Now Available: Mexico Power Report Q3 2013

Mexico's electricity generating capacity is struggling to keep pace with domestic demand - a fact acknowledged by the state-run Federal Electricity Commission in April 2013. While the government has pinpointed renewable sources of energy as a target area to fill this gap and has also brought the issue of nuclear power back to the table, we believe that the low price of gas and the prospect of shale gas discoveries on Mexican soil mean that gas will continue to play a central role in the country's electricity production. The government's 2013-2017 National Energy Strategy also addresses the issue of electricity tariffs - there are plans to make them cheaper for industrial clients as a means of boosting investment and raising productivity. Local governments have also asked that they become eligible for these lower tariffs; the details of these lower tariffs have yet to be published.

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We remain of the view that an estimated robust 3.96% year-on-year (y-o-y) growth for power consumption in 2012 will give way to a slightly less positive performance in 2013. With increased uncertainty as a result of a slowdown in the Mexican economy weighing on the sector, we believe that consumption growth will come in at a more modest 2.44% y-o-y in 2013.

Mexico's low per capita consumption and relatively high energy intensity suggest that risks for long-term electricity demand are on the upside; the Comision Federal de Electricidad (CFE) admitted in April 2013 that it was working at maximum capacity, with shortages of natural gas and poor maintenance of power plants two reasons behind outages.

In February 2013, the new National Energy Council of Mexico presented its first National Energy Strategy, outlining energy policy for 2013-2027. Renewables are expected to take a key role, while nuclear energy is also under consideration. We forecast that it will be gas that makes the greatest gains; however, not least given that the government is keen to invest in shale gas exploration. We forecast that electricity generated by gas-fired power plants will increase at a compound annual growth rate (CAGR) of 5.43% between 2013 and 2022, and will represent 59.1% of electricity generation capacity by 2022.

Key developments this quarter include:

* The National Energy Council of Mexico presented its first National Energy Strategy for 2013-2027. Goals including generating 35% of electricity from renewable sources by 2024.
* CFE announced in April 2013 that it had selected Abengoa to develop a US$14mn in a transmission project that will see two substations and a 49km transmission line.
* Sener and Spain's OHR announced plans to construct a 35-megawatt (MW) gas-fired cogeneration power plant for Pemex in April 2013.
* CFE announced plans to construct four 1,000MW combined cycle power plants in Veracruz, with work scheduled to begin in 2013 in a project that has an estimated cost of US$2.8bn.

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