Speaker 1: This is Tom rowlans Reese and you're listening to Switched
Speaker 1: on the podcast brought to you by Bloomberg and ef
Speaker 1: Mexico is one of the world's most strategically positioned economies.
Speaker 1: As the second largest economy in Latin America and a
Speaker 1: critical link in North American supply chains, the country's energy
Speaker 1: transition has implications well beyond its borders. That importance comes
Speaker 1: at a pivotal moment. The new administration is opening the
Speaker 1: door to greater private investment in the power sector after
Speaker 1: years of subdued activity, while broader reforms aim to accelerate
Speaker 1: the deployment of clean energy, storage and grid infrastructure. At
Speaker 1: the same time, negotiations over the US Mexico Canada Agreement,
Speaker 1: shifting trade relationships, and Mexico's reliance on imported US natural
Speaker 1: gas are reshaping the country's strategic options. The result is
Speaker 1: a country balancing competing priorities, attracting investment while navigating geopolitical pressure,
Speaker 1: expanding clean energy while strengthening energy security, and building on
Speaker 1: its position as a manufacturing hub for technologies ranging from
Speaker 1: electric vehicles to transformers. So why does Mexico mats out
Speaker 1: to the energy transition now and what opportunities are emerging
Speaker 1: as the country reshapes its energy system. On today's show,
Speaker 1: I'm joined by member BNF Latin America team associates Stefan Moti,
Speaker 1: and together we review findings from his note Mexico Transition
Speaker 1: Factbook twenty twenty six. NF clients can find this and
Speaker 1: related research by heading to BNF go on the Bloomberg
Speaker 1: terminal or BNEF dot com. If we'd like to learn
Speaker 1: more about how BNIF approaches strategy research on the energy transition,
Speaker 1: including developments in commodity markets, trends across different sectors, and
Speaker 1: the cross cutting technology shaping in the future, can find
Speaker 1: more information on BNF dot com. And if you'd like
Speaker 1: to speak with the member of our team about becoming
Speaker 1: a client, email us at Sales dot BNF at Bloomberg
Speaker 1: dot net. But for now, let's unpack the opportunities and
Speaker 1: trade offs shaping Mexico's energy future. Stephab, Welcome to the podcast.
Speaker 2: Thank you.
Speaker 1: So perhaps a good starting point is just to really
Speaker 1: establish actually that we shouldn't be overlooking Mexico and its
Speaker 1: role in the energy transition or its potential role in
Speaker 1: the energy transition. Could you just explain to us, you
Speaker 1: know why you're doing research on Mexico, why Mexico is
Speaker 1: important for us to be talking about.
Speaker 2: Great Tom, good morning, Great to be here with you.
Speaker 2: So to start off, let's say Mexico is the second
Speaker 2: largest economy in Latin America, so it's not just one
Speaker 2: more country. It's got a consumer market of over one
Speaker 2: hundred and thirty million people. It's heavily integrated into North
Speaker 2: American supply chains. It's a key provider to the United
Speaker 2: States of items like electric vehicles and transformers, among others.
Speaker 2: It's key to Trump's geopolitical strategies of this fortress North
Speaker 2: America concept. It's called a lot of interest from Chinese investors,
Speaker 2: but also from European investors. You know, long story short,
Speaker 2: it's an attractive economy and the timing is essential. Right,
Speaker 2: Mexico has come through a few years of relatively slow
Speaker 2: investment to now a moment where it's enacting numerous reforms,
Speaker 2: specifically in the energy sector, and kind of peaking investor
Speaker 2: interest once again. You know, things are expected to turn around.
Speaker 2: Despite the general economic numbers not being fantastic right now,
Speaker 2: the outlook itself is becoming much better based on the
Speaker 2: outreach that the government is currently undertaking with the private sector.
Speaker 2: So again we have scale and we have timing.
Speaker 1: This is interesting, I mean what you mentioned, I mean,
Speaker 1: as you mentioned, scale is a big part of it,
Speaker 1: but it's also sudden you mentioned is actually the kind
Speaker 1: of significant positioning of Mexico both as yeah, like it's big,
Speaker 1: so it has emissions, it has a market, it matters,
Speaker 1: but it also supplies a lot of equipment and is
Speaker 1: an investment opportunity. And I think the thing that was
Speaker 1: really interesting is so much of what we've been talking
Speaker 1: about when we're talking about the kind of the global
Speaker 1: energy transition is the increased fragmentation of the world, and
Speaker 1: particularly along a sort of a US China axis if
Speaker 1: you want to call it that, with maybe Europe floating
Speaker 1: around looking for its own significance. And here we described Mexico,
Speaker 1: which correct me if I'm wrong, has a server of
Speaker 1: history of non alignment or relative non alignment. All three
Speaker 1: of those kind of blocks are looking to be involved
Speaker 1: in Mexico and be involved in the energy transition in
Speaker 1: Mexico in different ways. It's not a fair way of
Speaker 1: stating it. And you know what's some of the nuances
Speaker 1: to that dynamic.
Speaker 2: That's not a great question, Tom, and I think it's
Speaker 2: a correct framing. Mexico has historically followed, you know, a
Speaker 2: political strategy and international political strategy of non alignment. However,
Speaker 2: it can't really shake off the fact that, you know,
Speaker 2: it is right just south of the United States, right,
Speaker 2: it has this very powerful neighbor that often casts a
Speaker 2: shadow on it in that sense. You know, Mexico, especially
Speaker 2: in the nineties, you know, with the first NAFTA agreement,
Speaker 2: the North American Free Trade Agreement, decided that you know's
Speaker 2: its future was in this capitalist block was oriented towards
Speaker 2: the United States, and it really did a lot of
Speaker 2: work in both opening its own market, which has historically
Speaker 2: been relatively open, but also integrating supply chains. Right, so
Speaker 2: you do have the Makiladas, those assembly factory models near
Speaker 2: the border with the United States. You have you know,
Speaker 2: lots of road and rail connections, and you have markets
Speaker 2: that are just really very very integrated. In the assembly
Speaker 2: process of car parts are going back and forth from
Speaker 2: the back and forth from one side of the border
Speaker 2: to the other multiple times before you have a finished vehicle.
Speaker 2: So in that sense, Mexico is kind of tied to
Speaker 2: the United States and is therefore sometimes subject to the
Speaker 2: whims of whoever is occupying the White House in Washington currently.
Speaker 2: Of course, this happens to be someone that's not so
Speaker 2: open to a Chinese presence in Latin America. As you know,
Speaker 2: this has pushed to look for alternatives to this dependence
Speaker 2: on the United States. So I think that's, you know,
Speaker 2: one of one of the big variables that we have
Speaker 2: here in that framing. You're, of course, as you said,
Speaker 2: it's kind of floating around looking for its own space.
Speaker 2: It's though historically always had a role to play in
Speaker 2: Latin America, whether it's kind of for linguistic or cultural reasons.
Speaker 2: But Spanish companies have always been present and active in
Speaker 2: Latin America. But anyway, Claudasheim Schambaum has had a more
Speaker 2: let's say, diplomatic approach to anyone who would like to
Speaker 2: invest in Mexico that would include Chinese players as well.
Speaker 2: We've seen Chinese players make in roads in evs, but then,
Speaker 2: for example, we had the United States pressure in Mexico
Speaker 2: to impose tariffs on Chinese evs. So again that shows
Speaker 2: the limits to the kinds of investment that can be
Speaker 2: attracted to the kind of presence that Chinese players can
Speaker 2: have in Mexico right now.
Speaker 1: So it seems like it's a unique cocktail of delicate considerations,
Speaker 1: both in terms of the domestic politics and the international
Speaker 1: positioning of Mexico. And so you've mentioned timing is a
Speaker 1: key thing of why we're talking about Mexico right now.
Speaker 1: So let's expand on that. So why are we at
Speaker 1: such a pivotal moment in Mexico as it relates to
Speaker 1: the energy transition.
Speaker 2: I'll mention two things related to timing. The first is
Speaker 2: just building off what we were just talking about the
Speaker 2: geopolitical aspects. So their United States Mexico Canada agreement is
Speaker 2: being renegotiated. Is supposed to be the first top level
Speaker 2: meeting for the renegotiation of the USMCA, right, And part
Speaker 2: of the reason why Mexico's Mexico's options are kind of
Speaker 2: limited when it comes to attracting Chinese investment is that
Speaker 2: it depends on a favorable renegotiation to be able to
Speaker 2: keep its long term plans the way they are. Trump
Speaker 2: has already indicated before that he intends to not renew
Speaker 2: the deal. That would mean that the deal goes into
Speaker 2: a kind of limbo, which requires annual renegotiations, so kicking
Speaker 2: the can down the road model rather than having a
Speaker 2: full framework. However, what that limbo will look like really
Speaker 2: does depend on how these negotiations go. It's a little
Speaker 2: hard for now to forecast how that's going to look.
Speaker 2: But the timing of that renegotiation means that Mexico's options
Speaker 2: in the short term are really limited in terms of
Speaker 2: looking for those alternatives. That's why it was kind of
Speaker 2: forced to accept that tariff hike on Chinese Chinese ev
Speaker 2: imports for example. Now, on the other side, we have
Speaker 2: good timing related to the energy sector reforms, so the
Speaker 2: fact that we're opening up a whole array of opportunities
Speaker 2: in the energy sector. So these reforms, they began in
Speaker 2: late twenty twenty four when Claudia Scheimaum became president, with
Speaker 2: constitutional reforms because this was a very closed sector historically,
Speaker 2: with a very heavy role for Mexico's state owned enterprises,
Speaker 2: both the utility cf which I already mentioned and Petronios
Speaker 2: Mexicanos better known as PEMICS, the national oil company. So
Speaker 2: the whole energy sector was basically built around these two companies. Now,
Speaker 2: after the constitutional reforms, we have a slight reduction in
Speaker 2: how strict the rules around them are. Not a disappearance.
Speaker 2: It's not not that these two companies are suddenly giving
Speaker 2: up their leading roles in the oil and gas and
Speaker 2: power markets. But we do have space opening up for
Speaker 2: private investment that was previously much more limited. So, based
Speaker 2: on these reforms, cf now has to have fifty four
Speaker 2: percent minimum share of power injected into the Mexican grid. However,
Speaker 2: you now have this forty six percent, which you can
Speaker 2: say is open for investment. It's more or less the
Speaker 2: share that was actually currently practiced in the market. However,
Speaker 2: since we do have forecasts for growth with these reforms,
Speaker 2: we have investment plans, we have these permitting processes being
Speaker 2: opened up for a private investment. We have a new
Speaker 2: mixed investment scheme whereby private developers partner with CFE on
Speaker 2: new clean power put we have the possibility of this
Speaker 2: the whole pie growing, including or maybe especially that forty
Speaker 2: six percent growing, because there will be some flexibility into
Speaker 2: how we define what CFI capacity is versus private capacity.
Speaker 2: So in that mixed investment scheme, for example, CFI will
Speaker 2: have a fifty four percent share of these projects, but
Speaker 2: that might be only on paper. The way the contracts
Speaker 2: might work, there will be a long term ppa and
Speaker 2: a guaranteed rate of return, after which the ownership of
Speaker 2: the project will revert to CFI. So this is a
Speaker 2: completely new paradigm from Mexico and it opens up a
Speaker 2: bunch of opportunities in solar, wind and maybe especially storage,
Speaker 2: which basically doesn't exist in the country now. It's a
Speaker 2: very minimal, minimal capacity that's currently operating, but that in
Speaker 2: the medium term even should be growing quite quickly. Part
Speaker 2: of the reason why is that storage will now be
Speaker 2: mandatory with new solar and wind assets. So the share
Speaker 2: that they're talking about is about thirty percent of storage
Speaker 2: capacity will be mandatory. So if you have a you know,
Speaker 2: one hundred megawatt solar plan, you need to include thirty
Speaker 2: megawatts of storage minimum three hours, So we're talking about
Speaker 2: ninety megawat hours of storage for a project of that
Speaker 2: size for example.
Speaker 1: One thing that's kind of interesting hearing you say this,
Speaker 1: and this is I'm saying this is someone who's based
Speaker 1: in the US and a lot of Therefore, my worldview
Speaker 1: on the power sector is shaped by the US, even
Speaker 1: if I'm not from there. And in the US, the
Speaker 1: big thing that is a headache, well, well one of
Speaker 1: many big headaches, but one of them is the planning
Speaker 1: and regulatory forms. From what you're saying, it sounds like
Speaker 1: in Mexico with these reforms, what has proved to be
Speaker 1: a really difficult problem to solve politically In the US,
Speaker 1: with these reforms, Mexico seems to have like breezed through
Speaker 1: and just been all right, that doesn't seem to be
Speaker 1: a problem. And I was just wondering, is that because
Speaker 1: your starting point has been something that's so centralized, you know,
Speaker 1: with one state utility and so you don't have a
Speaker 1: thousand stakeholders getting in the way, Or is it that
Speaker 1: actually maybe these those challenges will exist, but we haven't
Speaker 1: encountered them yet, you know, with long cues to get
Speaker 1: connected to the grid. I mean, do you do you
Speaker 1: have a view on how effective these reforms will be.
Speaker 2: That's actually a better framing, Tom, I'd say, when you
Speaker 2: use the word breeze through, or use of the phraseer
Speaker 2: breezed through, but the truth is that it's still an
Speaker 2: ongoing process. I began the explanation there by speaking about
Speaker 2: the constitutional reform. But the truth is that again, that
Speaker 2: was October twenty twenty four and we're now in July
Speaker 2: twenty twenty six, and there are still things that are
Speaker 2: that are taking shape. However, most of the main laws
Speaker 2: and regulations that had to be published after the constitutional
Speaker 2: reforms have been published. It's taken you know, about a
Speaker 2: year and a half to get through that. But the
Speaker 2: truth is there's still some details missing, i'd say, especially
Speaker 2: when it comes to some of the storage regulations. But
Speaker 2: let's go through it a little so so the listeners
Speaker 2: can have a bit of an idea of what came
Speaker 2: after the constitution reform. So there was a new power
Speaker 2: sector law, which you know, had all the general orientations there.
Speaker 2: There was a new law governing the National Energy Commission
Speaker 2: c and E, which is the new regulatory agency. It
Speaker 2: is still a pretty centralized agency. I think that point Tom,
Speaker 2: I think was correct. It makes it a little easier
Speaker 2: when you know you can cut through a lot of
Speaker 2: those stakeholders when it is you know, one main utility
Speaker 2: that's controlling most of the generation expansion, you can open
Speaker 2: space for other players a little more easily. However, you know,
Speaker 2: CNE because it's so centralized. It's also kind of opaque,
Speaker 2: so decision making is not that clear, but there is
Speaker 2: a law governing how they're supposed to make decisions, so
Speaker 2: that does help. They published permitting rules for self generation projects,
Speaker 2: so they're also you know, looking at those smaller capacities.
Speaker 2: They got permitting rules for generation and storage set. They
Speaker 2: published also their kind of binding planning law, which you know,
Speaker 2: basically force them to publish a power sector development plan
Speaker 2: known as PLADESI in Spanish. This document basically has planning
Speaker 2: through twenty thirty nine, you know, how generation will expand
Speaker 2: how transmission will expand what they have to do. Also
Speaker 2: in terms of distribution, how they're looking at at you know,
Speaker 2: gas pipelines, like it's kind of all in there. So
Speaker 2: you start having this this kind of roadmap of how
Speaker 2: the sector, how this market, how this industry is going
Speaker 2: to be organized. However, you know, I mentioned just now
Speaker 2: transmission and distribution, and it's important to mention that these
Speaker 2: are the biggest bottlenecks, you know, because you mentioned you know,
Speaker 2: connection cues and things like that. Those bottlenecks depend on
Speaker 2: having a grid that can handle all of that new
Speaker 2: generation capacity. That's being planned, right, And so when you
Speaker 2: look at the Mexican grid, Mexicans like to say that
Speaker 2: their problem is not just generation, it's actually transmission. That
Speaker 2: they have about one hundred gigawatts of generation capacity installed
Speaker 2: but only about fifty five gigawatts of transmission capacity. So
Speaker 2: you can see how this is the main problem here.
Speaker 2: That opens some possibilities for you know, some small scale
Speaker 2: a solar for example, for microgrids, you know, for basically,
Speaker 2: you know, anything that allows you to work around around
Speaker 2: that transmission grid. CFI does have a grid investment plan.
Speaker 2: It's also in a sense trying to outsource some transmission investments,
Speaker 2: some upgrades to transmission lines and substations, to renewable project developers,
Speaker 2: to the private sector. However, CFI has illegally mandated monopoly.
Speaker 2: This did not change in the reforms on transmission and distribution.
Speaker 2: So it's trying to find some worker ounds. And it's
Speaker 2: also got the storage mandate that should help with some
Speaker 2: of those bottlenecks and specific nodes. However, that that does
Speaker 2: remain you know, a big challenge, right and I mentioned
Speaker 2: in terms of the regulations, there's still some details missing,
Speaker 2: especially for storage. So right now we're seeing permits come through.
Speaker 2: The government opened two separate permitting processes for private projects
Speaker 2: and for mixed investment projects. These are still ongoing. In
Speaker 2: the first round of the private project scheme, they were
Speaker 2: able to assign about forty two percent of the capacity
Speaker 2: they were going for. I think this was still early
Speaker 2: days back in October of last year when they opened
Speaker 2: that first process, and I think private players were still
Speaker 2: adopting a wait and see approach at the time, so
Speaker 2: they really didn't put their full force behind that.
Speaker 1: I'd say it.
Speaker 2: Would be disappointing if it wasn't like the first time
Speaker 2: that we had private projects actually being proposed and getting
Speaker 2: permitted in a long time. So forty two percent can
Speaker 2: be considered low compared to other countries, but it's still
Speaker 2: pretty good for Mexico. The CNE listened to what the
Speaker 2: private players had to say about that first process and
Speaker 2: they opened the second one late May of this year,
Speaker 2: and they've since extended the deadline trying to signed the
Speaker 2: remaining capacity for private projects. The mixed investment scheme was
Speaker 2: a completely different story because of what I mentioned before,
Speaker 2: the long term PPAs and other support that CFE was
Speaker 2: going to provide. Even though there wasn't going to provide
Speaker 2: any direct capital for these developments. That was oversubscribed by
Speaker 2: almost six hundred percent, so there was a lot more
Speaker 2: interest in the mixed investment scheme projects, and those that
Speaker 2: process closed in June when they assigned about seven point
Speaker 2: four gigaatts of generation capacity, so not even including the
Speaker 2: storage component, So that was a far more successful process.
Speaker 1: So it sounds like, you know, we talked about some
Speaker 1: of the challenges, and you know, and you've detailed actually
Speaker 1: how some of those challenges are being addressed. And I
Speaker 1: think that it's important not just to get bogged down
Speaker 1: in the challenges. I know, I was the one who
Speaker 1: asked the question, because this is a really big opportunity
Speaker 1: that's opening up in Mexico that you know a few
Speaker 1: years ago didn't exist. So can we just put for
Speaker 1: our listener's just a number on that, you know, whether
Speaker 1: it's in gigs or if it's in dollars, How big
Speaker 1: an opportunity is this for you know, energy transition technologies.
Speaker 2: It's a great question tom our own being a forecast,
Speaker 2: looking at that twenty thirty horizon, we're looking at nearly
Speaker 2: thirty five gigawatts of new capacity, including solar, wind and
Speaker 2: storage coming online. This includes small scale solar, so this
Speaker 2: would be decentralized investment, let's say, which would account for
Speaker 2: about fifteen gigawatts of that. So we're looking at almost
Speaker 2: twenty gigawatts of utility scale capacity coming online. And in
Speaker 2: terms of the investment, so the scale of investment opportunity
Speaker 2: is sixty three billion through twenty thirty five. Basically, what
Speaker 2: we're talking about here is if every agent in the
Speaker 2: market took cost based decisions, took economic decisions, went for
Speaker 2: the most affordable, most cost effective technologies, we would have
Speaker 2: sixty three billion being invested in Mexico through twenty thirty five.
Speaker 2: And that number comes from BNF's new Energy outlook right,
Speaker 2: our economic transition scenario. It's a scenario of course, that
Speaker 2: is focused on these market based decisions and doesn't assume
Speaker 2: any additional policy support.
Speaker 1: Or policy breaks either. We should say its suemes perfect
Speaker 1: economic policy. So there's a really big opportunity here for
Speaker 1: solar storage with the energy transition technologies that we typically
Speaker 1: talk about in the power grid in the energy sector.
Speaker 1: I want to return to something that we were talking
Speaker 1: about at the beginning, and it's the sort of where
Speaker 1: Mexico sits in this great power relationship, and I was
Speaker 1: really interested. I didn't realize this what you were saying
Speaker 1: about the US and President Trump using the USMCA as
Speaker 1: leverage to impose conditions on Mexico in terms of putting
Speaker 1: the tariffs on Chinese evs.
Speaker 2: Right, that's correct.
Speaker 1: So when I think of this opportunity that is solar
Speaker 1: and batteries and wind, and in particular solar and batteries,
Speaker 1: the bulk of them hugely dominated by Chinese supply chains.
Speaker 1: And then I also think about what's it's displacing. You know,
Speaker 1: the Mexican power sector, as far as I understand, is
Speaker 1: quite heavily relyant on natural gas right now, and a
Speaker 1: lot of that comes from the US. So we have
Speaker 1: this dynamic. If I may sort of, you know, maybe
Speaker 1: speak beyond my level of expertise, but it seems to
Speaker 1: me that this transition is implicitly dependent on technologies coming
Speaker 1: from China reducing energy dependence on the US. And we
Speaker 1: have seen the US government is not shy about imposing
Speaker 1: constraints on Mexico to in its sort of ability to
Speaker 1: import things from China. So is that a risk here
Speaker 1: in that dynamic that at some point there are conditions
Speaker 1: that kind of get in the way of this transition
Speaker 1: that's heavy reliant on CIRN batteries that are coming from China.
Speaker 2: Yeah, that's fair, Tom. Basically what happened with EVS was
Speaker 2: exactly that that leverage was used based on this renegotiation
Speaker 2: to kind of force Mexico to put those tariffs on.
Speaker 2: And they're heavy terrriffs. They were paying I think maybe
Speaker 2: fifteen to twenty percent and now they're paying fifty percent. Right,
Speaker 2: this affects all kinds of Chinese cars. I think in
Speaker 2: this case, the United States was kind of worried that
Speaker 2: Mexico could eventually be a backdoor to the United States.
Speaker 2: How realistic a threat that was is debatable, However, the
Speaker 2: fact that that leverage was used is quite clear. Now.
Speaker 2: I do think that there are some limits to, you know,
Speaker 2: how hard the United States wants to squeeze Mexico, because
Speaker 2: there is some bilateral benefit to having those integrated supply
Speaker 2: chains and a complete decoupling would not be in either.
Speaker 1: Of Yeah, it's interest, right, the US benefits from the
Speaker 1: USMCA as well, Let's not forget that.
Speaker 2: But the truth is, yeah, that Mexico still has that
Speaker 2: heavy reliance on US gas. Today, gas is responsible for
Speaker 2: a little over two thirds of power generation in Mexico,
Speaker 2: and over seventy percent of the gas that Mexico consumes
Speaker 2: is important from the United States. So that is an
Speaker 2: additional source of leverage that's important there. And so of
Speaker 2: course I think diversifying Mexico's generation sources is also part
Speaker 2: of a national security strategy there. You know, it's not
Speaker 2: beneficial to have that level of dependence. Even though sometimes
Speaker 2: it's hard to escape it, and that American gas right
Speaker 2: across the border, coming in from Texas, for example, is
Speaker 2: very cheap, it's still, you know, generating a dependency that
Speaker 2: does make Mexico vulnerable. Now, in terms of the other
Speaker 2: components that Mexico needs for that energy transition, we could
Speaker 2: talk about batteries specifically, or wind turbines or solar panels.
Speaker 2: That has not, at least publicly come to the fore
Speaker 2: that it's become a bargaining chip. So Mexico did not
Speaker 2: increase teriffs any of those components, and it will probably
Speaker 2: resist pressure from the United States to do so because
Speaker 2: it's not like the United States is in any way
Speaker 2: offering alternatives. In terms of evs, there is a lot
Speaker 2: of domestic manufacturing in Mexico from American companies, but those
Speaker 2: evs are mostly going to the United States right there.
Speaker 2: It's a manufacturing base that is export oriented, right, so
Speaker 2: those American evs manufactured in Mexico are not being sold
Speaker 2: in Mexico. Right. Tesla has some market share there, minimal
Speaker 2: market share, but last year, based on our estimates, Chinese
Speaker 2: automakers had about ninety percent of the Mexican market. So
Speaker 2: we can say that there would be an alternative for
Speaker 2: American companies to sell some of these products, maybe competitively,
Speaker 2: even in Mexico with those tariffs. Now. I don't know
Speaker 2: if we can say the same for those other clean
Speaker 2: power components.
Speaker 1: But you could argue that natural gas is the alternative
Speaker 1: to those clean power components, and that is something that
Speaker 1: the US is offering.
Speaker 2: It is it is U and Mexico does have in
Speaker 2: the short term pipeline of gas powered plans of combined
Speaker 2: cycle gas plants that will be built out and should
Speaker 2: increase Mexican consumption of US natural gas. However, you know,
Speaker 2: you can't get much higher than those seventy percent in
Speaker 2: our outlook. The twenty thirty Mexico Gas Market Outlook, we
Speaker 2: have that dependency reaching eighty percent by twenty thirty, but
Speaker 2: again much higher than that.
Speaker 1: So what's that eighty percent? Is that eighty percent.
Speaker 2: Of eighty percent of the natural gas that Mexico will consume.
Speaker 1: For will come from the US? Yeah, got it, that's.
Speaker 2: In our in our Mexico Gas Market outlook twenty thirty.
Speaker 2: But again, yeah, it's it's there's already a very high
Speaker 2: level of dependency. I don't think Mexico wants set to
Speaker 2: go too much higher, right, and I think it will
Speaker 2: probably resist calls for tariffs and other components, especially when
Speaker 2: there are no great alternatives being offered from the United States.
Speaker 1: Let's talk about electric vehicles. I know we've been talking
Speaker 1: mostly about power generation, we've talked about evs in relation
Speaker 1: to these tariffs. How big is electric vehicle market in
Speaker 1: Mexico and how quickly is it growing?
Speaker 2: So it is big by Latin American standards. It's the
Speaker 2: second largest market in Latin America and it's growing quite fast.
Speaker 2: So we had Mexico break the barrier of one hundred
Speaker 2: thousand electric vehicles electric passenger vehicles here, including battery electric
Speaker 2: and plug in hybrid vehicles sold in twenty twenty five.
Speaker 1: And when were these tariffs introduced? Is this before or
Speaker 1: after the tariffs?
Speaker 2: So this was before the tariffs, so that was in
Speaker 2: twenty twenty five that we had those sales, and the
Speaker 2: tariffs kicked in on January first, twenty twenty six. However,
Speaker 2: we do not expect this momentum to stop or even
Speaker 2: necessarily slow in twenty twenty six. We know that based
Speaker 2: on import data, we know that imports accelerated towards the
Speaker 2: end of twenty twenty five, so before the tariff's kicked in.
Speaker 2: That means that a lot of those Chinese brands have
Speaker 2: stopped in having ventory in Mexico, and so we expect
Speaker 2: that at least until you know Q three, any price
Speaker 2: hikes will be minimal. And going forward, we've seen the
Speaker 2: you know, power prices in Mexico have increased. That has
Speaker 2: also increased the demand for evs. You know, new more affordable,
Speaker 2: more competitive models have also been introduced so far this year.
Speaker 2: So you know, we don't see this kind of reverting
Speaker 2: this tide or even reducing the market share for Chinese
Speaker 2: automakers in the country. Being a little more exact, we
Speaker 2: had almost one hundred and ten thousand units sold in
Speaker 2: twenty five that represented a little more than seven percent
Speaker 2: of all car sales in Mexico last year. By this
Speaker 2: year we see that increasing too close to ten percent actually,
Speaker 2: and the outlook going forward is really quite aggressive. Our
Speaker 2: most recent electric vehicle outlook, the long term Electric Vehicle Outlook,
Speaker 2: has that share reaching over seventeen percent by twenty thirty.
Speaker 1: And do we think a significant number of these metric vehicles,
Speaker 1: particularly with these tariffs in place, will be ones manufactured
Speaker 1: in Mexico, Whether it's by US companies or domestic companies, that.
Speaker 2: Really remains to be seen, and it really depends on
Speaker 2: the strategy that those legacy automakers might adopt. In the past,
Speaker 2: we've had companies like Bid, like Chang'an announce their intention
Speaker 2: of building factories in Mexico, but all of those decisions
Speaker 2: were kind of put on hold given the USMCA negotiation,
Speaker 2: because we know for a fact that the Mexican government
Speaker 2: would not be willing to fast track any of those
Speaker 2: investments from Chinese companies in Mexico while the USMCA renegotiations
Speaker 2: are ongoing. So again this is it's a matter of leverage.
Speaker 2: We saw the tariffs, We also saw those delays in
Speaker 2: those plans. Right Bide announced straight up that they were
Speaker 2: kind of suspending those plans for the time being. That said,
Speaker 2: there's an old Nissan factory, an old factory in Mexico,
Speaker 2: and there are some Chinese bidders for those factories. But
Speaker 2: it's very, very unlikely that we'll get any announcements of
Speaker 2: approvals from the authorities, even the state authorities in Mexico.
Speaker 2: We should see the federal government putting some pressure on
Speaker 2: them while those USMC and renegotiations are ongoing.
Speaker 1: Stepping back a moment, is it the picture I'm getting here?
Speaker 1: Is I mean taking out, you know, all of the
Speaker 1: kind of geopolitical nuances and the delicate type rope that
Speaker 1: it seems Mexico has to walk both relations to its
Speaker 1: neighbors and the global bigger picture. It seems like a
Speaker 1: lot of what has really changed is President Shane Baum
Speaker 1: has in effect opened up the market. But these different
Speaker 1: reforms sort of decentralized decision making power and therefore created
Speaker 1: opportunities not necessarily explicitly pushing energy transition technologies, but it's
Speaker 1: just more like opening up a market like that leads
Speaker 1: to those and kind of market reforms tend to be
Speaker 1: sort of quite sticky that they're difficult to reverse if
Speaker 1: someone else comes along with a different idea. But the
Speaker 1: one thing that I was reading about that does seem
Speaker 1: to be explicitly pushing the energy transition. I would love
Speaker 1: to just with the time we have here a bit
Speaker 1: more about this is a carbon market that's actually pretty huge,
Speaker 1: if that's if that's coming, So tell us a little
Speaker 1: bit more about what the plans are there and what
Speaker 1: the what the sort of the outlook is there.
Speaker 2: So before I'll push back a little on that most.
Speaker 1: From my characterization, yes, yeah, go on.
Speaker 2: Now, I would say that the reforms they do centralized
Speaker 2: decision making, would they.
Speaker 1: I was going to say they decentralized decision making, is
Speaker 1: what I meant to say.
Speaker 2: Yeah, they actually centralized decision making, but they decentralized project execution.
Speaker 2: So the planning is still very centralized. As I said,
Speaker 2: Mexico does have this binding planning framework for generation expansion,
Speaker 2: but it opens it specifically opens space for private projects
Speaker 2: and for these mixed investment projects. So that's where I
Speaker 2: would push back A good clarific, and it specifically defines
Speaker 2: the technologies. Right, So in both of these processes, it's
Speaker 2: all renewables and.
Speaker 1: Storage, got it, Okay, So it is I'm wrong to
Speaker 1: say that it's not prescriptive. It is actually a little
Speaker 1: bit prescriptive exactly exactly.
Speaker 2: So for example, when they opened this process for fast
Speaker 2: track permitting for private projects, they said exactly where those
Speaker 2: projects had to be, what technology they had to have,
Speaker 2: what capacity they were looking for, how much a grid
Speaker 2: reinforcement investment was going to be necessary. So they were
Speaker 2: very kind of deliberate about the projects they wanted. So
Speaker 2: it is very energy transition focused. These reforms do look
Speaker 2: to push an energy transition, and that kind of stems
Speaker 2: from Claudia Shambaum's background, right. She is a climate scientist,
Speaker 2: that's what she's done in her career in the past.
Speaker 2: So despite being the handpicked successor of a very pro
Speaker 2: fossil fuel president, her take on the energy transition is
Speaker 2: completely different. And so I think we shouldn't lose track
Speaker 2: of the fact that, yeah, things do change when governments
Speaker 2: change or when presidents change, even though they're from the
Speaker 2: same political movement. And also never underestimate Latin America's capacity
Speaker 2: to do a complete one eighty when the government switches.
Speaker 2: That's something that we can see very clearly, not so
Speaker 2: much in Mexico, which tends to have more political continuity,
Speaker 2: but more so in South America. But getting to the
Speaker 2: carbon markets, that's definitely an aspect where it's also a
Speaker 2: very deliberate intention to push for the energy transition. So
Speaker 2: Mexico has had these clean energy certificates over ten years.
Speaker 2: I think it was twenty fourteen fifteen when this system
Speaker 2: was launched. However, it was always weak in enforcement and
Speaker 2: it was also semi mandatory. It didn't catch on. I
Speaker 2: think that's the point that the carbon market in Mexico
Speaker 2: didn't catch on. Now, with Claudisheimun having this completely different
Speaker 2: take on the energy transition, she's trying again and the
Speaker 2: ideas to relaunch it make it a little easier to
Speaker 2: qualify for those carbon credits, and you know, we're reading
Speaker 2: some more incentives to participate actively in the market. The
Speaker 2: details of how this is going to take shape are
Speaker 2: not yet clear. There is a challenge. However, part of
Speaker 2: let's say the downside of making it easier to participate
Speaker 2: in the market is that the quality of those of
Speaker 2: those credits could be called into question, So that's something
Speaker 2: that we're going to be keeping an eye on. The
Speaker 2: target is twenty twenty six for the relaunch of the market,
Speaker 2: but the details are still scarce.
Speaker 1: And just to be clear, we're talking about a cap
Speaker 1: and trade system here, is that right.
Speaker 2: A cap and trade system, But I think the baseline
Speaker 2: setting is where the huge question mark is. It's how
Speaker 2: are they going to define that starting point, especially since
Speaker 2: you know we're covering very different different industries. If we
Speaker 2: look at the carbon market evolution over the last couple
Speaker 2: of years, we've seen a lot of credits starting to
Speaker 2: come from manufacturing and fewer than from kind of land
Speaker 2: use and agriculture. So again, the additionality of these credits
Speaker 2: depends on the baseline setting, and if the baseline setting
Speaker 2: is weak, then the quality of these offsets will be
Speaker 2: called into question.
Speaker 1: Right. My question though, is if it's a cap and
Speaker 1: trade system. I realized that offsets can be involved in
Speaker 1: a cap and trade system, but presumably a lot of
Speaker 1: those reductions would be just through the capped industries consuming less,
Speaker 1: you know, basically emitting less, which is a reasonably robust
Speaker 1: form of carbon reduction. It's kind of exciting if Mexico
Speaker 1: has a carbon market and if it sticks, just because
Speaker 1: you know, thinking about this in the North American context,
Speaker 1: we have a carbon market in California. It's linked to
Speaker 1: the carbon market in Quebec. It's just been linked to
Speaker 1: the carbon market in Washington State. So it's sort of
Speaker 1: like there you see the seeds of a North American
Speaker 1: carbon market growing. And then if Mexico enters the picture
Speaker 1: and the carbon market proves to be robust and stable,
Speaker 1: you could see speculatively, I don't know, you're the expert
Speaker 1: on Mexico. Maybe this is ridiculous. Maybe that gets linked
Speaker 1: as well, and suddenly then the whole thing has a momentum.
Speaker 1: In Mexico would obviously be significantly the largest player in
Speaker 1: that scale. Could you ever see that happening, because that
Speaker 1: would be hugely influential, not just on Mexico but on
Speaker 1: the region as a whole.
Speaker 2: Well, yes, certainly, it would certainly be influential. I think
Speaker 2: it's probably more for the medium or long term. I
Speaker 2: think considering the fact that Mexico.
Speaker 1: That's you, that's your polite way of saying, that's not
Speaker 1: going to have that's a very ridiculous notion.
Speaker 2: The likelihood is low for the time being. If it
Speaker 2: does stake, if there is you know, a political will
Speaker 2: behind it. Let's give like some examples of companies that
Speaker 2: are already you know, leading, and this is very surprising I
Speaker 2: think to a lot of people that Mexican companies lead
Speaker 2: in decurbanization in cement and steel. For example, semex is
Speaker 2: one of the world leaders that has some of the
Speaker 2: most ambitious targets for emissions reductions. Right. You know, Mexico
Speaker 2: has about ninety seven percent of its steel capacity coming
Speaker 2: from electric arc furnaces, so it's not burning coal to
Speaker 2: make steel. You know, these are are things are quite
Speaker 2: impressive for a Latin American market, but even you know,
Speaker 2: by global standards here.
Speaker 1: So Mexico has everything to gain from trying to bring
Speaker 1: about a global decarbonization of industry because that's a game
Speaker 1: in which it is already one nil. Up.
Speaker 2: Yeah, i'd say, but yeah, for the time being, though, again,
Speaker 2: you need the political will, you need the buying from
Speaker 2: you know, from companies from the private sector. You need continuity, right,
Speaker 2: I think that's that's something that's that's going to be necessary.
Speaker 2: If it took ten years for the previous iteration to stick,
Speaker 2: and it didn't, and now you're having this revamp. If
Speaker 2: this time, you know, with a climate scientist at the
Speaker 2: HELM there in Mexico, it actually does take hold, and
Speaker 2: whoever the next president is keeps working at it, then
Speaker 2: who knows. Maybe it is possible to integrate with other markets.
Speaker 2: But one step at a time, time.
Speaker 1: One step at a time, and you know, it's it's
Speaker 1: good to dream, but like maybe bring it back closer
Speaker 1: to the immediate reality. This has been fascinating because, you know,
Speaker 1: just going back to the very start of this conversation,
Speaker 1: Mexico because it has scale, because its supply chains are
Speaker 1: so integrated into North America. So we talk about how
Speaker 1: much the US can influence Mexico, but Mexico also has
Speaker 1: influence and maybe hasn't been a major player in the
Speaker 1: sort of the global climate conversation, but very much could
Speaker 1: enter the chat in a very significant way because of
Speaker 1: that scale. And so it's kind of exciting learning about
Speaker 1: everything we've been talking about today. It's a very multifaceted question.
Speaker 1: This is sort of this moment that we're at in Mexico,
Speaker 1: and like you say, there was a way of doing
Speaker 1: things in the last ten years. Now there's a bit
Speaker 1: of a reset. Let's see what the next ten years brings.
Speaker 1: But Stefan like, thank you. This has been really fascinating
Speaker 1: conversation for me.
Speaker 2: It's been I've been very happy to talk to you, Tom.
Speaker 2: Anything you need about Latin America. We've got a whole
Speaker 2: team for it. So here we are. Don't hesitate to
Speaker 2: reach out, and thanks for your time.
Speaker 1: Today's episode of Switched On was produced by Cam Gray
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