Mexico’s Energy Problem
A lack of access to sufficient, reliable, and clean energy jeopardizes nearshoring investments as well as economic development
The increasing commercial rivalry between the United States and China has accelerated nearshoring, a term that describes the transfer of investment and operations to nearby countries. Mexico is in an excellent position to benefit from this phenomenon, given its proximity to the U.S. market, the business environment generated by USMCA, and the historical integration of their production chains. In fact, our country can play a highly important role in Washington's strategy to incentivize a manufacturing renaissance in North America, especially since not all businesses can easily relocate to the United States and maintain their competitiveness.
While nearshoring opens a window of opportunity for the relocation of supply chains in Mexico, the limited capacity of the country's electricity sector could jeopardize these investments. The report The Power Problem: Nearshoring and Mexico’s Energy Sector, prepared by the Center for the U.S. and Mexico and Tecnológico de Monterrey, presents a brief diagnosis of the state of the power sector in Mexico and the new policies the incoming government can implement to make the promise of nearshoring a reality.
Mexico’s power challenge
Relocated companies need access to sufficient and reliable energy, ideally from renewable resources. Many companies demand these conditions to operate effectively, but also to align with their own environmental, social and governance (ESG) commitments.
Unfortunately, Mexico’s energy sector –particularly the power sector– has faced a notable lack of investment in recent years. Investment has been insufficient to meet the demand needed for relocating supply chains. Furthermore, energy policies may have led to increased electricity costs, environmental degradation and lower reliability, undermining Mexico’s attractiveness to potential investors. These policies, largely restrictive of private investors, have led to delays in new investments in energy generation.
Supply issues affect companies that are getting started –and eventually expanding their operations– and those that already operating in Mexico. In fact, there have been challenges such as frequent delays in supply due to additional demand resulting from economic expansion. For many entrepreneurs, this is a critical factor in their decision to relocate industrial plants.
Analysts agree that Mexico will find it increasingly difficult to meet energy demands in the coming years, which may disincentivize companies from doing business in the country as they have to compete for limited power sources. The main reason for this limited capacity is an infrastructure model that relies primarily on government funding, which remains insufficient to provide the power required for nearshoring in the next decade.
In addition, some companies that have set goals to reduce their carbon footprint and meet their ESG obligations have also expressed concerns about Mexico's apparent lack of commitment to renewable sources. Attracting companies becomes even more difficult in the absence of access to clean energy.
How can energy supply issues be addressed?
Mexico needs to implement important changes if it wants to take full advantage of the offshoring of international supply chains, such as:
- Environmental, regional, and global policies of nearshoring
U.S. industrial policy is likely to continue to pursue North America’s manufacturing renaissance. Therefore, addressing the challenges associated with energy policies, protectionism, and geopolitical uncertainty is imperative to maximize the benefits of nearshoring and promote sustainable economic development in the region. Mexico is a key partner in these efforts.
The rise in nearshoring activities is driven by various factors, including U.S. public investment to incentivize relocation, as well as tariffs imposed on Chinese products. To boost domestic manufacturing and reduce reliance on foreign production, U.S. industrial policy incentivizes companies to relocate their manufacturing operations back into the country or nearby. Meanwhile, tariffs on Chinese imports have led U.S. companies to seek alternative sourcing options.
Based on this policy, the Mexican government has seen a new opportunity to boost further industrial development in the country, channeling some of it to the southern states. However, effective public policies are required to encourage industry relocation to southern Mexico, including the provision of a sufficient, reliable, and clean energy supply. For decades, US companies have prioritized their operations in the northern border states and, more recently, in the Bajío central region. Railroad infrastructure projects such as those in the Tehuantepec Isthmus and the Yucatan Peninsula, are, at best, initial steps. Infrastructure alone will not be able to trigger a sustainable development process without a significant increase in the availability of reliable and clean electric power to encourage companies to move south.
On the other hand, Mexico benefits not only from the relocation of US companies, but also Chinese firms. However, concerns about tariffs and trade disputes between the United States and China could affect nearshoring decisions and require careful consideration of the potential risks, particularly in the electric vehicle and EV battery industry. Considering this, Chinese investments in Mexico may be affected.
- Investment in transmission infrastructure
The biggest hurdle in Mexico’s electricity sector does not lie in generation capacity, but rather in transmission infrastructure: getting power to where it is needed. The need to invest in robust transmission infrastructure is heightened by nearshoring. While solar and wind resources are abundant, they are often regionally concentrated, necessitating the development of extensive transmission networks to distribute electricity across the country efficiently, especially to areas that are attracting the majority of investment.
Although the Mexican Constitution permits contracts between private entities and the CFE—thus facilitating private sector participation not only in generation, but also in transmission infrastructure—in practice, regulatory activity and administrative hurdles hinder private participation. Nevertheless, there are promising projects, such as the public-private partnership to build a transmission line in Querétaro. These types of collaborative efforts involving multiple stakeholders, including federal and state governments, utilities, industry players, and financial institutions, are important.
Transmission infrastructure is a decisive aspect. As demand continues to rise, addressing this area of opportunity is imperative to ensure not only new investment, but also energy security, facilitating economic growth, and mitigating the risks associated with reliance on natural gas.
- Market-oriented policy solutions and engagement in the energy transition
Pressure on the grid is evident, as outages disrupt industrial operations and incur substantial costs for consumers and industrial users. The required investment scale is substantial, with estimates suggesting tens of billions of dollars to expand capacity by 75% over the next 10 to 15 years.
However, addressing the quantity of power available is only part of the challenge: the quality and reliability of electricity supply is equally crucial, especially for large companies that have pledged to reduce their carbon footprint on the planet. In this context, technological innovations offer a way to streamline solutions that would otherwise take too long to materialize.
For example, distributed generation (DG) arrangements, such as rooftop solar panels, present an opportunity to relieve pressure on the grid and enhance resilience. There are significant advantages to DG, including the minimal costs of transmission.
However, this approach is not a panacea, as it does not solve the structural problems created by restrictive electricity sector policies. Political will is required to adopt a paradigm shift in energy policy along with the necessary regulatory changes to ensure reliable and sustainable energy resources for the increased demand driven by nearshoring.
Recommendations for Mexico
Looking ahead, if our country is to take advantage of nearshoring opportunities, new policy directives should focus on:
- Unleashing the potential of the private sector to accelerate investment in the power sector and increase the supply of electricity.
- Boosting the production of natural gas to support the expansion of power generation.
- Incentivizing the introduction of technological innovations in power generation, especially in relation to clean energy.
- Addressing the state of power transmission infrastructure.
- Restoring regulatory autonomy to the industry’s governing bodies.
- Reinforcing investment [protection measures.
- Making a turn toward renewable energy generation.
- Expediting technological innovation in the power sector to accomplish a transition to a clean power supply.
- Market-oriented policy solutions accompanied by a robust regulatory state.
- A steady focus on climate change and the need to fully engage in the energy transition.
These policy recommendations demand regulatory and normative amendments to the power sector in the entire country. Constitutional reform is not required, as the current version allows for accommodating these changes. By recognizing and tackling these challenges within the current legal framework, Mexico can position itself as a leader in sustainable nearshoring practices by attracting investment and driving economic growth while prioritizing environmental stewardship and energy security.
The author is research professor in Economics and Finance at EGADE Business School.
