Nearshoring an opportunity for Mexico, but energy to power it could be a challenge

Mexico faces a great opportunity with nearshoring of foreign businesses, from companies that already have operations in Mexico looking to expand to others considering setting up shop in the country because of its low costs and easy access to the world's largest market.

But market participants and observers say that the window of opportunity will not be open for long and that the Mexico must solve some challenges, including its limited availability of natural gas and renewable energy in vast areas of the country.

Mexico depends on natural gas, mostly imported from the US, to produce energy and to fuel its industry. In June, imports from the US reached an all-time high of over 7 Bcf/d on nine days. Mexico also uses natural gas for its upstream and midstream sectors, utilizing it at oil wells to add pressure and at its refineries to produce fuel, although it mostly uses local production for this.

Natural gas demand in 2022 exceeded pre-pandemic levels and reached 8.4 Bcf/d on the back of strong demand from gas-fired power plants and industrial production. According to S&P Global Commodity Insights data, total demand for natural gas is expected to reach nearly 9Bcf/d in 2023, with the power sector expected to account for 58% of that.

Transmission infrastructure

Yet, availability of natural gas is limited to the industrial corridors created after the signing of the first North American trade agreement in the mid-1990s, independent consultant Rosanety Barrios told S&P Global. Nearshoring investors are likely to go to those areas, where services and infrastructure are already developed.

However, those corridors are saturated, and more infrastructure, particularly for transmission, is needed, said Barrios, who helped in the design of the current legal framework as a high-level official at the Energy Secretariat, or SENER, during the previous administration.

"Mexico is already in a sensitive position in terms of its power balance," Abraham Zamora, president of the Mexican Energy Association, or AME, said Aug. 16 during a virtual webinar organized by Coparmex, the country's employers association.

Mexico's installed capacity is roughly 90 GW, of which only about 60 GW is dispatchable, and this summer's peak demand has already reached 57 GW, Zamora noted, putting the system under alert.

"This showed just how fragile the system is," Zamora said, adding that nearshoring will put an even greater stress on the system.

Calls for better planning

Market participants and observers see Mexico's situation as the product of poor planning.

SENER publishes a long-term energy sector outlook yearly. In its latest edition, published in May, it considers an average yearly growth rate of power demand of only 2.5% for the next 15 years, which does not consider the potential increases as a result of nearshoring, observers said.

"If nearshoring is not even considered in the official planning document, how can the country take advantage of the opportunity?" Barrios said.

The private sector should be allowed to participate more in planning in the sector and help the government identify where investments are most needed, observers say.

"As nearshoring materializes and demand grows, the market will need to think in new forms of generating power, or at least make use of all those provided in the law," Zamora said during the Coparmex webinar.

Power supply options

Fortunately, the legal framework in Mexico allows for many ways to solve power supply issues, such as distributed generation and isolated supply, Carla Medina, president of the National Solar Energy Association, or ASOLMEX, said during the webinar.

"The country should be open to different mechanisms to generate energy for the industry given the challenge that is ahead," Medina said.

Mexico, according to its own goals, will need to build roughly 30 GW of renewable energy in the next decade.

"The only way we can be successful in this endeavor is to use every tool available," she said.

Rodrigo Rosas Isunza, a Wood MacKenzie gas analyst, told S&P Global Aug. 16 that he is skeptical nearshoring will have a huge impact. Although he does think investments will come, he does not project the growth as significant enough to boost gas demand.

In his scenario through 2030, which he considers conservative, gas demand increases by only 500 MMcf/d, considering growth in the power and industrial sectors.

"The opportunity is there," he said. "I just don´t know that we have done enough."