MDB & Energy Project: Country Studies: Mexico summary

Mexico Report

Summary

TABLE OF CONTENTS

1. Overview of the Energy Sector in Mexico
2. Potential for Renewables, Conservation and Efficiency
3. MDB Policies and Loans
4. Conclusions and Recommendations

1.Overview of the Mexican Energy Sector

In spite of its vast and diverse energy resource base, Mexico has relied heavily on the use of oil and its derivatives to meet growing energy needs since the discovery of vast oil reserves in the seventies (which turned the country into a major exporter). These oil discoveries have had a positive impact on the country's balance of payments, but have also served as a disincentive for developing a more sustainable energy sector. Close to 75 percent of Mexico's final energy consumption is based on hydrocarbons (including oil, natural gas and gasoline). The distribution of final energy consumption by sector in 1995 was: 38.9% transportation; 36.2% industrial; 20.6% residential, commercial and public; and 2.6% agriculture.

According to the Secretary of Energy's 1995 report, a series of economic crises and economic adjustment programs contributed to a relatively slow growth of energy demand in Mexico between 1980 and 1986 (an average of 1.7 percent per year). However, from 1986 to 1992, this growth rate jumped to an average of 4.5 percent per year. By 1995, however, another economic crisis led to a 2.1 percent decline in demand for energy.

Mexico's installed electricity generation capacity rose from 14,625 MW in 1980 to 31,649 MW in 1994, more than half of which comes from hydrocarbon-based plants and slightly less than one third from hydroelectric plants. In 1994, total sales of electric energy reached 111.5 TWH, of which over half (53.8%) was used by the industrial sector and other high and medium tension consumers, and a quarter was used by residential customers.

Sector Agencies and Policies

The Secretary of Energy has overall responsibility for the sector. Oil and its derivatives are operated by Petroleos Mexicanos, an enormous public enterprise facing severe problems of quality control, environmental protection, and efficiency. Although the private sector and some government representatives would like to privatize PEMEX, the Constitution guarantees -and widespread public opinion insists- that it remain in the hands of the State. The electricity sector is led by two public utilities: the Federal Electricity Commission (CFE) and the Central Light and Power Company (CLyFC).

Although in general terms, Mexico's energy policies refer to the importance of sustainability, in practice there is relatively little emphasis on efficiency or conservation. Of the total energy sector budget of 69 billion pesos (approx. $8.73 billion) in 1997, PEMEX received about $50 billion, or 72.8% of the total. The electricity sector received $18.5 billion, leaving only 156 million for research and development and 56 million for other agencies.

Under a great deal of pressure from the MDBs and a World Bank technical assistance loan for infrastructure privatization (1995, $46 million), the Mexican government has promoted the gradual privatization of the energy sector. PEMEX has been decentralized, to allow for privatization of sub-sectors, beginning with secondary petrochemicals and natural gas transportation, storage and distribution. The Electricity Law was amended in 1992 to allow private generation of electricity, although transmission and distribution remain in the hands of the state. However, the World Bank recently decided to not to move forward with a proposed transmission and distribution project, partly as a result of the fact that the government never provided the Bank with the required sector policy note. This appears to be tied to the government's reluctance to follow the Bank's recommendations for a decentralization (and gradual privatization) of the CFE. While this could be considered a type of "commitment lending", it is clear that it is guided by the Bank's privatization policy (decentralization to facilitate gradual privatization) more than any explicit efficiency/conservation issue.

2. Potential for Efficiency, Conservation and Renewables

The relatively higher cost of renewable sources of energy continues to be an obstacle for their extended use in Mexico. With the exception of some large-scale hydroelectric projects, renewables continue to be limited primarily to relatively small pilot projects. As long as there continues to be a large supply of oil, the official tendency is to rely on that, thinking only in the short term. When we take a long term view and incorporate environmental externalities, however, some renewables (including solar and wind in specific regions) are competitive then traditional sources. Certain sectors within the Federal Electricity Commission also appear to be an obstacle in the development of renewables, because of high short term costs and the fact that they illustrate the highly inefficient nature of existing CFE plants. Even with these obstacles, however, some impressive projects have been developed with renewables in recent years.

For example, it is estimated that Mexico has some 40,000 solar panel systems installed, which are primarily used for providing light or for heating and pumping water. The Rural Electricity with Solar Energy project of the Secretary of Social Development (SEDESOL) promotes the use of PV systems in some 10,000 homes in various regions of the country.

Another project being carried out by the CFE in Ventosa, Oaxaca, provides 1.6 MW of wind energy. Recent studies indicate that there is a potential to supply up to 600 MW of wind energy in this region. According to some analysts, however, the CFE has dragged its feet and has refused competitive bids from private companies to develop the sector.

Two agencies have been established to deal with energy efficiency (Trust Fund for the Electricity Sector's Energy Savings Program, or FIDE) and conservation (the National Commission for Energy Savings or CONAE). Although they have both contributed to significant energy savings, they do not appear to have been well-integrated into the mainstream energy projects and policies of the sector. According to official estimates, between 1990 and 1995, FIDE's projects have resulted in savings of 5,400 GWH and have avoided the need to increase generating capacity by close to 180 MW (Biller, Dan and Suzanne Maia, "Pursuit of Sustainable Energy Development in the Americas: A Look at Recent Progress," The World Bank, November, 1996, p. 18). According to the Secretary of Energy, all of the planned activities around efficiency and conservation will result in savings of between 5,513 and 7,951 GWH per year starting in the year 2000.

One major problem in promoting efficiency and conservation is that fuel and electricity prices continue to be far below real costs. At the end of the eighties, under pressure from the World Bank, the government began to gradually eliminate consumer subsidies. This has been difficult, however, in a climate of recurrent economic crises. Even with a constant increase in tariffs, the CFE still does not cover its costs. When tariffs begin to approach real costs, there is another devaluation, substantially undoing the progress made. Although in 1994, residential tariffs covered 80 percent of long term marginal costs in 1994, this was reduced to only 50 percent in 1995 and 50 percent in 1995. It is estimated that during 1995 and 1996, the electricity sector received more than 22 billion pesos (close to $3 billion) in direct subsidies from the federal government. (Zu¤iga, Juan Antonio, "La pol¡tica del sector el‚ctrico impone un contsante aumento de tarifas, a pesar de los subsidios oficiales," La Jornada, 8 January 1997).

According to various analysts, the subsidy system is highly inefficient and unjust. Energy advisor Antonio Gershenson estimates that large scale consumers (of over 2,500 kwh) receive a monthly subsidy of about 1,500 pesos (slightly under $200), mostly at the expense of small businesses. This inequality is reflected in consumption figures. While small businesses reduced their electricity consumption by 2.7 percent in 1996, the large scale businesses increased theirs by about 15.3% (Gershenson, Antonio, "Tarifas y generaci¢n el‚ctrica," La Jornada, 11 May 1997, p. 5)

3. The Role of the MDBs in Mexico's Energy Sector

Although the energy sector has not been the principal priority of either of the two banks, a large amount of resources has been channelled to the sector. The World Bank has supported energy projects worth approximately $960 million since 1990, while the IDB has financed two large projects for a total of $405 million. The World Bank appears to set the overall priorities for the sector, while the IDB complements them. However, the IDB has played the leading role in the natural gas sector, financing a new combined cycle plant and playing an advisory role in establishing a regulatory framework for the liberalization of the sector.

It seems that the World Bank's seemingly artificial separation of its energy policies into two papers -one on the electric sector and the other on efficiency and conservation- is reflected in its approach to the energy sector in Mexico. The Bank continues to address the important issues of efficiency and conservation as if they are separate from overall sector management issues. These two issues (efficiency and conservation) are key elements of good management, and should be fully integrated into all sector lending, instead of being relegated to very small pilot projects or studies.

At least publicly, both Banks say that they are not tied to investments in the oil sector in Mexico. However, the World Bank has produced confidential documents for the Mexican government provide policy advice for the oil and natural gas sectors. It has also financed studies by private consultants about the restructuring of the sector. Thus, although their involvement is not visible in the investment portfolio, they have played a role of advisor at the policy level.

The two banks have focused all of their large scale energy projects in the electricity sector. Most of these projects involved either the restructuring of the sector (which has included important investments in maintenance of thermoelectric plants) and in generation via (World Bank) hydroelectric plants (which resulted in the forced resettlement of 3,500 people) or (IDB) combined cycle (natural gas/diesel) plants. According the World Bank, each of its projects contains elements of demand side management, but from what we can see in the project documents, DSM appears to be limited to changes in the tariff structure.

A 1990 World Bank document notes that their long term strategy for the energy sector in Mexico includes: a) assisting the country to obtain added foreign currency for financing the power sector program; b) promoting financial policies that will eliminate the need for Government subsidies; c) prompting the government to gradually open up the procurement in the power sector to international competition; d) helping the CFE in its institution-building efforts; e) ensuring the adequate consideration of least-cost principles in the power sector investment program; f) strengthening the sector's norms and procedures on environment and social matters related to construction and operation of power projects; g) promoting co-generation and efficient use of energy through adequate policies. ("Staff Appraisal Report: Mexico Transmission and Distribution Project," March 20, 1990, p. 21-22). A revision of the Bank's investments during the past ten years gives us the impression that the first four objectives are indeed priorities. The last three - precisely those that have to do with efficiency and social/environmental issues - appear to have been less important.

Now that the sector's restructuring is well under way and private sector electricity generation has been legalized, both Banks have begun to finance private generation projects. Last year the IDB approved a $75 million loan for a 700 MW gas turbine combined cycle plant in Samalayuca, Chihuahua. The IFC is currently deciding whether to support another 484 MW gas turbine combined cycle plant near Merida, Yucatán.

4. Conclusions and Recommendations

The investments of both multilateral banks in the energy sector in Mexico respond to their global policies of promoting a restructuring of the sector in order to promote greater private sector participation and economic efficiency. In addition to financing the construction hydroelectric and natural gas power plants and the maintenance of thermoelectric plants, they have focused their efforts over the past decade on establishing rules and regulations that will give a greater sense of security to the private sector, establish real tariffs and ensure the decentralization of the sector.

Although there have been small investments in energy conservation and efficiency, when we compare them to overall investments it is obvious that this has not been a priority for either of the Banks. Aside from one exemplary GEF project to replace 1.7 million incandescent light bulbs with CFLs, the most notable World Bank effort in terms of demand side management has been the establishment of real tariffs. However, the tariff system continues to be very inefficient and unequal.

Considering this, we would point to some basic recommendations for both Banks in the energy sector:

1. Fully integrate the requirements for improved efficiency and energy savings into each project that is approved for the energy sector, in addition to other related sectors (transportation, industry, agriculture, etc), while also increasing support for the agencies in charge of promoting efficiency and savings (FIDE and CONAE in particular).

2. Be more flexible in their programs and projects, in order to adjust to the particular realities and needs of different situations.

3. Promote a regulatory framework that gives incentives to efficiency and conservation. This could include a change in the tariff structure, increasing rates for high tension users, including large industries, while offering them special programs to improve efficiency and reduce costs. Transfer subsidies from oil-based energy to projects based on clean, renewable sources.

4. If the Banks are going to support plant maintenance projects, require a demand side management component (that is not a simple rate increase), which will result in similar energy savings.

5. In addition to requiring environmental studies for energy projects, require an action plan for the implementation of recommendations of these studies, which would be effective during the life of the project.

6. Do everything possible to seek alternatives to projects that require forced resettlement of the population. In cases in which there are no viable alternatives (or in which the government would go ahead with the same project even without the support of the Bank), make a commitment to the government and the population to ensure that the residents are in better conditions after the resettlement. This includes providing them with access to similar work (which normally means land to harvest) in their new community. Cash payments are not sufficient. In addition, the Banks should make all relevant information available to affected communities.

7. Channel a portion of the suspended loans (which were going to be used for restructuring of the sector) to innovative solar and wind energy projects, in addition to projects to improve efficiency. This would send an important message to the government that not only are the Banks worried about the private sector and the regulatory framework, but above all they are concerned about the promotion of a sustainable energy sector.

8. Support the government in efforts to strengthen national capacity to supply inputs for the energy sector. This could improve the financial situation of public companies, create jobs, and improve the country's trade balance.