Latin American PolicyVolume 1, Number 1Pages 98113

Energy Transition: A Path Toward

Sustainable Development for Mexico

Lourdes Melgar
This essay looks at the current situation of the Mexican energy sector as the nations oil
production is declining and the government attempts to abate greenhouse gas emissions.
It argues that the energy reform approved in 2008 was limited in scope to addressing the
challenges ahead. It states that the incentives to undertake a profound transformation of
the energy sector encompass economic, energy security, and climate change considerations. It advances that Mexico should embrace an energy transition to a low-carbon
economy as a path toward sustainable development. The transition to a lower-carbon
energy sector requires innovative public policies and the political will to create a new
institutional framework. The nal section analyzes the potential to and the barriers to
prompting this transition.
Este ensayo considera la situacin actual del sector energtico mexicano en un contexto de
creciente cada de la produccin petrolera y de la necesidad de llevar a cabo polticas
tendientes a mitigar las emisiones de gases de efecto invernadero. Se argumenta que la
Reforma Energtica de 2008 presenta serias limitaciones para responder a los retos nancieros, de seguridad energtica y de cambio climtico del pas. Por ello, se propone que
Mxico emprenda una profunda transformacin de su sector energtico a travs de la
transicin energtica hacia una economa baja en carbono. Esta transicin ofrece a Mxico
un camino hacia el desarrollo sustentable, pero requiere de polticas pblicas innovadoras
y de la voluntad poltica para crear un nuevo marco institucional. En la ltima seccin se
analizan el potencial y las barreras para avanzar hacia la transicin energtica.
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98..113

Key words: energy policy, climate change, energy reform in Mexico, low-carbon economy

ver the past decade, an international consensus has been emerging regarding the need to address simultaneously energy security and climate change
concerns. As scientic evidence has grown on the origins and potential destructive effect of anthropogenic greenhouse gas (GHG) emissions, policy makers
have been designing policies aimed at advancing toward a low-carbon economy.
Given its contribution to the problem, the energy sector is key to the solution.
Achieving the double objective of ensuring energy security and mitigating greenhouse gas emissions is no easy task. Energy policy requires long-term planning
and entails decisions that have an effect over the decades to come, whereas

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99

mitigation strategies carry a sense of urgency and a degree of uncertainty that

clash with the short-term goal of ensuring the availability of energy resources at
the most competitive price. As rarely before, in 2009, climate change issues,
energy security matters, and economic concerns have converged, pushing
forward the need to solve the 3Es equation (environment, economy, and
energy) through a paradigm shift in the way energy is produced and used. This
is the underlying force behind the concept of energy transition.
The preparations of the United Nations Climate Change Conference in Copenhagen of December 2009 continuously brought to the table the need to limit the
use of hydrocarbons and develop cleaner energies. This objective was, at rst, a
requirement for oil-dependent countries wanting to reduce their reliance on
imported hydrocarbon, independent of climate considerations. Thus, some countries initiated the path away from fossil fuels as early as the 1970s. As the international pressure to undertake mitigation commitments has grown, so have the
challenges for countries with signicant consumption of coal, oil, and natural gas
to diversify their demand. Moreover, despite the growing international experience, the conversion to a low-carbon energy sector remains an expensive proposition. The arrangements to nance this transition are at the heart of the current
international negotiations and will signicantly affect the outcome.
Few countries bring to the forefront the dilemmas and challenges of meeting
the triple objective of ensuring energy security, reducing greenhouse gas emissions, and simultaneously promoting sustained economic development that
Mexico does at this point in time. This oil-producing and -exporting country has
entered the natural phase of maturity because its major oil eld, Cantarell, is
rapidly declining, and the alternatives have proven to be less enticing than
expected. For the rst time in almost three decades, Mexico is showing a hydrocarbon exchange balance of less than one million barrels a day. The effect on
government nances, as well as on energy security, will be signicant. At the
same time, Mexicos GHG emissions have been growing, making it one of the top
10 emitters in absolute terms (WRI, CAIT, 2009).1 In 1992, Mexico was clearly a
developing country; today, it is considered an emerging economy that is being
called on to undertake serious mitigation action.
The case of Mexico allows us to fully explore the dilemmas faced by an
emerging economy as it seeks to move to a low-carbon economy in an attempt to
reach its development goals while meeting its international responsibilities. This
essay looks at the current situation of the Mexican energy sector. It argues that the
energy reform approved in 2008 was limited in scope to address the challenges
ahead. It proposes that the incentives to undertake a profound transformation of
the energy sector encompass nancial, energy security, and climate change considerations. It advances that Mexico should embrace an energy transition to a
low-carbon economy as a path toward sustainable development. The nal section
analyzes the potential to and barriers against prompting a transition to a lowcarbon economy.

Mexicos Energy Reform of 2008: An Appraisal

By 2008, the Caldern Administration became deeply aware of the impending
crisis of the Mexican oil industry. The output of Mexicos giant oil eld, Cantarell,

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which in 2004 represented more than 60% of total production, was rapidly collapsing, restitution of reserves was at historically low levels, and major bottlenecks were apparent in the upstream and downstream side of Petrleos
Mexicanos (PEMEX), the national oil company. Given that oil revenues accounted
for more than 35% of government total revenues,2 the accelerated decline in crude
production foretold of a potential nancial crisis for the Caldern Administration. It is in this contextwell before the international nancial crisis struck the
worldthat President Caldern presented, in March 2008, a diagnosis of the state
of the oil sector and, on April 8, 2008, introduced before Congress an energy
reform bill.
Considering Mexicos political context, the presidents move was bold and
courageous. Since 1938, oil has been equated with national sovereignty, and the
states absolute control over oil resources, exploration, production, and processing is a fundamental emblem of the countrys identity.
Given the sensitive nature of the topic, the initiative of the Caldern administration was based on four premises: no constitutional change, no risk contracts,
no privatization of PEMEX, and no challenge to the PEMEX union. This initiative
was the result of an internal negotiation within the federal government and
aimed to address the decline in production and in the restitution of reserves, the
increasing importation of rened products (40% of Mexicos gasoline is
imported), the bottlenecks in product transportation, and serious managerial
shortcomings within PEMEX, yet the underlying objective of the presidential
proposal was to maximize oil revenues to avert the collapse of government
nances.
The initiative took into account what was politically feasible and not what was
actually necessary to tackle the crisis looming in PEMEX. It was called energy
reform, but centered on the oil sector. In this regard, it was limited in scope and
had a shortsighted view of the challenges and potential of the Mexican energy
sector, yet it had an unexpected advantage; for the rst time, Congress, the
private sector, and civil society undertook an in-depth discussion of the present
and future of the energy sector. Given the political distress the presidential bill
generated, the Senate Energy Commission convened a public forum on the
matter. From May 13 to July 22, 2008, hearings were held, gathering more than
160 experts who covered pertinent aspects of the issue. As a result, the scope of
analysis and the range of solutions were wide. After the hearings, both opposition parties in the Senate, the Partido Revolucionario Institucional and the Partido de
la Revolucin Democrtica, issued their own initiatives, taking as a point of departure the presidential one.
On November 28, 2008, Mexicos energy reform was issued, containing seven
new laws: ve directly related to PEMEX and two aimed at addressing issues of
energy transition to a low-carbon economy. The result was greeted with initial
euphoria. The executive and the legislative branches both viewed it as a signicant political success. A consensus had been reached on measures to move
Mexicos energy sector forward. The reform provided PEMEX with a new corporate governance, granting it greater budgetary and administrative autonomy. It
broadened the PEMEX board to include four professional members, created the
National Commission on Hydrocarbons, strengthened the Energy Regulatory
Commission, revamped the National Commission for Energy Savings into the

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National Commission for the Efcient Use of Energy, and set the bases for the
new by-laws and regulations for contracting for PEMEX, as well as for promoting
renewable energies and energy efciency.
A year later, however, it became evident that the agreed-upon reform had
signicant shortcomings; some of them derived from its content, others from its
implementation. The designation of the newly created high-level positions has
been the result of negotiations, with political considerations overriding technical
requirements. By-laws and regulations are often vague, without clear goals or
adequate mechanisms to reach the stated objectives. In the case of the oil industry,
the approved by-laws are already under legal dispute, with questions of unconstitutionality having been raised, including by advocates of opening the oil sector
to private investors (Grunstein, 2009). The unequivocal proof of the limits of the
energy reform of 2008 is that, in his State of the Union Address of September 2009,
President Caldern called for a second energy reform, but this time the needed
one, not the possible one.
Advocates of the approved reform often state, not without some merit, that it
is too early to evaluate its impact. During this rst year, the architecture of the
new design has been slowly put into place, yet given the magnitude of the
problem faced by the Mexican energy sector, it is becoming increasingly evident
that the tools provided barely address the short- and medium-term challenges of
the oil industry. It is impossible for a new legal structure to rapidly reverse years
of abandonment of the oil industry. Today, PEMEX is struggling as a result of
years of nancial exploitation, appalling underinvestment, poor decision making,
and a governmental policy of short-term benets to the detriment of the health
and viability of the oil company, which has been run not as an enterprise but as
an innite source of revenue for the government.
Output at Cantarell, the giant oil eld that gave power and prestige to the
Mexican oil industry, has fallen from 2.2 million barrels a day at its peak in
December 2003 to 659 thousand barrels a day in July 2009. According to PEMEX,
crude production fell from 3.383 million barrels a day in 2004 to 2.621 in 2009. Part
of the lost production from Cantarell was made up with production from
Ku-Maloob-Zaap, Ixtal-Manik, and Crudo Ligero Marino, which produce lighter
crude, improving the quality of the Mexican mix, but Chicontepec, the chosen
alternative to balance production, has failed to yield the expected outcome (Suro
Perez, 2009).
As a result of the signicant decline in oil production, exports fell from 1.793
million barrels a day in 2006 to 1.1 million barrels a day in August 2009. In
addition, the imports of rened products have escalated. For the rst time since
1981, Mexico has registered a hydrocarbon balance less than 1 million barrels a
day (Lajous, 2009). Some analysts contend that within the next decade, Mexico
could cease to be an exporting country, and increasingly, some argue that energy
policy should consider the possibility of setting limits on oil exports to pace the
rate of production and consumption of Mexicos limited oil resources.
There are fundamental questions that ought to be addressed with regard to the
future evolution of the Mexican oil sector, but in the short run, the main concern
of the government is the effect that the collapse of net exports is having on its
revenues. Between 2008 and 2009, oil revenues fell from 36 to 28% of government
revenues, partly because of the decline in oil prices, but also from the loss of net

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hydrocarbon exports. Mexico has been unable to seriously address its scal
dependency on oil revenues. The country is in urgent need of true scal reform,
which would expand the taxable base and provide alternative sources of income.
Without innovative scal reform, Mexico will be unable to promote sustained
economic development in the years to come.
Even in the best-case scenario, in which Mexico was able to reverse the declining trends in its oil production and reserves, even if a scheme were agreed upon
to rationally exploit existing reserves in the deep waters of the Gulf of Mexico, it
would take close to a decade to start new production. Hence, a second energy
reform solely centered on the petroleum industry would not sufce to address
the nancial and energy security challenges the nation is facing. Additionally,
Mexico is increasingly committing to undertaking its international responsibilities with regard to climate change. Mexicos intention to abate emissions has
profound implications for the energy sector, given the high concentration of
fossil fuels in the national energy balance. Hence, an energy reform that focuses
mostly on increasing hydrocarbon production would fail to provide adequate
answers to the challenges ahead.
Thus far, the greatest shortcoming of Mexican energy reform is that it does not
consider energy policy globally and does not take into account crosscutting
issues such as climate change. In addition to being one of the top GHG emitters
in absolute terms, Mexico is a country with high vulnerability to climate change.
Hence, it has an ethical responsibility to promote the adoption of a comprehensive, legally binding accord and to move toward a low-carbon economy. Thus far,
the international commitments Mexico has undertaken with regard to climate
change are not being translated into public policies that abate emissions at the
rate the country is claiming they would. Some of the policy documents the
government has recently issued have important limitations, particularly with
regard to actions for the energy sector. The stakes are high, and the challenge
ahead is enormous, yet the transformation of the energy sector could be the
answer to directing the country back onto the path of sustainable development, as
it addresses its 3E equation: economic growth, energy security, and environmental concerns.

Energy Transition as a Mitigation Strategy

Energy transition to a low-carbon economy is a response to simultaneously
addressing energy security and climate-change concerns. Until recently, both
policy objectives, aimed at ensuring the availability of energy resources at competitive prices and mitigating greenhouse-gas emissions, had been disconnected.
In the 1990s, the International Energy Agency (IEA) adopted a multidimensional
approach to energy security that for the rst time included an environmental
variable, but it was not until this century that a conceptual shift took place in
terms of energy policy design.
Indeed, 2005 marks a turning point with regard to climate change consciousness and the need to take action, particularly in the energy sector. The Kyoto
Protocol entered into force, and the Inter-Governmental Panel on Climate Change
(IPCC) presented a report stating that climate change was a greater problem than
had been thought. With their signicant destructive power, hurricanes Katrina

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103

and Rita generated public apprehension concerning climate change. A major

international ministerial meeting gathered in Paris and announced the return of
nuclear power as an option to advance energy security and address climate
concerns. Most important, the Group of Eight (G8) invited Brazil, China, India,
Mexico, and South Africa to join them in their deliberations in Gleneagles, establishing the G8 + 5 dialogue on energy and climate change. At that meeting, the G8
mandated that the IEA provide technical support to promote policies that would
foster compliance with the Gleneagles Plan of Action on Climate Change, Clean
Energies and Sustainable Development.
Two years later, in 2007, the IPCC presented an even more alarming report,
concluding that, under a business-as-usual scenario, temperatures could rise up
to 6C by the end of the century. According to the latest data published by the
World Resource Institute, the generation and use of energy accounts for 66% of
the world carbon dioxide equivalent (CO2-e) emissions, the power sector produces 24.9%, and the transportation sector produces 14.3%. Given the major
contribution of the energy sector to the problem, stabilizing emissions at 450
parts per million (ppm) of CO2-e by 2100 would require a signicant change in
the way energy is produced and used. A viable agreement would necessitate the
active participation of emerging economies in the mitigation effort.
The proposal advanced by the IEA, which has been guiding the positions of
most Annex 1 countries, was updated in 2009, before the UN Climate Change
Conference in Copenhagen. It delineates the following scheme for a 450-ppm
scenario with the aim of limiting temperature rise to 2C by the end of this
century (International Energy Agency, 2009b, p. 202):
Organisation for Economic Co-operation and Development (OECD) Plus countries
(including Mexico and Korea, two non-Annex 1 countries members of
OECD) would have to establish a cap-and-trade system for the power and
industrial sectors, adopt international sectorial agreements for industry and
transport, and implement national policies and measures for buildings.
Other major economies would have to adopt international sectorial agreements
for industry and transport and implement national policies and measures for
power generation and buildings.
Other countries would have to undertake only national policies.
In addition, international aviation and shipping would be subject to international sectorial agreements binding for all countries, and as of 2021, other
major economies would have to participate in an international cap-and-trade
mechanism for the power sector and industry.
In other words, countries will have to start down the path toward lower-carbon
energy production, transportation, and use.
Addressing climate requires fundamental changes in the way things are done
that go well beyond the deployment of new technology; it calls for a new range
of policies and regulations, new institutional frameworks, new forms of industrial organization. It entails a profound revolution in the realm of ideas.
Policy makers and private investors will have to make decisions using a riskmanagement approach. As Professor Mort Webster from the Massachusetts

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Institute of Technology has pointed out, no technology is a silver bullet. There are
signicant uncertainties about the potential of future technologies, and local
conditions will have to be assessed to determine the best array of options. The
future energy system will be a mix of several fuels and technologies. The mosteffective strategy for public policy makers and private investors will be to adopt
a sequential approach to determining portfolios and generating options
(Webster, 2009). This energy system will require a new nancial architecture to
support it, which will call for additional investments in the energy sector, on the
order of $10,500 billion, between 2010 and 2030 (International Energy Agency,
2009b, p. 257). It will also require building, at the national and international level,
the institutional infrastructure needed to launch a low-carbon economy.
In terms of energy policy, the move toward a lower-carbon economy entails
fostering energy efciency; promoting fuel diversication; including nuclear
energy and rapidly expanding renewable resources; developing and swiftly
deploying new technologies for the generation of energy and for carbon capturing and storage; implementing a cap-and-trade mechanism to limit emissions
and to generate resources to nance this profound transformation of the energy
sector; and the use of scal instruments, such as a carbon tax, to favor carbon
reduction.
Just as the 19th century saw the reign of coal and the 20th century that of oil, the
21st century is looking to be the century of clean energies. Nonetheless, as the
IEA stresses, fossil fuels will remain the dominant source of primary energy at
least for the rst half of the century, representing up to 80% of the share of world
energy demand between 2007 and 2030. In a business-as-usual scenario, during
the same period, the projected growth of coal demand would be 53%, and that of
natural gas, 42%. The demand for oil would recover starting in 2010, rising 24%
over the next 20 years, reaching 105 million barrels a day in 2030 (International
Energy Agency, 2009b, fact sheet). In a 450 ppm of CO2-e stabilization scenario, in
2030, fossil fuels would constitute 68% of global primary demand. Even with
stringent policies to curb the demand of fossil fuels, under this scenario, by 2030,
the demand for natural gas and oil would be higher than in 2007; only the
demand for coal would decline relative to 2007 levels (International Energy
Agency, 2009b, p. 195).
Given the lifespan of energy infrastructure, the required investments to build
new plants, the cost of fuel switching, and the technology needed to improve
efciency and reduce emissions, the change to a low-carbon energy system
cannot be an immediate one. It is a path that involves a transition period during
which, as Gramsci would say, the old is dying and the new is yet to be born. In
Mexico, this stage is being called energy transition, although some scholars
prefer the phrase energy transformation (Universidad Nacional Autnoma de
Mxico, 2009). International agencies and other governments favor such terms as
green growth, lower-carbon economy, and move towards clean energies.
Recently, the IEA coined the expression low-carbon energy revolution, a
phrase that captures the magnitude of the challenge ahead.
It is an enticing proposition for policy makers worldwide to have the rare
opportunity to design and build a new architecture for the realm of energy, with
its technological, nancial, political, and social structures. From the perspective
of energy analysts, the world is moving in fascinating directions: Current debates

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105

are becoming dated, as emerging alternatives require innovative thinking and

raise new concerns. It is also a time when major interests are at stake, leading to
battles over the outcome. In the power industry, for instance, arguments over
privately owned versus state-run electricity sectors lose relevance in the face of
the arrangements needed for deploying smart grids, which would allow for a
more-efcient entry of power generation into the grid, maximizing the advantages of each source of production, generating savings for producers and consumers, and leading to signicant abatement of emissions. The launching of
smart grids would entail a new form of organization for the electricity sector.
Most OECD countries already have started down the path toward energy
transition. Within the context of climate policy, the European Union (EU) has put
in place an emissions market and adopted stringent policies to promote renewable energies and reduce CO2 emissions. The EU has a 20% target for renewable
energies by 2020. For its part, the Obama Administration has taken seriously the
need to mitigate emissions in the United States, the second-largest emitter in
absolute terms after China. Signicant steps were taken in designing a comprehensive energy transition policy with the Waxman-Markey Act, which passed
Congress in the summer of 2009 and is currently being considered by the U.S.
Senate as the Boxer-Kerry Climate Bill. Despite the tough debate and arduous
negotiations taking place in the Senate, it is foreseeable that the United States will
eventually approve a blueprint to move toward a lower-carbon economy, and that
it will do so with the needed instruments to support it.
As mentioned before, for energy security reasons, some countries moved on
to the path of lower hydrocarbon consumption early on. One such country was
France, which in the 1970s decided to turn to nuclear power generation to reduce
its energy dependence. As a result, the country was able to cut its emissions by a
third long before the question became an issue and ensure its energy security.
Other countries, such as Denmark, Germany, and Spain, decided to promote the
development of renewable energies in the 1990s and used a wide range of scal
and regulatory instruments to spur their deployment. Some of these policies
included scal incentives to the cost of capital, soft credits, feed-in tariffs for
green energies, and green quotas for power generation. In the developing world,
Brazil became a world leader in biofuels after years of governmental support for
research and development of ethanol, in addition to regulations for fuels and
automobiles that made mandatory the use of biofuels. The Brazilian policy was
devised well before it became the oil-producing nation it is today, launching the
country on to the path of lower-carbon energy, given that its power generation is
mostly hydro-based. (Brazils GHG emissions are mostly derived from its agricultural sector, with deforestation a primary concern.)
The alternatives to fossil fuels are not without their own downsides. Cleaner
energies might produce no GHG emissions or smaller quantities of them, but
there are other considerations that ought to be taken into account. For instance,
not all biofuels are equal; some require huge amounts of water in their production processes, and others, such as those made out of corn, generate more emissions than they limit and disrupt the food-supply chain, raising serious concerns
over food security. Nuclear power has the advantage of delivering base-load
generation with zero emissions, but concerns about radioactive waste disposal,
public acceptance, and risks of proliferation have yet to be solved. Wind and solar

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energies are intermittent; sites with optimum conditions are not necessarily close
to the grid, and they face opposition to their deployment in some communities.
In designing policies for a lower-carbon energy sector, policy makers have to
take into account the crosscutting nature of climate change, internalize the externalities, price carbon so as to compare alternatives on an equal basis, and include
a diverse energy matrix.
Thus far, in energy policy, the leading comparative element has been cost,
giving an advantage to the cheapest options. For instance, in the power sector,
coal-red generation plants tend to be favored because the cost of a kilowatt-hour
produced is cheaper than that generated in a wind-power plant or a nuclear
reactor. The initial cost of capital in a coal-red plant is more than double that of
a gas combined-cycle plant, but the cost of fuel is one-fourth. A nuclear power
plant requires an initial investment almost 50% higher than that of a coal-red
power plant, yet the cost of fuel is almost half that of coal, and the heating factor
is higher. If GHG emissions were taken into account in the comparison and the
cost of CO2 was factored in, the results for the most-competitive options would be
different. Decision makers need to consider the new variables urgently because
they are choosing alternatives that will lock in certain technologies with their
resulting emissions for decades to come.
Over the past few years, most progress in terms of energy transition has been
obtained in the power sector. Improvements have been attained in energy efciency for buildings and appliances, and steps have been taken to move forward
in the transportation sector, even if the results are still modest at the commercial
level. Energy transition requires a profound transformation of society, a fundamental change in consumption habits, and an awareness of the need to protect
our environment. Some fear that the move to a lower-carbon economy will bring
about a decline in standards of living, although it could be argued that we are
being offered the opportunity to improve our quality of life, because we would
adopt new patters of production, consumption, and behavior that could become
the motor for sounder, more-sustainable development.

Energy Transition: A Path toward Sustainable

Development for Mexico
Internationally, the initial steps toward transition to a lower-carbon economy
have been the result of a search for energy security, a desire to reduce ones
carbon blueprint, or both. In some countries, the need to comply with mitigation
commitments agreed to under the Kyoto Protocol spurred the promotion of
renewable energies or the implementation of a carbon tax. In the case of Mexico,
initial measures were adopted in an attempt to follow international best practices
in terms of fuel diversication and energy efciency, although over the past ve
years, the push to promote cleaner energy production and use in Mexico has
come primarily from international and environmental sources. Given the declining oil production, energy security objectives are bound to reinforce the urgency
to redene the energy landscape of the country.
Since 1992, when the U.N. Framework Convention on Climate Change
(UNFCCC) was adopted, signicant changes have taken place in the international
world order. At the time, countries were divided into two broad categories: the

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107

industrialized nations and transition economies versus the developing world.

UNFCCC introduced the idea of shared but differentiated responsibilities,
which became central to assigning binding commitments under the Kyoto
Protocol.
In 1992, Mexico was a developing country and a member of the Group of 77
(G77). By 1997, the year the Kyoto Protocol was adopted, Mexico was already a
North American Free Trade Agreement (NAFTA) partner and a member of the
OECD that had voluntarily resigned its membership to the G77. Nonetheless,
Mexico remained within the non-Annex 1 countries category.
The rst voices demanding quantitative commitments from Mexico to abate
emissions rose in the United States, as its Senate was considering the ratication
of the Kyoto Protocol. Mexico was grouped with China and India. The Senate
would not approve the protocol unless these three countries undertook veriable
quantitative mitigation action. Diplomatic steps were adopted to take this
NAFTA partner off the list of three countries. Ads naming Mexico as part of the
three countries that, according to the U.S. Senate, had to adopt GHG emissions
reduction targets before the United States could ratify the Protocol were swiftly
changed so as to mention only the Asian nations, but the message that the country
needed to reduce had already been sent.
By 2005, Mexico, as well as Brazil, China, India, and South Africa, were
invited to participate in a dialogue with the G8 in search for a consensus for
action, which would include emerging economies in an international effort to
avert the foreseen effect of climate change. Since then, the Gleneagles Summit
of 2005, the G8 + 5, as this group came to be known, has met yearly and agreed
on voluntary steps, particularly for the energy sector through the promotion of
clean energies. These agreements have been taking place outside the UNFCCC
negotiations and thus do not carry the legally binding nature of the accords
under the Kyoto Protocol.3
As the Copenhagen meeting approached, the expectations on emerging economies mounted. Mexico has been pressed to abide by its OECD and NAFTA status
and adopt quantiable mitigation actions. Even though the country accounts for
less than 2% of world emissions, it is already the 10th nation in terms of total
emissions. In a business-as-usual scenario, Mexico would move up to the seventh
position by the end of the next decade. Contrary to what has happened with
other emerging economies, since the Gleneagles Summit of 2005, Mexican diplomatic rhetoric has been on target: The President of Mexico has put climate
change at the top of his foreign affairs priorities.
In 2008, at the UN Climate Change Conference in Poznan, Mexico announced
that it would undertake a voluntary commitment to reduce emissions by 50%
below 2000 levels by 2050. This nonbinding goal is contingent on two
conditionsthat there be a multilateral agreement to limit the rise of temperatures to 2C and to stabilize emissions at 450 ppm of CO2-e, and that nancial
and technological support be available internationallyaccording to the
UNFCCC principle of common but differentiated responsibilities (IEA,
2009a, p. 139). This announcement was ratied at the UN Climate Change Conference in Copenhagen.
In July 2009, at the Meeting of Major Economies on Climate Change and
Energy, President Caldern signed the Final Declaration of the Heads of State and

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Government (Declaration of the Leaders, 2009), which stated that (emphasis

added by author):
[Major economies] will undertake transparent nationally appropriate mitigation
actions, subject to applicable measurement, reporting, and verication, and prepare
low-carbon growth plans . . .
Developing countries among [them] will promptly undertake actions whose projected effects on emissions represent a meaningful deviation from business as usual in
the midterm, in the context of sustainable development, supported by nancing,
technology, and capacity-building.

In addition, at the Summit of NAFTA leaders held in Guadalajara, Mexico, in July

2009, Mexico signed a declaration that stated that:
[The three countries] share a vision of a low carbon North America . . .
[and] will work in conjunction to establish and implement [their] own ambitious medium and long-term goals to reduce national and North American
emissions.

President Caldern has been an advocate of climate action in international

forums, even promoting the creation of a Green Fund to support countries
nancially in their transition to low-carbon economies. His leadership on climate
change was recognized in Copenhagen with the Global Legislators Organization
Award. Now the challenge for his administration is to put Mexicos internal
policies in line with its international commitments.
Compelling action needs to follow politically correct rhetoric, not an easy task
given the legal framework of Mexicos energy sector. Addressing climate change
implies the adoption of innovative public policies. The transformation of the
power sector, which is responsible for almost one-third of Mexican emissions,
calls for exibility to expedite the diversication of the energy mix, foster the
deployment of renewable energies and clean technologies, and promote greater
energy efciency.
In 2008 the Caldern Administration presented an energy reform bill (Poder
Ejecutivo Federal, 2008a) to Congress that reected limited awareness of the
challenge ahead. After the Senate hearings, Congress amended the proposal to
include the Law on Renewable Energies and the Funding for Energy Transition (Poder
Ejecutivo Federal, 2009a) and the Law on the Sustainable Use of Energy (Poder
Ejecutivo Federal, 2008b). Thus far, the by-laws and regulations derived from this
bill have fallen short of expectations. They are limited in scope and reach and fail
to comply with international best practices on the matter. In this regard, it can be
argued that the rst constraint to energy transition in Mexico lies in the realm of
ideas.4
Policy makers seem to believe that a low-carbon economy can be achieved
through minor changes on the fringes instead of a deep revolution in the way that
Mexicans conceptualize the energy sector. The challenge is enormous; the
country needs to rethink its very essence. For decades, oil has represented
national sovereignty. Mexicans, particularly politicians, have to imagine a nation
without the political and nancial safety net of oil in order to invest their political
capital in the design of a low-carbon economy. An effective energy transition
entails the redenition of rules and players in the power sector, something policy

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109

makers have not been willing to undertake because of the presumed consequences for the oil sector.
In 1994, the Law on Public Service in Electric Energy opened a small window for
private participation in power generation. Fifteen years later, private investors
provide about 7% of the electricity produced in Mexico for self-supply. The
percentage would go up to around 30% if IPP were included. In fact, through the
Comisin Federal de Electricidad (CFE), the state controls decisions on power
generation, transmission, and distribution.
Independent producers face economic and technical barriers to fostering the
development of alternative generation in Mexico, particularly of renewable energies, because the policies of the CFE and the Finance Secretariat are based solely
on cost minimization and do not take into account externalities. Furthermore,
access to the grid can be difcult because of technical and geographical challenges, in addition to CFEs mandate to purchase electricity at the lowest cost.
Finally, electricity fees do not vary with demand. Current regulations do not
allow inuencing demand by varying rates. This will have to be addressed if
Mexico is to develop smart grids, in order to reduce transmission and distribution losses and better dispatch intermittent power produced from renewable
sources. The latter is not only a growing requirement of a diversied generation
basket, but also a commitment undertaken by President Caldern at the NAFTA
Summit in Guadalajara, as the three leaders agreed to collaborate with lowcarbon, climate-friendly technologies, including the construction of an intelligent
North American network for more efcient and reliable electric connections
(North American Leaders Declaration, 2009).
In terms of renewable sources of energy, once again, nature has blessed
Mexico. The country has outstanding potential in geothermal, wind, and solar
generation, and signicant potential in small hydropower. The main barrier to
the full development of clean energies is political. The decision makers at CFE
are not convinced of the need to foster renewables; more importantly, they feel
threatened by them. The Mexican energy sector is lled with vested interests;
CFE is not the exception. The Programa de Obras e Inversiones del Sector Elctrico
(POISE) 20092017, which presents the investment plan for the next six years,
promotes further use of fossil fuels, including fostering coal, and allows for
only a minor push for renewables, to be developed mostly by private investors.
Lip service is paid by establishing pilot projects for solar energy and a small
increase in wind generation, but the majority of the investment goes to keeping
business as usual, that is, promoting natural gas combined-cycle generation and
coal, even if both sources of fuel have to be imported because domestic production is insufcient to meet demand. No legislation needs to be amended or
issued for CFE to increase its geothermal or other renewable portfolio, but
it does need the political will to do so and the full support of the Finance
Secretariat (Melgar Palacios, 2009).
Even if the nancial aspects are taken into account, fuel shift is basically a
political decision to be taken by the Energy Secretariat and CFE and supported by
the Finance Secretariat. Like other Latin American nations, Mexico is making the
mistake of assuming that fuel diversication entails the promotion of coal, which
is still one of the cheapest available fuels. The decision does not weigh the fact
that, in a low-carbon world, coal-red plants could become expensive if a tax on

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carbon is levied or if abatement credits are eventually required. Mitigating emissions with carbon capture and storage is still a couple of decades away, and, if it
actually works, will prove to be an expensive proposition. If Mexico invests in
new coal-red plants, the country will increase its CO2 intensive capacity, with its
irreversible carbon lock-in.
As mentioned earlier, establishing smart grids is not only desirable to
promote a diverse generation basket, but is already an international commitment of the country. Yet this sole initiative challenges to its core the structure
of the system that has sustained the Mexican power sector. Profound political
work is needed not only to convince CFE to give up some of its power and
control, but also to rally the support of the Finance Secretariat, which could see
smart grids, with their variable rates and transparency, as a threat to a source
of revenue from CFE. In this specic area, a fundamental change in the way the
Mexican power sector is conceived is needed. Liberalization does not have to
be the absolute answer, but key changes are needed in terms of rates and rights
of entry into the grid. In addition, signicant investments are required to
update transmission lines to meet the technical challenges of a more-exible
generation mix.
Given state control of PEMEX and CFE, co-generation could be widely promoted, yet even PEMEX nds it uninteresting to co-generate beyond its needs
because of the low rates at which CFE buys its additional production. Industry
faces a similar dilemma. Purchasing rates ought to be revised if co-generation
abatement potential is to be realized.
Even with its renewed interest, nuclear power generation remains highly controversial, yet the record in Mexico has been positive, and the option should not
be discarded out of hand. Legislation does not need to be passed to install two
additional reactors in Laguna Verde, the current site of the Mexican nuclear
power plant, or to develop new sites. The problem, once again, is political. In a
country where the president inaugurates even the tiniest infrastructure project,
the nuclear power plant of Laguna Verde has never been ofcially unveiled. No
politician wants to invest its capital in a debate that will undoubtedly arouse
erce opposition from some sectors of the population. The challenge is not
insurmountable; the required awareness and public opinion campaign has never
been undertaken. Mexico could benet from international best practices on the
matter to reduce opposition to nuclear power generation. As the country loses the
security of supply derived from oil, increasing its nuclear generation will become
important, particularly to ensure base-load generation, because renewable energies (wind and solar) tend to be intermittent.
Mexico has agreed to participate in efforts to promote carbon capture and
storage in North America. Initial efforts can be made in the petroleum industry,
with the injection of methane into oil caverns, but the full potential will not be
realized within the next 1520 years, because some of the technology, particularly
for the power sector, is still in the stage of development and will not be commercially available before 2025. In addition to signicant investments in research and
development, carbon capture and storage poses geological challenges that will
need to be carefully weighed, given that Mexico is in a highly seismic region.
The Finance Secretariat has identied energy efciency as a priority for action
in the current administration. It is seen as the low-hanging fruit that should be

Energy Transition in Mexico

111

the hallmark of the Caldern presidency. Unfortunately, the by-laws issued on

the subject reframe actions already under way or propose questionable methods
for implementation. In addition, the repowering of thermoelectric plants and the
implementation of measures within PEMEX would require investments that are
unlikely to take place at this point, given the nancial crisis. Hence, most efforts
have been directed to demand-side managing measures, such as appliances and
light-bulb substitution.
In terms of policy design, short-term political interests seem to have overtaken
the sound and rigorous technical work needed to set the ground for the future.
A case in point is the rushed publication of the Estrategia Nacional para la Transicin Energtica y el Aprovechamiento de las Energas Renovables (Secretara de
Energa, 2009). The administration wanted to have something to show to comply
with a deadline, whereas ofcials at the Energy Secretariat knew they needed
more time and the support of experts to produce the document. As a result, the
currently available National Strategy is a collection of existing programs and
action, with no additional abatement effect. The Energy Secretariat is working on
a new version, which should see the light in 2010.
In spite of the shortcomings mentioned above, over the past few years, Mexico
has been building the technical and institutional capacities needed to move
toward a low-carbon economy. In this process, it has received the nancial and
technical support of multilateral organizations, such as the Inter-America Development Bank, the World Bank, and the IEA as well as bilateral cooperation from
the United Kingdom. Mexico has a much clearer understanding of its contribution to climate change and of the potential consequences of not reaching an
effective international mitigation accord.
A study along the lines of the Stern Report, The Economics of Climate Change in
Mexico, known as the Galindo Report (Galindo, 2009), has been issued. McKinsey
and Company produced a GHG Abatement Curve for Mexico and the World
Bank a study entitled Mexico: Study on Diminishing Carbon Emissions, known as
MEDEC, which provides a blueprint on how to achieve the goals established in
the Programa Especial de Cambio Climtico (Poder Ejecutivo Federal, 2009b).
Mexico is working on developing the technical capacity to account for and report
GHG emissions and to establish performance standards and emissions baselines
to be ready to participate in a cap-and-trade mechanism. In addition, legislation
with the appropriate title is being issued, even if the content is not quite up to
standards; efforts are already undertaken to amend and improve existing texts.

Conclusions
Energy transition provides a unique opportunity to foster sustainable development in Mexico at a time when the future, under a business-as-usual scenario, looks grim. Through an energy transition to a lower-carbon economy,
Mexico has the opportunity to diversify its sources of energy just as its oil
production is declining, ensuring its future supply of electricity and using its
limited petroleum resources more effectively. In addition, developing new technologies could become an area of industrial development in Mexico, because
wind generators, solar panels, and other equipment could be produced for
internal consumption and exports. Qualied labor already exists in some

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depressed sectors, such as the automobile industry, that could be employed in

the clean energy industry. Research and development in clean technologies
could be fostered, and Mexican scientists could participate in international
research teams to share their know-how, for instance in geothermal heat and
power generation, an area in which Mexico has had worldwide recognized
expertise. In moving to a lower-carbon path, Mexico could benet from existing
and future nancial mechanisms, including international funds, the clean
development mechanism, and cap-and-trade markets.
An effective energy transition could spur Mexicos sustainable development
and provide the country with international prestige and recognition, but to do so,
the Executive branch, Congress, and society have to be willing to pay the initial
cost of moving in that direction. Change will not come about without affecting
vested interests. Change will not come about without the appropriate policies,
which in time, will do away with long-time granted privileges. For instance,
Mexico will have to eliminate subsidies in gasoline and electricity to foster the
appropriate consumer behavior. Politically, the decision will have a cost, but hard
choices have to be made if a profound transformation of the energy sector is to
take place. Energy transition offers an opportunity for simultaneously achieving
the goals of energy security, climate change abatement, and sustainable development. It is an opportunity that Mexico should not miss.

About the Author

Lourdes Melgar, PhD, is a researcher and consultant on energy issues. She was
formerly a public ofcial in the energy sector and a diplomat. She has been a
visiting scholar at the Center for International Energy and Environmental Policy
of the University of Texas (Austin). She has taught at the Instituto Tecnolgico
Autnomo de Mxico and the Instituto Tecnolgico y de Estudios Superiores de
Monterrey and has written on energy security, trans-boundary resources, and
energy and climate change.

Notes
1

Most publications rank Mexico as number 13 in terms of total emissions worldwide. That ranking
has as year of comparison 2000. In preparation for the Copenhagen Conference, the World Resource
Institute issued updated rankings using 2006 data. In this new ranking, Mexico is the number 10
emitter in absolute terms.
2
For most of this decade, oil revenues have accounted for approximately 35% of government
revenues. In the rst semester of 2009, the percentage fell to 28% as a result of the combined decline
in petroleum production and the international price of oil.
3
The Copenhagen Conference is coming to an end just as this essay is being nalized. In its closing
hours, the informal meeting of major economies overtook the UN process, with a last-minute nonbinding agreement between the United States, China, India, Brazil, and South Africa. An analysis of
the consequences of this outcome could be the subject of another paper.
4
On December 15, 2009, the Chambers of Deputies passed an amendment to this law, which is
currently under consideration of the Senate, to increase the required percentage of power generation
with clean energies.

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