dollars’ worth of “financial guarantees.” This practice had created an exclusive culture of energy producing “robber barons” that many native Mexicans feel are taking unfair advantage of their natural resources.

These restrictive “guarantees” are, according to Sergio Oceransky of the Yansa Group, in amounts that “no community in Mexico could meet.” Which means that often times local programs which may be beneficial in both the long and short runs are shot down in favor of those proposed by multinationals.

Oceransky sees exclusionist tactics to blame and says that “these are requirements that are basically designed to ensure that only projects presented by multinationals can compete.” This exclusivity breeds higher rates by strangling competition.

Winds of Change are Blowing

For generations Mexico’s power grid has relied on electricity from thermal generation plants and hydroelectric facilities. Now those traditional methods of power generation are falling by the wayside. Hydro power accounted for nearly 25% of Mexico’s total production a decade ago. In 2010 that percentage dropped to just 14%. Mexico stands on the precipice of a new era and is poised to be one of the fastest expanding wind energy markets in the entire world. In fact, wind studies have shown that there are enough viable sites (with 30% productivity or less) available to generate 82 gigawatts per year!

The wind harvesting revolution started with Calderon’s regime. When he took office in 2006 Mexico’s wind production was a measly 6 megawatts. Just 6 years later that total has risen to 519 megawatts.

Several new wind farms opened in 2011 and are already producing hundreds of megawatts per year with dozens more scheduled to open in the near future. These projects (mostly along the Isthmus of Tehuatepec) would bring wind-generated electricity in the multiple-gigawatt range in the foreseeable future. In fact, the Energias Sierra Juarez wind farm owned by Sempra International could potentially generate enough energy at that one site to fee all of Mexico if the transmission grid could be upgraded!

The technology is there for the taking but will the government take advantage of it?

Political Machinations May Stall Energy Reform

Carreón and Jimenez warn that reform is necessary “however, the task of moving forward in the process of reform has proven not to be easy, especially in the face of divided and highly politicized Congress. The ability of this government to build consensus could determine the pace and potential for the country’s economic growth.” While new president Enrique Peña Nieto has promised energy reform, critiques like Ricardo Castillo of The News are skeptical.

Castillo cites the Peña administration’s lack of transparency as reason to be doubtful. The President is touting energy reform but “exactly how President Peña Nieto will go about it remains a mystery.” Most agree that his focus will be zeroed in on oil production. Meanwhile, Mexicans continue to pay dearly for electricity when their nation is poised to potentially become a world leader in green energy production.

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