Will Mexico’s president-elect meet the nation’s renewable targets?

Good morning and welcome back to Energy Source. Malcolm Moore here, coming to you from London.

Before we get to Christine Murray’s main feature on Mexico’s energy dilemma, I wanted to tell you briefly about a $14bn energy deal looming here in Europe.

Abu Dhabi’s National Oil Company (Adnoc), one of the largest oil producers in the world, with a 2027 goal to pump 5mn barrels of oil a day, or twice as much as Exxon, has moved a big step closer to buying Covestro, one of the jewels of German industry.

Covestro is a play on the energy transition. It specialises in the chemicals that are used to create insulation for energy efficient homes and in lightweight but strong plastics that are increasingly used in electric vehicles or battery casings.

For Adnoc, the deal would also lock in a long-term customer. Covestro’s plants depend on gas, and also on oil compounds such as benzene. Abu Dhabi, like Saudi Arabia and other major oil producers, is investing in ensuring there are future markets for oil after its use for transportation peaks.

Read all about it here.

Mexico’s support for state energy collides with climate goals

As a deadly heatwave pushed temperatures in Mexico to record levels in May, hours-long power cuts left millions of people unable to use their fans or air conditioners.

The record demand for electricity overwhelmed the country’s grid, and operator Cenace began a series of rolling blackouts that hit consumers and businesses in most states.

It highlighted the heavy strain on the country’s electricity system after years of under-investment and underscored the challenge facing President-elect Claudia Sheinbaum to quickly build out capacity and resilience while meeting renewables pledges.

“Everything suggests we have weather patterns that are now structural, because of global warming we’re seeing big increases in temperatures . . . the electricity system isn’t prepared [for it],” said Miriam Grunstein, an energy consultant.

Three-quarters of Mexico’s electricity generation last year came from fossil fuels, mostly via natural gas and some coal. The left-wing Sheinbaum has promised to accelerate the renewable energy transition and meet Mexico’s target of generating 50 per cent of its energy from renewables by 2030.

She appears well-qualified to do so: Sheinbaum has a doctorate in energy engineering and contributed to the UN’s Intergovernmental Panel on Climate Change.

But she has also fully backed the policies of her longtime mentor President Andrés Manuel López Obrador, a charismatic nationalist who promoted fossil fuels and backtracked on the country’s emissions targets.

As he tried to reassert state dominance of the sector, regulators stopped handing out generation permits, auctions for long-term power purchase agreements were cancelled and the rules were tilted in favour of state energy groups.

There was no new significant private investment in generation during his term, except in small-scale self supply projects.

In the past five years, state electricity company CFE has invested an average of about $900mn a year in transmission and generation, according to Guillermo García Alcocer, a professor at Mexico’s ITAM University and former head of energy regulator CRE.

That compares to some $5bn-$6.5bn needed annually to meet the likely demand in the coming years, he said.

Sheinbaum has broadly outlined that she supports renewables including solar, wind, green hydrogen and solar panels on houses and businesses, with little detail on what the private sector will be allowed to do.

She is committed to López Obrador’s pledge to keep 54 per cent of generation in the hands of CFE. Although the state group will soon bring online six new gas and steam-powered plants, it doesn’t have the financial resources or expertise to reach Mexico’s renewables targets on its own, according to sector analysts. Some people in the industry, however, said they were still optimistic that new projects would get off the ground out of necessity.

“That 46 per cent being offered to the private sector is a world of energy, it’s a lot . . . I think the optimism makes sense,” García Alcocer said.

Looming over Sheinbaum’s energy plans are a set of constitutional reforms proposed by her predecessor, which Sheinbaum has backed. They include eliminating independent regulators and reasserting CFE’s dominance in the sector; several of the reforms potentially violate Mexico’s trade agreement with the US and Canada, trade analysts say.

Under one proposal that is set to be approved this year, elections will be held to replace all of the country’s federal judges. López Obrador escalated his attacks on the judiciary after courts halted his 2021 electricity legislation on the grounds it was unconstitutional.

The ruling party, Morena, is hosting a series of forums starting this week to explain and discuss the judicial overhaul, but has given little indication that it is open to making major changes to its existing plans.

The government is unlikely to need to negotiate with the opposition, but may be more inclined to engage with Mexico’s business leaders and with US officials who recently fired a warning shot over the changes.

“If they start changing the rules, with Congress how it is, it could be very difficult [to attract investment],” Grunstein said. (Christine Murray)

Power Points

• Goldman Sachs appointed oil tycoon John Hess to its board of directors, just as the Wall Street bank stands to make as much as $80mn in fees for helping Hess complete a contentious sale to Chevron.

• Abu Dhabi’s National Oil Company Adnoc is set to achieve Europe’s largest takeover of year with its sweetened €14.4bn bid for Covestro.

• The majority of Britain’s onshore renewable energy projects fail to get beyond the planning stage, according to a new analysis.

• Joe Biden’s flagship hydrogen project, the Appalachian Regional Clean Hydrogen Hub, is facing growing opposition.

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.

Letter in response to this newsletter:

How president-elect can hit Mexico’s climate goals / From Jose Maria Valenzuela, Senior Research Fellow, University of Oxford, UK