The Mexican government has decided to allow two companies to incur in actions that will affect the health and wealth of Mexicans. The government is directly responsible for this, in its dual role as regulator of the energy sector and administrator of CFE, the state-owned electric utility, and Pemex, the state-owned oil company.
The plot is complex. I will try to simplify it. The current government is obsessed with refining more crude. They believe that along the way they will enrich Pemex. The evidence shows otherwise. At current international fuel prices, even the most efficient refineries around the world often lose money. Those of Pemex did so even before this crisis.
Inside the government they must believe that if the volume of refined crude increases, the losses will become gains. They are investing public resources to that end, to increase the use of existing refineries and to build a new one, Dos Bocas. Building and operating a refinery is very complicated, even for those who know how to do it. It will be a waste of money.
The biggest problem is a different one. Refineries generate refuse. Heavy fuel oil is the largest portion of all refining wastes. Of the six Pemex refineries, three can process heavy fuel oil, although they do not usually work optimally. By refining more crude, Pemex is generating more and more of it. Storage capacity is limited. If Pemex is not able to place heavy fuel oil somewhere, its refineries would come to a halt.
Selling heavy fuel oil is very difficult. Before, it could be used in ship engines. It is now banned globally, because of the pollution it generates. Pemex heavy fuel oil was previously burned by CFE, but currently natural gas is much cheaper and cleaner. Mexico’s electricity law mandates that CENACE, Mexico’s electric grid operator, to prioritize cheap sources of electricity. The first in that list is renewable energy (including hydro), then nuclear, then natural gas. At the end of the queue comes heavy fuel oil.
In an unprecedented action, justified under the alleged need to provide stability to the Mexican electricity grid due to the pandemic, the Ministry of Energy arbitrarily decided to do away with renewable energy produced by private electric companies. The government’s reasoning is in itself even more absurd given the current drop in electricity demand due to the pandemic. Moreover, Mexico’s independent body responsible for ensuring the legality and rationality of regulation (CONAMER) did not authorized the Mexican government’s decree. Its head just resigned.
CFE will now be able to use heavy fuel oil that Pemex generates. Since electricity produced with heavy fuel oil is more expensive, it will be necessary to pass the cost to the Mexican consumer, or assume a loss. CFE won’t mess around with the average residential electricity consumer. It will be CFE itself, Mexico’s Finance Ministry, or the Mexican private sector (already in trouble) those bearing the additional cost.
People’s health in those areas surrounding CFE’s thermoelectric plants is damaged whenever the company burns heavy fuel oil. In the words of environmental expert Gabriel Quadri: “recent studies in Mexico estimate that (CFE’s) Tula thermoelectric plant is responsible for more than 14,000 premature deaths per year in Tula and in the Mexico City metro area”. If CFE’s plants burn even more heavy fuel oil, the problem will increase.
There is an additional cost for the country. Clean energy companies have been wiped out by the stroke of a pen. There are renewables projects worth more than $ US 6 billion that are being affected. Uncertainty surrounding this issue will further depress private investment in Mexico. The government will have to face costly and complicated litigation with injured investors and conflicts with the US and Canada, Mexico’s main trading partners.
President Andrés Manuel López Obrador (AMLO) ought not be well informed. Decisions are being made through improvisation and without the adequate level of debate that would allow to watch and measure their consequences. Public officials administering and regulating the Mexican energy sector are being blinded by ideology. Instead of helping so that the government can focus all its resources on the pandemic, they have put the country in serious trouble.
* Carlos Elizondo Mayer-Serra is professor at the School of Government and Public Transformation at Tec de Monterrey, in Mexico City. A Spanish version of this Op-Ed appeared first in Reforma’s newspaper print edition. Twitter: @carloselizondom