Active competition policy key to Mexico’s successful energy reform

28 February 2017

Mexico City Getty(Zocalo Square, Mexico City. Photograph: Getty Images)

Mexico embarked on an ambitious and comprehensive energy sector reform in recent years to harness market forces and attract new investments, moving away from its monopoly-driven system, and leading to increasing market transparency, improved energy security and strengthened environmental sustainability.

The energy reform process initiated in 2013 ended the country’s decades-long monopolies in the oil and power sectors and attracted new actors to the country’s energy sector. Today, active competition policy remains the crucial ingredient to ensure that the country will reap the long-term benefits of the reform, according to the country’s first in-depth energy policy review by the International Energy Agency.

The new IEA report documents the steady and impressive pace at which reforms have been implemented by the Mexican government. In the report ”Energy Policies beyond IEA countries: Mexico 2017”, the IEA welcomes these efforts and applauds the government of Mexico for the progress made to date.

“In terms of scope, depth and pace of implementation, Mexico’s energy reform ranks as the most ambitious energy system transformation worldwide in a long time,” said Paul Simons, the IEA Deputy Executive Director.

Turning around a market based on monopoly structures into a competitive one requires constant attention by government and regulatory agencies to prevent incumbents from using their market power to increase their own profit, thereby reducing the efficiency of the new system.

In the oil and gas sector, this is being implemented with asymmetric regulation (third party access) along with a gas release programme modelled on sector reforms in other markets. The attractiveness of the new framework has been validated by the interest shown by international investors in the first oil and gas bid round, as well as a successful first farm-out agreement by Petróleos Mexicanos, or PEMEX, the former oil and gas monopoly.

In the power sector, the IEA commends the government for its careful approach to reform, which successfully incorporates lessons and best practices from around the world. The remaining challenges now lie in the decisiveness of reform implementation, including the effective unbundling of Comisión Federal de Electricidad, the former power monopoly.

The IEA report also identifies energy security as one of the key issues to still needs be addressed. As new market entrants and regulators play an increasing role, a revised division of responsibilities between the government and industry players needs to be defined. New regulations are currently being prepared to meet this challenge.

Finally, in view of Mexico’s climate ambitions as well as the forecast growth of the Mexican economy and population in coming decades, the IEA report encourages the government to incorporate energy and climate considerations into long-term urban development and transport plans.

In a separate scenario analysis to 2040 published last year (Mexico Energy Outlook), the IEA concluded that Mexico’s energy reform would boost oil production, increase the share of renewable energy sources in the power sector, increase energy efficiency and slow the growth in carbon dioxide emissions. In the absence of these energy reforms, oil production would fall further, electricity costs would be higher, and household spending would be hit. Indeed, failure to reform would reduce Mexico’s gross domestic product by 4% in 2040, resulting in a cumulative loss of one trillion US dollars in total economic output.