Mexico’s Next Leader Has an Energy Problem

Mexico will elect a new president on June 2. For the first time in the country’s history, the two leading candidates are women: Claudia Sheinbaum and Xóchitl Gálvez. Sheinbaum represents outgoing President Andrés Manuel López Obrador’s Morena party, and Gálvez heads up a broad opposition coalition. Most polls predict a resounding victory for Sheinbaum, who benefits from López Obrador’s popularity and party machine.

On March 22, Sheinbaum presented her economic agenda before Mexico’s business leadership in the city of Monterrey, where Tesla plans to build an electric vehicle plant. Sheinbaum hopes to take advantage of the opportunities offered by U.S. nearshoring efforts; Mexico has emerged as an attractive destination for U.S. companies seeking to relocate their supply chains closer to home. She has also proposed creating 10 so-called development poles throughout Mexico, which would see regions specialize in sectors such as tourism, technological innovation, and renewable energy while also satisfying various sociocultural development goals.

To achieve her ambitious economic objectives, if elected, Sheinbaum must ensure that Mexico has a stable, growing energy supply. That is easier said than done, given López Obrador’s controversial steps to undo reforms that had liberalized the country’s energy sector to attract private investment and meet growing electricity and fuel demands. Although Sheinbaum has defended López Obrador’s energy policy so far, she is more pragmatic and less ideological than he is—and may be open to policy change.

Sheinbaum cannot guarantee Mexico’s energy stability if she does not regain the trust of private investors that was shattered under López Obrador. Failing to do so would not only be detrimental for the grid but could also jeopardize Mexico’s commitments under the United States-Mexico-Canada Agreement (USMCA) and Paris Agreement—and derail any Mexican hopes of becoming a nearshoring haven. If former U.S. President Donald Trump returns to the White House in January 2025, failing to comply with USMCA could spell outright trouble for the U.S.-Mexico relationship.

In 2013, a constitutional reform ended the Mexican government’s monopoly control of the energy sector. For the first time, state-owned oil company Pemex and power utility CFE had to compete against private firms on a regulated market. But since the first days of his administration, in 2018, López Obrador has staked his presidency on reversing the reform—creating legal uncertainty that has left many investors skeptical of Mexico.

In 2021, López Obrador amended regulatory laws to privilege Pemex and CFE over private firms in their respective markets. In the petroleum sector, the government raised the requirements for private companies to maintain their fuel import and distribution permits. In the power sector, CFE would have priority over other firms in dispatching electricity. Previously, power had been routed based on cost competitiveness, which was cheaper and more efficient, as it was supplied by many private utilities. By giving CFE the upper hand, Mexico fell back on the public utility’s coal-fired and other petroleum-fired plants.

López Obrador also called for a review of all existing electricity contracts with private firms. In 2022 CFE supplied just over 41 percent of Mexico’s total demand; private utilities generated nearly all the rest. The president sought to impose a long-term market share for CFE at 54 percent. He canceled auctions to increase power generation from renewable energies, alleging the events had not been well planned.

López Obrador’s moves to take control of the energy sector strained Mexico’s investment climate, generating a broad opposition bloc of national and international companies, opposition political parties, nongovernmental organizations, and environmental advocates who sought to decarbonize Mexico’s economy. All of these groups saw their varied interests under threat. Several companies called for injunctions to invalidate the amended legislation, and Mexico’s Federal Economic Competition Commission asked the Supreme Court to rule on the amendments’ constitutionality.

Only this year did the court judge that the reforms to the electricity sector were unconstitutional, saying they disrupted competition policies and market regulations. However, the court upheld the government’s control over the petroleum industry. Altogether, the yearslong ordeal and legal limbo strained Mexico’s investment climate.

If Sheinbaum is serious about launching her proposed 10 poles, she must recognize that Mexico will not be able to expand and modernize its energy infrastructure under the primacy of two state companies.

Pemex has failed to make Mexico energy self-sufficient; around 70 percent of the country’s natural gas consumption is imported from the United States, and 64 percent of gasoline consumption and 60 percent of diesel mainly come from refineries also located in the United States. The Dos Bocas refinery, one of López Obrador’s flagship projects, is not yet online and has cost much more than what was originally budgeted, putting pressure on Pemex’s finances. The state-owned company’s external debt exceeds $100 billion. CFE, for its part, has claimed that it has close to 54 percent of the electricity market share after a government-led confrontation with Iberdrola, a Spanish electric utility that had 28 plants in Mexico. In April 2023, the government announced it would acquire 13 of Iberdrola’s plants via a trust called Mexico Infrastructure Partners; the sale was finalized in February.

Canada and the United States have doubts about whether a Sheinbaum administration would allow international investors to participate in Mexico’s energy industry, as is stipulated by USMCA. Chapters 14 and 22 of the trilateral agreement explicitly protect the corporate rights of investors and prohibit discriminatory treatment of a state company in its commercial relations with private companies. In mid-2022, in response to López Obrador’s legislative amendments, U.S. and Canadian trade representatives began conversations with the Mexican government on the matter.

If Sheinbaum continues favoring Pemex and CFE over private utilities, as she has said she would do as president, she could risk a panel dispute under USMCA. That could result in severe trade sanctions on Mexico. Sheinbaum likely also won’t be able to take advantage of U.S. nearshoring opportunities if she cannot reaffirm her commitments to the treaty. (The acid test will come in 2026, when USMCA is set to undergo a general review by all three participating countries.)

USMCA is not the only major international agreement to which Mexico is beholden. The country is also a state party to the Paris Agreement and has committed to generating 35 percent of its electricity from clean sources by this year. But Mexico has not yet managed to achieve this goal, even after López Obrador’s government announced new climate plans at the 2022 United Nations climate conference in Egypt.

To keep Mexico on track to meet its climate commitments, Sheinbaum would have to adopt more green energy sources. She cannot do so without reviving long-term electricity auctions to attract investors who are capable of increasing Mexico’s renewables supply at competitive prices.

Sheinbaum’s success may depend in part on who wins the U.S. presidential race. If Joe Biden is reelected, the two leaders will need to jointly address tricky shared problems such as migration management and drug trafficking. But Sheinbaum’s industrial project could fit neatly within the framework of Biden’s flagship Inflation Reduction Act as well as the CHIPS and Science Act, both of which promote a green economic agenda and boost nearshoring efforts. A second Trump administration would be a different story.

During his presidency, Trump forced both Mexico and Canada to terminate the North American Free Trade Agreement and negotiate its successor, USMCA. The talks did not occur in a vacuum—Trump sought to pressure Mexico to end illegal migration to the United States and build a wall on the two countries’ shared border. Trump also imposed taxes on steel and aluminum from Canada and Mexico, citing national security concerns. He warned that he would withdraw from USMCA negotiations if the treaty did not accommodate his interests, which included establishing a 16-year sunset clause in the agreement and instituting general review periods every six years.

In May 2019, Trump threatened to impose a 5 percent tariff on total imports from Mexico that could rise to 25 percent if the Mexican government did not stop the illegal entry of Central American migrants at Mexico’s southern border. The diktat forced López Obrador to mobilize the Mexican military at its border with Guatemala, signaling Trump’s leverage over the Mexican leader.

If Trump returns to the White House, tensions with Mexico are likely to escalate over migration, illegal drug trafficking, and—above all—trade relations with China. Beijing has noted Sheinbaum’s industrial goals and is interested in increasing its commercial and investment ventures in Mexico.

China aims not only to supply Mexico’s internal market with manufacturing but also to export to the United States, thereby circumventing tariffs that have been in place since the Trump administration. If this occurs, Trump would likely react belligerently at the USMCA revision table in 2026, alleging, among other things, that the agreement harms U.S. interests by allowing Chinese strategic supplies to leak into the United States from Mexico. Trump could even threaten to leave the agreement if Mexico does not impose tariffs and bans on China similar to those already imposed by Washington.

Canceling USMCA is a red line that neither Sheinbaum nor Trump should cross. If that happens, neither country will see its nearshoring agenda realized.