New frontiers: Mexico

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Buoyed by US growth, an energetic new President and strong renewables potential, Mexico is an increasingly attractive rapid-growth market for power and utilities (P&U) investment. Carlos Carrillo examines the country’s key advantages and challenges.

Growing economy = growing demand

Mexico’s economy is experiencing solid growth, mostly due to its close ties with the recovering US market. Its expected growth rate in 2012 is 3.8%, with projected average economic growth to 2025 of 3.6%.

This expanding economy points to a predicted 4% rise in electricity consumption, allowing for some regional variations. This will require a substantial increase in Mexico’s installed electricity capacity.

The growth will translate into consumption of around 408 terawatt (TW) hours by 2025, so the actual installed electricity capacity will need to be duplicated through additional generating plants or reconfiguration of the plants.

Since only the state-owned Comision Federal de Electricidad (CFE) currently performs the distribution, it will be necessary to install more transmission and distribution lines to connect the new capacity to the current network.

Opportunities in wind and solar

To increase electricity generation, the Mexican government has announced it will construct approximately 32 TW of additional capacity from 2012 to 2025. This presents several opportunities for P&U companies to either construct or operate these new plants.

The Mexican government is also committed to increase its use of renewable energy. Currently, only 5% of Mexico’s generated electricity comes from renewable sources. The government has pledged to boost this to 35% by 2024.

The country boasts two regions with an almost constant supply of wind – Oaxaca and Tamaulipas. Several multinationals are currently looking for land here to construct new wind farms. Although the wind power tariff remains high, the government offers grants and incentives for electricity generated by renewable sources.

Solar power is also being developed, especially in Mexico’s northwest, where solar irradiation is strong and land is available to construct suitable facilities.

Challenge of energy reform

President-elect Enrique Peña Nieto’s promised reforms to the state-owned energy sector are expected to open up the country to more foreign direct investment. If implemented well, these reforms may also bring in the technological know-how needed to unlock potential reserves, boost long-term production and reduce electricity cost for households and industry.

To achieve their aims, reforms should include legal changes allowing private investment not only in electricity generation, but also in transmission and distribution. Mexico also needs its own spot market to allow wholesale trading between electricity market participants.

Lack of natural gas is also a challenge. The current natural gas consumption is primarily driven by PEMEX, the Mexican state-owned oil and gas entity, CFE and the independent power producers (IPPs), which together account for nearly 85% of all natural gas produced in Mexico.

This year, PEMEX has cut supplies to some of its largest customers by up to 45% as it copes with increased demand and the challenges raised by cheap US shale gas. The situation is creating uncertainty around whether to increase levels of production in an industry where using an alternative combustible is not an option. Mexico may need to increase its natural gas pipeline system by linking it to the US market.

Several Mexican energy projects that had faced delays due to a lack of government coordination or financing are expected to begin the bidding process soon. We also expect to see more energy players start planning new conventional and renewable power plants and reconfigure the necessary infrastructure.

Tipped to be one of the world’s 10 largest economies by 2040, Mexico holds great promise for P&U investment, particularly in renewables. Awareness of Mexico’s unique advantages and challenges are crucial for investors’ success both in the near and long term.

Mexico by the numbers:

Mexico by the numbers

Mexico’s top economic advantages

  • Strong macroeconomic indicators supported by an expanding middle class, stable peso and controlled inflation
  • Multiple trade agreements offer taxation flexibility for international companies
  • Ready supply of young, low-cost labor, including increasing numbers of engineering graduates

For more information

Our Rapid Growth Markets Forecast (Summer edition — July 2012) Our Rapid Growth Markets Forecast (Summer edition — July 2012) is the latest issue of our quarterly forecast of 25 rapid-growth markets. Read the full report here or visit www.ey.com/rapidgrowth to learn more.

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Mexico by the numbers


Mexico

  2010 2011 2012 2013 2014 2015
Real GDP growth (% per year) 5.6 3.9 3.8 3.8 5.0 4.5
CPI inflation (% per year) 4.2 3.4 3.7 3.7 3.5 3.0
Current account balance (% of GDP) -0.3 -0.8 -0.7 -0.9 -0.7 -0.4
External debt total (% of GDP) 18.3 17.7 17.4 16.2 15.3 14.5
Short-term interest rate (%) 4.6 4.4 4.4 4.3 4.5 4.5
Exchange rate per US$ (year average) 12.6 12.4 13.1 12.9 13.1 13.2
Government balance (% of GDP) -2.4 -2.3 -2.0 -1.8 -1.8 -1.5
Population (millions) 113.6 115.0 116.3 117.6 118.9 120.2
Nominal GDP (US$b) 1,035.9 1,156.0 1,201.1 1,308.7 1,398.8 1,492.1
GDP per capita (US$ current prices) 9,119.2 10,056.2 10,327.4 11,124.7 11,760.1 12,412.0

Source: Oxford Economics.

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