Enrique Ochoa, the head of Mexico’s state electricity company, CFE, is a busy man. “My diary is full of meetings with national and international companies that want to come and open up here – I have at least 10 a week,” he says. “I’m seeing huge appetite, from Europeans, Americans, Asians and many Mexican companies.”
The prospect of Mexico’s oil reform turning North America into a new Middle East has galvanised public attention, but it is the quieter, but no less far-reaching, reform of the electricity system that could bring faster change in the form of cheaper tariffs and better, more sustainable supply.
For the past two decades, Mexico has given private companies the limited opportunity to generate power – allowing groups such as Cemex, the cement producer, or Walmex, the Mexican arm of US supermarket group Walmart, to generate power, including wind or solar, for their own needs. Now, they will be allowed to sell that power to third parties, as will electricity companies that are already in, or about to enter, the newly liberalised market.
“Mexico is going to be one of our main investment destinations in the next few years, with up to $5bn through to 2018 in new combined-cycle gas turbine plants and wind farms,” says Ignacio Galán, chairman and chief executive of Spain’s Iberdrola, the largest private generator in Mexico.
“As a result, we will be producing more energy in Mexico than in any other country where we have operations,” Mr Galán says. Iberdrola says it already illuminates one in seven of the country’s lightbulbs.
Cheaper electricity is vital to boosting Mexico’s industrial competitiveness, but there is one big problem: because Mexico is not producing enough gas to meet its own needs, and the existing network to import gas from the US is full to capacity, CFE has had to turn to costlier and less environmentally-friendly fuels.
A fifth of the country’s power is generated using fuel oil, which is four times more expensive than natural gas and 68 times more polluting.
That has led to electricity bills that are, on average, 25 per cent higher than in the US, although Mr Ochoa says when subsidies are stripped out, the average tariff is 75 per cent higher. Industrial users pay 84 per cent more for their power and commercial users considerably more than double than in the US.
It has also sent CFE’s profits plunging. Despite record sales in 2013, the company racked up a 37.6bn peso ($2.8bn) loss last year.
That left it ill-equipped to tackle another pressing problem: Mexico loses some 15 per cent of its electricity because of creaking infrastructure and theft, in particular the practice of illegal electricity connections known asdiablitos (little devils). That is more than double the OECD average of 6 per cent and five times higher than in South Korea.
Under the reform, the state retains control of transmission and distribution, but there will be an independent operator for the whole grid, known as Cenace.
The reform has already opened the door to $7.7bn of investment in a range of infrastructure projects, including gas pipelines that will boost the size of Mexico’s network by 34 per cent. Texas, which is a third of the size of Mexico, has a gas pipeline network that is nine times larger, according to Mr Ochoa.
Seven power-generating plants are being upgraded, at a cost of $200m, to run on natural gas rather than fuel oil. That promises big savings: it costs 2,000 pesos per megawatt hour to generate with fuel oil, compared with 780 pesos at converted plants and 478 pesos at the next generation of state-of-the-art combined-cycle plants, Mr Ochoa says.
“This is a reform in favour of competitiveness, sustainable supply and sustainable prices,” he stresses.
The changes also offer a big opportunity for Pemex, the state oil company, which wants to switch from being Mexico’s biggest customer of electricity to its second-largest producer. Emilio Lozoya, Pemex’s chief executive, wants to harness the heat and vapour from its operations to fuel a new business line, in which it expects to generate about 10 per cent of the nation’s supply.
Mexico has already set ambitious targets for renewable energy, stipulating that green power must make up 35 per cent of the country’s generation by 2026.
“There are thousands and thousands of megawatts of wind and solar projects that at some point in time will be able to be constructed,” says Michael Till, co-head of energy at Actis, a private equity firm that has set up the Zuma Energy platform in Mexico.
Zuma has bought a wind farm in the southern state of Oaxaca that will be operated by Spain’s Acciona, the biggest renewables producer in Mexico.
Miguel Angel Alonso, the head of Acciona in Mexico, has praised the government for its thoroughness and willingness to engage with the private sector. “It is generating more documentation than we can digest and comment on,” he laughs.
Acciona, which generates about a quarter of Mexico’s wind power, sees the reform as a great opportunity. “We are very keen to grow . . . We think growth of 30 per cent is feasible for us,” Mr Alonso says.
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