Jesús Garza: Energy self-sufficiency and the blackout

Jesus GarzaJesús Garza Source: Courtesy

This week a large part of the country, especially the north, suffered significant disruptions in the generation and distribution of electric power. The president’s response was blunt in one of the mornings, arguing that what happened is the result of the lack of self-sufficiency in power generation. It also argued that there was no current plan to extract gas in Mexico. He ended up justifying the construction of the new refinery as a result of these problems.

The previous administration had a five-year plan (2015 to 2019) for tenders for around 128 hydrocarbon exploration and extraction blocks that included areas rich in natural gas (in the states of Coahuila, Nuevo León and Tamaulipas). The current government suspended these tenders and canceled public-private partnerships with Pemex.

In addition, in the zero round of the previous energy reform, several blocks were assigned to Pemex with high certainty of exploitation, many of which were gas, which were also canceled by the current government. For the energy security gas storage is required.

In Mexico, gas storage is two days compared to 25 in China, 65 in the United States, 100 in Germany and 151 in the Netherlands. In other words, the key to energy security is the storage and not necessarily production.

The federal government did have an action plan, but decided to eliminate it. On the other hand, while much of the recent problem stems from Texas’ natural gas supply, there are many alternatives to supplant these energy supplies. For example, investment in renewable energy.

Unfortunately, these energies do not fall within the government’s investment priorities. In addition, the recent energy reform counter limits private sector investment in all energy sectors to give the state more market power. All national and international business associations have shown their concern in this regard.

The concentration of power generation is not only detrimental to production but also to prices to the final consumer. Without competition there will be higher production costs which will drive up energy prices. All of the above is very harmful to the national industry because of the loss of competitiveness by higher production costs and by the disruption in the production of goods and services. In addition, it reduces the disposable income of families that allocate more resources to pay higher electricity rates.

Thus, the lack of competition in the energy sector is claiming its first victims. Let us expect downward revisions in the country’s potential growth rate due to lower investment inflows into the energy sector coupled with a loss of competitiveness in the industry due to higher energy costs. Oh, and let’s get used to blackouts.

The author is CEO of GAMMA Financial Solutions and professor of Economics and Finance at EGADE Business School. He has a Ph.D. in Finance and an MA in Financial Economics, both from the University of Essex in the UK. He was the chief economist for Mexico at Itau BBA, deputy general director of International Financial Organizations at SHCP and researcher at Banco de México. He is the author of the book: Competition and Efficiency in the Mexican Banking industry.

This is an opinion column. The expressions used here are the sole responsibility of the person signing them and do not necessarily reflect the editorial position of El Financiero.