Transmission, Transformation, and Regulation: Deficiencies in Mexico’s Electrical System that Threaten the Industrial Sector

Arrambide stresses that the "most immediate and critical problem" facing Mexico's industrial sector is that, while production capacity exists, there is insufficient capacity for electrical transformation—measured in kilovolt-amperes or kVAs—and inadequate infrastructure to transport that energy to where it's needed. As a result, industrial developers face steep costs to secure electrical demand rights—paying as much as $1,000 per kVA—due to the obligation to undertake costly connection and reinforcement works for the electrical system. This significantly drives up project costs.

"We could have all the generation in the world ready to go, but without transmission and transformation capacity, it's worthless." According to the energy investment advisor, while the government attempts to address the issue, Mexico is reaching a "critical point" where "if there's no investment or action, the national electrical system will collapse." However, Arrambide remains optimistic "since it looks like they've understood the issue and are ready to address it."

Mexico also faces another problem: its energy mix, which relies heavily on fossil fuels. By this year, at least 35% of Mexico's energy production should have come from clean sources. However, according to IMCO data, this proportion was only 28.7% and 24.3%, respectively, in 2022 and 2023.

Clean energy generation is essential to attract global companies committed to sustainability. "Today, many foreign companies are looking for 60% to 80% of their energy to come from clean sources. Without sufficient diversification toward renewable energies, Mexico risks losing competitiveness to other markets offering a more sustainable energy mix," notes Arrambide.

Alongside the lack of investment in transmission and transformation infrastructure and the dependence on fossil fuels, the energy regulatory specialist highlights "regulatory bottlenecks" that severely affect the system.

There are two core issues: first, transmission and distribution are exclusively controlled by the Federal Electricity Commission (CFE), limiting private sector participation in essential infrastructure and hampering the development of a more flexible and efficient grid. The second issue is the lack of clarity and consistency in sector rules, leading to regulatory overload and lengthy approval times for new projects. This combination raises investment costs and creates uncertainty, discouraging companies at a critical moment for Mexico's industrial expansion. Arrambide indicates that the private sector "could adapt to any changes, as long as the rules are clear and fair, but the lack of certainty has stalled billion-dollar projects essential for meeting the country's energy demand."

The pressure from the U.S. and the commitments under the USMCA add a strategic dimension to Mexico's energy crisis. Arrambide points out that Mexico's only counterbalance to secure a coherent energy policy may come from abroad, as the U.S. depends on a reliable and clean power supply for key sectors like automotive. Without changes to the regulatory framework and investment in infrastructure modernization, Mexico risks becoming less attractive to U.S. and Canadian companies, which seek consistent and clean energy sources to operate in the country.

Recently, the Federal Electricity Commission (CFE) reaffirmed its status as a public or State-run company, further consolidating its operations under government control. Since the 2013 energy reform, while the CFE retained constitutional exclusivity over the transmission and distribution of electricity, it was allowed to enter into contracts with the private sector to support these activities. This framework sought to combine State control with private sector participation, encouraging investment and modernization in the energy infrastructure. However, a recently approved reform eliminated this possibility, granting the CFE complete and exclusive control over these strategic areas.

While this measure ensures the company’s financial stability and enhances its credit rating in international markets—thanks to its reliance on a government with solid financial and economic standing—it also limits private sector participation in critical areas. By reserving these activities solely for the CFE, the law safeguards the interests of the State but risks hindering the modernization of the country’s energy infrastructure. According to Arrambide, this ongoing tension between the public and private sectors remains critical. It could significantly slow down the investments necessary to sustain the country’s industrial growth if not managed carefully and urgently.

Santos Elizondo's senior partner suggests that Mexico could stabilize its energy system through public-private partnerships and more streamlined regulation in response to these challenges. Through these agreements, the private sector could fund and build the transmission and transformation infrastructure Mexico needs, while the CFE would retain operational control. This collaboration would enable the modernization and expansion of the grid without sacrificing State control or breaking the law while reducing connection costs for industrial developers.

Modernizing and strengthening the energy sector is not just an option—it's a necessity for Mexico to solidify its role as Latin America's industrial hub. A reliable power supply, clear rules, and a commitment to clean energy will be critical to maintaining competitiveness and attracting investments that fuel the country's industrial growth.

In a context where Mexico's industrial future hinges on critical energy decisions, having reliable and timely information about the commercial real estate market is as valuable as the infrastructure itself. Want to know more about the development and performance of the commercial real estate market? Explore SiiLA REsource or contact us at contacto@siila.com.mx.