NS4960 Spring Term 2017 Mexico: Electricity Prices Oxford Analytica, Mexico: Electricity Rate Increases May Harm Industry, March 1, 2017

Overview On March 1, 2017 Mexico’s state-owned power company, the Federal Electricity Commission (CFE) announced that Industrial and commercial power rates would increase by up to 17.2% and 12.1% respectively over February levels For a minority of high consumption residential users, electricity rates also went up by up to 8% Low consumption residential users – which apply to 99% of domestic users, rates remained unchanged for a 27th consecutive month The CFE which has a legal monopoly over electricity sales indicated that industrial and commercial increases occurred because price of natural gas used in power generation increased by 92% over rates in 2016

Electricity Pricces I Natural gas however remains 45% cheaper that other fuels such as oil or coal As use of oil for electricity has declined over last 15 years natural gas has become the main fuel used for power generation. Use grew by 82.6% between 2005 and 2015 In 2015 natural gas accounted for almost 60% of total electricity generated

Electricity Prices II The the government claims the prior reduction of domestic energy prices resulted from changes in the power sector brought about by reforms of December 2013 In practice it has been a consequence of cheap gas imported from North America Fuel prices determine about 80% of the cost of Mexico’s electricity Between 2006 and 2014 domestic electricity rates had been growing at an average of 4% per annum During 2015 and 2016 they fell by 9.8% in real terms due to the increased use of natural gas

Electricity Prices III Nevertheless its cost remains high, especially for industry which consumes 60% of Mexico’s electricity. Mexico exports around 2.2% of global trade in goods However, it accounts for only 1.4% of energy intensive goods because electricity rates undermine the competitiveness of its industries Between 2010 and 2015 subsidies to end-users amounted to $37.6 billion dollars In 2015 alone subsidies for domestic and agricultural users amounted to 17% of the cost of electricity

Subsidies I Subsidies remain One of the key goals of the Electric Industry Law of August 2014 which emerged from energy reform was to reduce costs of electricity In 2013 CFE’s average rates were 25% higher than the U.S. Without subsidies they would have been 73% higher.

Subsidies II The reform introduced several elements to facilitate the gradual reduction of subsidies over time Goal to replace them with targeted social policy measures for those households that would find it difficult to pay market rates A requirement for an annual budget allocation for electricity subsidies allowing greater transparency and oversight and The introduction of wholesale and retail market competition in the electricity sector seeking to reduce generation costs and end-user prices which would allow for gradual phasing out of subsidies Further reduction of technical and nontechnical losses (which in 2015 accounted for 6% and 8% of total generation respectively)

Issues I Pending Issues Consensus is that the energy reform of 2013 has made progress towards its objectives in power sector However several major issues remain Unbundling of the CFE is huge task that requires monitoring to maintain a level playing field IEA maintains the remaining challenges lie in the decisiveness and speed in implementing the reform.

Issues II Key issues Reducing electricity prices vital to encourage domestic and industrial growth At same time phasing out subsidies is necessary given that they are a regressive measure that most benefits those that least need them Having a viable commercial rates is also essential to incentive investment in the power sector Achieving all these goals is a difficult balancing act.

Issues III Restructuring of electricity rates will have to wait until after the 2018 election Should Pena Nieto be succeeded by leftist Andres Manuel Lopez Obrador the subsidized structure of power rates will remain unchanged Under a member of the PRI or conservative PAN the issue would likely be addressed if the victorious candidate has enough political capital to take on a difficult battle

Assessment I Reform effects on power rates will only materialize when CFE losses are reduced Infrastructure grows and Natural gas generation increases Power subsidies remain unsustainable long-term and will continue to act against the efficiency gains sought by the reform Electricity rates will define whether private players can compete with the CFE and will be key to defining the success of liberalization The government’s promise that electricity prices would remain stable after the energy reform could compound frustrations as prices rise.

Assessment II Unlike case of gasoline prices in January 2017 increases in power rates will not have a significant political impct because they will not affect the general population directly However they will contribute to inflation which is main area of concern They will also compound the lack of competitiveness of Mexican industry in both domestic and international markets Electricity rates could record much more significant increases in the months to come depending on demand for US gas and the strength of the peso against the dollar, further undermining the country’s productive sectors.