Energy Reform, Investment Checkmate

Before the most recent energy reform, the average cost of electricity in Mexican industry was approximately 37 percent higher compared to US industry

This week the against energy reform of the federal government that would grant more market power to the productive companies of the state. Furthermore, competition from the sector is limited. This decision is bad news for investment for several reasons.

First, because at reduce competition in the sector In order to privilege state companies, efficiency in energy production is reduced and therefore the benefits of lower costs in the future. Furthermore, since the public company is the predominant one, it will have no incentive to reduce consumer prices. In any case, to lack of investment In the sector and if it is a quasi-monopoly, the reduction in prices would occur only through a subsidy from the federal government, that is, public resources would be allocated to reduce final prices.

Before the most recent energetic reform the average cost of electricity in the Mexican industry was approximately 37 percent higher compared to the US industry (with data from 2005 to 2013 and obtained from SENER and EIA). As of the reform, the cost was reduced to 14 percent higher than the US on average (data from 2014 to 2019). In other words, the liberalization of the sector that resulted in greater competition had a favorable impact on reducing costs. The counter reform will raise production costs which will reduce the productivity of the industrial sector by increasing its operating costs. This will cause the country’s potential growth to decrease in the medium term due to lack of productivity (production costs rise).

Second, because the energy reform limits investment in renewable energy privileging those related to fossil fuels. Solar energy is already the cheapest in the world according to the International Energy Association (IEA) and the strong investment in this sector (renewable) will continue to encourage the fall in its production costs, which will be transferred in lower electricity prices. Besides, the biden administration is very interested in a strong investment in renewable energy. This will give priority to these sectors to the detriment of the most polluting and expensive energy sectors (fossils).

Third, because the new against reform does not comply with the agreements of the Free Trade Agreement (TMEC) with the United States by limiting private sector investment and participation in the energy sector. Many US and Canadian companies are likely to take legal action and seek redress for distorted competition in the marketplace. Many of these companies will think twice about continuing to invest in the country.

Thus, it seems that this reform may be the final blow for investment in the country. The gross fixed investment league 21 months in contraction and these measures are not encouraging to reverse its trend. This measure, in conjunction with the Banxico Law, which would oblige the monetary authority to acquire illegal dollars in the country, and the outsourcing law, would be a checkmate for investment in the country.

The author is CEO of GAMMA Financial Solutions and professor of Economics and Finance at EGADE Business School. He has a Ph.D. in Finance and an MA in Financial Economics, both from the University of Essex in the UK. He was the chief economist for Mexico at Itau BBA, deputy general director of International Financial Organizations at the SHCP and researcher at Banco de México.

Originally published in El Financiero.

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