Mexican energy reform may be a bridge to a low carbon economy – or a fossil fuel past

Mexico must manage its reserves well to transition to a sustainable energy future. EPA/Pemex

Following President Lázaro Cárdenas’ expropriation of foreign oil company assets in 1938, the oil industry has been a symbol of Mexican sovereignty. This made the state oil firm Petróleos Mexicanos (Pemex) politically untouchable. That is until now. Game-changing laws have recently been approved that open deep-water oil and shale fields to foreign investment, as well as liberalising Mexico’s electricity industry.

According to president Peña Nieto the energy reforms will increase oil production from the current 2.3m barrels a day to 3m in 2018 and 3.5m in 2025. Natural gas production will also increase dramatically from 5,700 million cubic feet a day to 8,000 million in 2018 and to 10,400 million in 2025. Consequently he believes that GDP will grow by an additional 1% by 2018 and by an extra 2% by 2025.

These official projections are no doubt optimistic and imbued with populist promises such as cheaper household electricity prices. Indeed, they may not happen as quickly or exactly as promised (electricity tariffs paid by household consumers are already among the lowest of the OECD countries thanks to subsidies). But the reforms are still an important step in the right direction – and a good cause for optimism.

Political meddling

For decades Mexico has missed out on productive investment in its energy industry. Instead, politicians set up a system that allowed them to use the fiscal cash cow to support their political interests, rather than enhance the competitiveness of the national oil company.

The latest example of this was the official PRI party’s taking of a 20% cut from Pemex donations intended to fund public works, appropriating them for electoral ends. Political meddling has resulted in a corrupt workers’ union, an unsustainable system of pensions and benefits, and an over-taxed national oil company struggling to invest in new fields, maintain current ageing assets or decrease the rate of a declining production.

As a consequence, Mexico currently has limited gas production, inadequate midstream capacity and insufficient transport and distribution infrastructure. This means that, despite its huge resources, Mexico is currently a net importer of gasoline, natural gas, diesel and other oil products, as the domestic processing capacity is insufficient to cover the increasing demand of its emerging economy.

Shale gas potential

The prospect of tapping into Mexico’s vast shale gas reserves after the energy reforms has contributed to the Federal Electricity Commission’s decision to increase additional power generation capacity to 2027 largely using combined-cycle gas turbine plants. But these grand prospects for increasing fossil fuel production and consumption do not square with the global push to reduce greenhouse gas emissions.

While Juan José Guerra Abud, Secretary of Environment and Natural Resources, has indicated that the switch to gas in electricity generation will have a real benefit in terms of reducing greenhouse gas emissions, this is only true in the short-term, insofar as combined-cycle gas plants replace the older fuel oil-fired plants.

But the carbon emissions of these plants are still around 350-400 grams of CO2 per kWh generated. This can be contrasted with the 2050 target required to decarbonise Mexico’s energy system, which is about 20 grams of CO2 per kWh.

Gas as transition fuel or carbon lock-in?

This does not mean to say a low carbon future is not possible, however. Mexico is aiming to cut its greenhouse gas emissions by 30% by 2020 and by 50% by 2050. To meet their target, the government has mandated that it must generate at least 35% of its electricity from renewable resources by 2024.

Given the large amount of gas-fired generation that is planned in the next two decades, achieving these targets would potentially involve stranding combined-cycle gas power plants mid-life and replacing them with lower-carbon sources – at a significant economic cost. Plus, delaying action to decarbonise Mexico’s energy system until after the 2020s, but still striving for the same cumulative emissions reduction, would be very technically challenging and expensive.

Natural gas has been described as a “transition fuel” in the power sector, but there are strict caveats. The increase in gas production must replace more carbon-intensive fuels (particularly coal), the transition period must be strictly time limited and carbon capture and storage needs to be deployed on a wide scale.

UN backed research suggests that a low-carbon electricity sector in Mexico by 2050 will largely consist of renewables (especially solar) and natural gas with carbon capture and storage. However, there is considerable uncertainty in the successful commercial deployment of this technology.

While gas-fired generation has a clear role to play in Mexico’s electricity generation mix in the period to 2030, over-investment in new capacity in the coming years can cause investment lock-in. Once these plants are in place, the inertia to continue generating from these assets could make future decarbonisation more difficult to achieve.

Before investing heavily in the new energy supply system, policy-makers should consider the incentives and disincentives that must be implemented to avoid carbon lock-in constraints to long-term policy aims.

Forward thinking

The scope and range of the energy reforms may provide Mexico with the tools needed to work toward being both competitive and sustainable. This is an opportunity to think systematically about the energy supply system but also about the relationship between patterns of energy demand, technology and policy.

For instance, as public policies incentivised travel by car, the number of cars doubled and 68% of oil products in 2011 went to road transport. This compares with 55% in 2000 and is part of the reason that costly gasoline and diesel imports have increased in the last decade.

Optimising the entire energy system, thinking forward in time, can unlock greater energy efficiency as well as economic benefits. The renewable energy laws to be announced this month must include long-term solutions and provide a pathway towards a future low-carbon economy. Policy must be developed to enable a volume of investment in new gas-powered electricity generation capacity and associated infrastructure that is compatible with a sustainable future.

According to the Mario Molina Centre, for gas to truly become a transition fuel, the income it brings must be invested in the non-fossil fuel transition. This requires politicians keeping their hands off the new state-owned energy companies, unions and regulatory institutions.

Should there be a correct and transparent execution of the energy reforms, Mexico will be on its way to become not only one of the world’s ten largest economies by 2050, but a more sustainable and competitive economy too.