Mexico Power Sector: Growing Pains

As more companies shift production closer to the United States from Asia, investment in manufacturing is booming in Mexico. The growth is so fast, however, that it is outpacing the construction of power capacity to keep pace.

When Elon Musk announced this year that Tesla, his electric carmaker, will invest $5 billion to build an assembly plant in northern Mexico, it was the latest company to join a nearshoring boom of building factories and distribution centers in the Americas to supply the United States. It makes sense. The risks of supply disruptions when shipping from China and as far afield, whether from pandemics, trade tensions or war, can eat into profits.

But can the nearshoring markets handle all the new business?

Mexico is showing signs that it may struggle to do this.

The power sector, for one, is racing to connect more businesses in the north to the grid, and many energy hubs are already saturated. There is a risk that many cities there could suffer blackouts next summer, warns Lorena Barrientos, CFO of Mexican energy and infrastructure investment trust Xinfra Fibra E.

Investors have already had a taste of what could befall them. In March and June of this year, blackouts hit several cities, including in industrial areas in northern states such as Nuevo León, a crucial point for nearshoring and where Tesla will build its huge electric car “Gigafactory.” There were also outages in the southeastern states of Tabasco and Veracruz, a concern for the advance of the Corredor Transístmico, a major logistics project that will link the Gulf of Mexico with the Pacific Ocean.

Blackouts are not new in Mexico. But this time the power system collapsed as temperatures surpassed 45°C (113°F), leading to a surge in the use of air conditioners. This energy demand is expected to grow further as the climate heats up. Mexico has warmed 0.3°C per decade since 1975, even more in northern states, according to data from the Climate Change Research Program of the National Autonomous University of Mexico in Mexico City. Between 2015 and 2039, the average annual temperature in Mexico will increase by between 1.5°C and 2°C in the north of the country, according to data from Mexico’s Climate Change Information System.

This rise in temperatures has also brought more droughts, water shortages and other causes for alarm to investors and citizens.

Could this quell the nearshoring boom?

Manuel Rodríguez, a founding partner and CEO of Mexican private equity firm Ainda Energía & Infraestructura, is worried. The most recent spate of blackouts, he says, came even after restricting demand to industry. This lack of reliable electricity has put a hold on the construction of new industrial parks for nearshoring activities, even as many in operation are running at 95% occupancy rates.

Mexico’s state-owned electric utility CFE “has had to restrict the connection of electricity from industrial parks to the electrical network,” depressing projects to build new industrial parks, Rodríguez says.

Rubén López, the Mexican head of infrastructure company Aleatica, which is owned by the Australian investment firm IMF Investors, is equally concerned about the dependability of the power grid.

The company is building the Atizapán-Atlacomulco highway to make transport “more agile” to the states of Michoacán and Jalisco, where big ports are located for export. Aleatica has other such projects to improve the connectivity more in Mexico, including the Circuito Exterior Mexiquense, a toll road in and around Mexico City that launched in 2011. The road has helped speed up the movement of cargo from the Port of Veracruz to Mexico City, Toluca, Querétaro and Puebla. The Puebla elevated bypass and interconnection works with the Felipe Ángeles International Airport outside Mexico City will also help make Mexican products more competitive in the United States and other export markets, according to López.

But to attract the investment in nearshoring activities to use this infrastructure, Mexico’s energy generation and transmission capacity must be increased, as must water infrastructure, López says.

Building power lines

The infrastructure challenge is also an opportunity.

Ainda, the private equity firm, plans to raise $800 million in a fund, including $600 million in Mexico and $200 million in Colombia, in October to finance infrastructure, transportation, water, mobility, electricity, oil and gas projects. This will expand on its $118 million investment to acquire an 8% stake in Hokchi Energy, an oil and gas company controlled by BP-backed Pan American Energy, which is based in Argentina. Ainda’s Rodríguez says the firm could make investments in building transmission lines.

More transmission lines are needed. While the Mexican power grid was extended by 1.4% between 2019 and 2022, that was less than the growth in consumption of 2.6% over the same period after dips during lockdowns for the COVID-19 pandemic, according to data from CFE, Datosmacro and the Mexican Ministry of Energy.

Xinfra Fibra E’s Barrientos says the energy challenge will fall on the next government to be elected in the general election in June next year. The good thing is that two of the leading contenders for the presidency are versed in energy. Left-leaning Claudia Sheinbaum is a scientist and promoter of the environment, while Xóchitl Gálvez is a businesswoman who has called for opening up the energy sector to private investment and promoting the development of renewable energy.

The next government, Barrientos says, “is going to have to look at this issue urgently” if it wants to avoid more blackouts from deflating the nearshoring boom. LF