THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.
Power Sector Outlook
Key View: The Mexican power sector's capacity will grow at an average annual rate of 2% over the next decade with generation reaching 391.2TWh in 2031. Our growth outlook for the market remains modest as government policy continues to obstruct privately-developed projects in the country's energy sector. Natural gas capacity will see the highest expansion over the forecast period while we highlight growing risks to non-hydro renewables development in the market.
- In July 2022, the US requested dispute settlement consultations under the US-Mexico-Canada Agreement (USMCA) with Mexico regarding the nation’s energy policies. The dispute claims that measures taken by the Mexican government undermine US energy firms and US-produced energy in favor of state-owned firms in violation of the USMCA. The consultations are ongoing and could result in tariffs being placed on a range of Mexican-produced goods.
- In August 2022, a federal judge declared modifications to the nation’s National Electricity Law which would have granted Comision Federal de Electricidad (CFE) dispatch priority unconstitutional. However, the government is continuing attempts to limit private sector involvement in the energy sector in favor of CFE through the regulatory permitting process. It has been reported that already constructed non-hydro renewable projects totalling over 15GW have been denied permits by various permitting agencies and are unable to operate. The projects are owned by foreign private-sector companies including Egie SA, Enel SpA and Acciona Energia SA.
Mexico currently generates the majority of its electricity using natural gas and the technology is expected to the dominate the power mix throughout our forecast period to 2031. We estimate that natural gas currently accounts for about 62.9% of Mexico’s generation and that its share of the power generation mix will hold steady over the next 10 years. In looking to revitalise state-owned utility Comisión Federal de Electricidad (CFE), the government has announced a significant pipeline of projects to add to its existing natural gas generation fleet. Furthermore, plant retirements planned under the previous administration have been cancelled, amounting to nearly 1.2GW of conventional gas power capacity and more than1.6GW of combined cycle units.
Modest Growth In Mexico's Power Market Over The Next Decade
Mexico - Total Power Generating Capacity, MW (2021-2031)
e/f = Fitch Solutions estimate/forecast. Source: EIA, IRENA, SENER, World Nuclear Association, Fitch Solutions
Regulatory uncertainty caused by recently proposed energy reforms will continue to weaken investor sentiment in Mexico's power market. While AMLO’s most substantial reforms have been defeated, the current government has had some success in reshaping the nation’s electricity sector from an open market to one with a higher degree of state control through increasing regulatory scrutiny on private energy firms and delaying permits for privately-owned projects. Additionally, AMLO has signalled he will not back down from nationalisation efforts and measures to strengthen state-owned utility CFE's position in the market. These actions continue to raise concern with environmental groups, the Federal Economic Competition Commission (COFECE) and trade partners such as the United States. With court challenges still ongoing, we are maintaining our subdued overall outlook for the market over the next decade.
Gas-fired power will be the main driver of growth in Mexico's power sector, supported by the government's robust investment plans. The government has outlined significant thermal capacity additions in its national power plan, the Programa de Desarrollo del Sistema Eléctrico Nacional (PRODESEN). The 2020-2034 Report included more than 13,300MW in capacity additions from thermal power plants, 4166MW of which to be combined cycle natural gas-fired plants deployed by the CFE. In PRODESEN 2021-2035, the government outlined plans to introduce about 9.7GW of gas-fired combined-cycle plants by the end of 2024. Additionally, the government is seeking to build new gas pipelines and support increased utilisation of existing infrastructure. This includes a recently announced USD4.5bn project by the CFE in partnership with energy ministry Sener to expand natural gas access on the Yucatan Peninsula.
Announced Natural Gas Capacity Additions
| ||Project ||Value (USDmn) ||Capacity (MW) |
|Q1 ||Gonzalez Ortega Plant ||- ||600 |
| ||San Luis Rio Colorado Plant ||446 ||600 |
| ||Baja California Sur Plant ||- ||327 |
| ||Tuxpan Phase 1 Plant ||467 ||1,086 |
| ||Merida Plant ||359 ||532 |
| ||Valladolid Plant ||449 ||1,037 |
| ||San Luis Potosi Plant ||- ||804 |
| ||Salamanca Plant ||600 ||837 |
| ||Mexicali Oritente Plant* ||- ||429 |
| ||Parque Industrial Plant* ||- ||202 |
| ||El Sauz II* ||- ||256 |
| || || || |
|Q2 ||Manzanillo III Unit* || ||349 |
| ||Guadalajara Unit* || ||409 |
| || || || |
| || || || |
| || ||*Not yet included in forecasts |
|Source: Fitch Solutions Key Project Database |
Gas Generation And Capacity Forecast
Natural gas is currently the pillar of the Mexican power sector, accounting for nearly 63% of total electricity and 82% of thermal electricity generated in 2022. The technology will continue to dominate the country’s power mix over the 10-year forecast period while the AMLO administration prioritises thermal power development via state-owned utility CFE. We forecast natural gas-fired electricity generation will increase to around 244.7TWh in 2031, growing at an annual average rate of 1.9% between 2022 and 2031. This will result in the share of natural gas in the country's power mix remaining around 60% by the end of the forecast period, while thermal power as a whole will account for almost 74% of total electricity generated.
A significant pipeline of new power plants under construction, already contracted, and still at the planning phase, in combination with anticipated growth in combined-cycle power plants by the CFE under AMLO's administration, supports our relatively upbeat outlook for Mexico's gas-fired power generation over the coming decade. The 2020-2034 Programa de Desarrollo del Sistema Eléctrico Nacional (PRODESEN) included more than 13,300MW in capacity additions from thermal power plants between the end of 2020 and 2034. In particular, the report states that the CFE will add 4,166MW of combined cycle natural gas-fired capacity additions between 2021 and 2024 through the commission of six plants. In PRODESEN 2021-2035, the government outlined plans to introduce about 9.7GW of gas-fired combined-cycle plants by the end of 2024. These plans are not yet being incorporated into our forecasts, though the recent awarding of contracts does mark an important step forward. In addition to the new plants that will supply power to the CFE, we expect gas-fired capacity will grow due to the construction of cogeneration plants (such as those owned by Mexico's NOC Pemex) and of plants that will sell directly to the wholesale electricity market, or export markets such as Guatemala. Planned tenders for a series of thermal power plants attracted very little investor interest over 2021, reflecting investor uncertainty created by the aforementioned changes to power market regulations. As a result, CFE has instead directly awarded contracts for these developments in early 2022 and announced plans for further plant additions.
In Q419, we revised our thermal power sector outlook to no longer include the retirement of nearly 10GW of thermal capacity, which had been planned by Mexico's previous administration. We no longer factor these in as the new administration is looking to revitalise CFE through the updating of many of these plants in addition to the building of new thermal power plants. The PRODESEN 2022-2036 report, released in June 2022 by Mexico's Secretariat of Energy, states that the planned retirements under the previous administration are formally eliminated. The previous administration planned to retire about 11.7GW of thermal capacity by 2032 under its plan know as el Programa Indicativo para la Instalación y Retiro de Centrales Eléctricas (PIIRCE).
While the AMLO administration sees a smaller role for privately owned natural gas-fired power plants in the sector, there is still significant room for the growth as CFE appears to be taking on a greater role in the development of new capacity, including combined-cycle plants. We do not expect AMLO to be able to substantially reduce the role of natural gas in Mexico's power generation mix or reduce the country's dependency on natural gas imports. Our Oil & Gas team believes the majority of natural gas produced in Mexico will continue to be used to enhance oil recovery rates at mature fields. Moreover, the AMLO administration will want to take advantage of the growing capacity of Mexico's pipeline infrastructure to import cheap natural gas from the US. Moreover, utilising domestic oil instead of gas as feedstock would increase the cost of electricity, which goes against the interests of Mexican consumers and the future administration, and damage the country's environmental credentials. Hence, we predict that gas generation will remain dominant in the power mix, at 62.5% in 2031.
Gas To Remain Dominant In Mexico's Power Mix
Mexico - Natural Gas-Fired Power Generation & Share Of Total Generation (2021-2031)