Nearshoring and the Future of Energy Policy with Sheinbaum

By: Isaac Jaimes Rivera

After the effects of the Covid-19 pandemic, the war in Ukraine, and the comercial war between China and the United States, the multinational companies decided to relocate their production processes to countries that are close to the target markets in order to increase resilience in supply chains.

Mexico stands out as a very attractive country for attracting the productive activities of companies that seeks to relocate due to its strategic location. The country shares a border with the United States, the world’s largest market; it has more than 14 free trade agreements that allow it to trade with 50 countries, and additionally, it offers a skilled workforce at a competitive cost.

For instance, Germany has announced the closure of automotive plants in Europe to relocate them to Mexico, and in the past year, it has already become the second-largest source of Foreign Direct Investment (FDI) in Mexico, only surpassed by the United States.

In recent years, nearshoring has been extensively debated in the country as a significant new opportunity for its development. Among its potential advantages are estimated growth rates arround to 3.5%, to strengthen the country's manufacturing and export industries, creating millions of formal jobs and boosting investment flows. However, the incoming administration of President Claudia Sheinbaum faces several challenges to capitalize on this opportunity and attract the companies that are looking to relocate their operations.

The country's main challenges are due to the vital importance of the energy sector in attracting FDI. Former President López Obrador’s administration left a lot of work to be done in this field, particularly in terms of increasing electricity generation capacity, modernizing power distribution networks, and transitioning to clean energy. All of them will need to be priorities for the incoming government if it wants to ride the wave of nearshoring.

Another critical challenge for Claudia Sheinbaum is to ensure a strong legal framework that adequately allows and regulates private sector participation in energy generation. During López Obrador's administration, energy policy had a conservative and nationalist approach, with a core emphasis on strengthening state-owned companies like Petróleos Mexicanos (Pemex) and the Comisión Federal de Electricidad (CFE) in pursuit of energy sovereignty, relegating the private sector as a secondary priority.

The incoming administration instills renewed hope for the sector, as Claudia Sheinbaum has explicitly expressed her support for the transition to renewable energy and enhanced collaboration with the private sector which stands in stark contrast to the policies of the former administration. This stance is backed by the president’s academic background, since she has published several academic articles on Mexico's energy transition.

Moreover, the selection of technical profiles to lead the sector stands out, contrasting with the political appointments of the previous administration. The Ministry of Energy will be headed by Luz Elena González, who possesses specialized studies and several years of experience in planning environmental and energy transition policies. Pemex and CFE will be led by Víctor Rodríguez Padilla and Emilia Esther Calleja Alor, respectively, both of whom have an extensive technical background in the energy and electrical sectors, recognized by key industry stakeholders.

In her inaugural speech, Sheinbaum mentioned the National Energy Plan, a 25-year ambitious project that outlines some key points such as increasing electricity generation by 15%, investing in a comprehensive transition program so that by 2030, 50% of energy comes from renewable sources, and allowing 46% private sector participation in energy generation under strict supervision and regulation. All of this has raised expectations among energy sector representatives, who have expressed enthusiasm and willingness to collaborate with the administration.

However, there are also concerns regarding political conflicts of interest. While Sheinbaum has spoken about this new approach to energy policy, she has also hinted at continuity in some areas, such as strengthening state-owned companies and fossil fuel production in the short term. Additionally, the recent judicial reform and the proposal to eliminate some independent agencies, such as the Comisión Federal de Competencia Económica, the Comisión Reguladora de Energía and the Comisión Nacional de Hidrocarburos, have created uncertainty among investors about the country's business climate.

In summary, during Sheinbaum’s administration, we can expect an energy policy more focused on strengthening electrical infrastructure, transitioning to renewable energies, and promoting electromobility in the long term, as well as greater openness to private sector participation compared to the previous administration. However, Claudia will also need to navigate the political interests within Morena, so she faces the considerable challenge of balancing her new vision focused on the energy transition with López Obrador’s more conservative and statist approach