Can Mexico and the United States Take Advantage of their Energy Potential?

The energy systems of Mexico and the United States are deeply interconnected. Their respective energy policies are misaligned to take full advantage of that potential. Increasingly, the interwoven ties among immigration, trade, drug trafficking and energy will make policy outcomes more complex and unpredictable. What can be done?

We first wrote this paper in December 2024. Since then, the economic, trade and political relationships between the United States and Mexico—as well as with the rest of the world—have gone through a period of historic uncertainty. On April 2, the United States raised tariffs on exports to the United States to the highest levels since 1910. On April 9, the Trump Administration announced a 90-day pause on tariff increases, but it also imposed a 10% tariff on most countries exporting to the United States, and it raised tariffs on Chinese exports to 145%. Mexico and Canada must pay a 25% tariff on products that do not comply with the US-Mexico-Canada Agreement (USMCA) on free trade, plus 25% on automobile, auto parts, steel and aluminum exports. By the time this article is read, all of these tariff arrangements are likely to have changed. What will not change is the uncertainty and volatility that these measures have introduced into the global trading system, in turn freezing long-term investments in infrastructure and disrupting supply chains across the world.

Energy and trade relationships between Mexico and the United States (and Canada) are deeply affected by these developments, and those that are yet to come. At stake is the deep integration of North American manufacturing across all three countries. That will affect energy demand, technologies and production. Because the United States has tied tariffs to immigration and fentanyl issues, there are no clear commercial performance benchmarks. Predicting potential energy investment trends will be speculative at best.

We are updating this paper in April 2025 to review the Mexico-U.S. energy relationship in light of recent developments. Presidents Donald Trump and Claudia Sheinbaum have already had many direct exchanges on immigration, fentanyl and tariffs. Close to 85% of Mexico’s exports go to the United States. Possible 25% tariffs on Mexico’s steel, aluminum, automobile and parts exports could drive Mexico into a recession. Many independent economists also assess a significant probability that the United States may face a recession. For the world, whether the United States, Mexico and Canada can sustain the USMCA could signal the course of global growth, energy demand, investment trends and supply chain disruptions. If the USMCA flounders, global prospects become grim.

Key Highlights

• U.S. disruption of global supply chains could be North America’s opportunity to near-shore investment, with Mexico at the heart, if Mexico can win investor confidence to protect investor rights. Manufacturing exports from Mexico to the United States return 30 cents per $1 of exports, whereas the return to the United States from Asian exports is negligible.
• Mexico will need to invest about US$30 billion through 2030 to build critical power infrastructure. Private sector investment will be critical for the government to achieve its infrastructure goals.
• Mexico and the United States will need to reach an understanding on how the USMCA will protect private investment given Mexico’s constitutional changes that radically alter its judicial and regulatory systems.
• Private investment in renewable power, transmission and distribution will be key to Mexico’s capacity to introduce more renewables in the fuel mix and achieve its climate goals.
• Investors will seek both a stable cross-border political and financial environment and assurance that their investments in Mexico will be secure. Issues on immigration, fentanyl and security may well override the U.S. Administration’s position on energy cooperation.

Unfilled Potential

This should be North America’s moment to attract private investment for near-shoring supply chains—and Mexico’s to shine on energy transition. Trade tensions between the United States and China have become a national security concern and will force the diversification of supply chains away from China. Mexico, with the benefit of its free trade agreement with the United States and Canada, is a natural platform to capture market share from China on clean technology exports, processing critical metals and minerals, manufacturing and batteries. Both the United States and Mexico already benefit from interdependent trade: Mexican heavy crude oil for U.S. refineries, U.S. natural gas for Mexican power generation, industry and household.

Still, Mexico’s potential for nearshoring remains more of an aspiration than a reality. As shown in Figure 1, in 2024 about 74.4% of Foreign Direct Investment (FDI) in Mexico was from reinvestment of profits or dividends. That boosted expansion of industrial parks, but it did not expand investment in critical infrastructure for energy and water. Access to clean electricity supply has become a bottleneck for global companies looking to establish in Mexico as the energy policy from the López Obrador administration froze expansion of renewable power. Claudia Sheinbaum’s administration has committed to take new directions on sustainability and private investment. Whatever policy directions that might emerge have been obscured by the far deeper challenges posed by U.S.-Mexico bilateral and U.S. global tariffs, and how they affect economic growth, supply chain competitiveness and investor appetite.

Figure 1: Mexico: FDI inflows, US$ billions

To be sure, final positions on trade among the North American partners and between the United States and the rest of the world will change in the face of the U.S. administration’s policies on tariffs, immigration and other issues the U.S. may decide to bring into trade negotiations. Beyond the trade arrangements, this paper addresses five key questions that will affect the investment outlook for energy. 

Does Mexico Need Private Investment in Its Power Sector?

During the López Obrador administration, investment in Mexico’s electricity sector slowed considerably due to a power sector policy built around a “rescue plan” for the Federal Electricity Commission (CFE). Regulatory changes triggered a wave of legal disputes. The United States and Canadian governments claimed violations of the USMCA. These legal actions slowed the implementation of some proposed regulatory changes and maintained wholesale market operations relatively stable. Still, as shown in Figure 2, private investors, mostly in renewable energy, faced a sharp increase in denied generation permits and interconnection to the national grid.

Figure 2: Wind and Solar Capacity Evolution & Interconnection Capacity Requests

One aspect of the legal disputes has centered on a policy adopted during López Obrador’s administration to require that CFE supply at least 54% of the country’s electricity demand, while limiting private generators to 46%. The intent was to ensure that CFE could dispatch all its power plants and contracted power, even if private generators could offer a lower price in the power market. Enforcing that balance led to measures that precluded private power generators from connecting to the grid, particularly with renewable power at lower marginal costs.

Mexico’s growing electricity demand, combined with an aging generation fleet, exacerbated supply problems as investment in the transmission network languished. During the first months of 2024, there were multiple critical alerts when reserve margins fell below the safety level of 6%. Even though current installed generation capacity considerably exceeds the maximum demand, much of this capacity exceeds its expected useful technical life and has compromised supply reliability (Figure 3). In 2024, there were around 9 GW of installed capacity running on fuel oil and 5 GW of coal, plants exceeding or close to their 30-year technical life. Replacing this capacity with new natural gas and clean energy generation could represent an investment of approximately $5.6 billion, an investment that would require private participation given CFE’s budgetary limitations.

Figure 3: CFE Capacity Fleet by fuel and age

In late January 2025, President Sheinbaum sent a package of secondary bills to Congress that included a new power sector law as well as new laws for CFE and the newly created National Energy Commission (CNE), among others. Given the government´s control in both chambers, Deputies and Senate, the legal framework easily passed, adding a binding requirement that the state controls at least 54% of the total energy annually injected into the grid. On February 5, the government presented the Plan for the Strengthening and Expansion of the National Electric System 2015-2030, providing a first glimpse of the Sheinbaum administration’s plans to close the gap in meeting rising electricity demand. Although this strategy is based on maintaining CFE’s participation of at least 54% in the electricity sector, it opens the door to new private sector investment. For 2025 to 2030, the strategy includes 22 GW of new capacity plus over 7 GW currently under construction. The plan, expected to be predominantly driven by CFE, outlines a more positive outlook for renewables, although gas-fired generation remains the main source of firm energy supply.

Based on S&P Global Commodity Insights estimates (SPGCI), the government’s plan would cost around $20 billion in addition to the nearly $7 billion committed in capacity under construction. CFE alone is expected to invest over $15 billion to build nearly 16 GW of new gas-fired and renewable capacity, with private players investing the remaining $5 billion, mostly to build renewables. SPGCI’s power requirement outlook, based on bottom-up modeling of sector requirements, estimates new capacity requirements at 31 GW at a cost of $30 billion—similar to Mexico’s plan.

This new strategy also includes mechanisms for private participation with CFE. Under an IPP (Independent Power Plant) model, CFE will contract capacity and energy under long-term contracts. A second model is framed as a public-private partnership with a minimum state participation of 54%. The recent acquisition of 13 generation plants from Iberdrola by Mexico Infrastructure Partners for about US$6 billion, with the participation of government funds, is an approach the government seeks to develop. An additional consideration in the strategy is the likely requirement to include backup capacity in private generation projects using renewable sources. The government also seeks to open specific channels where private participation can be accelerated, including an increase of up to 0.7 MW for distributed generation installation (up from the current 0.5 MW) and plants ranging from 0.7 to up to 20 MW without selling excess to the grid.

CFE had previously announced a power generation investment budget of $12.3 billion through 2030 which falls short of the estimated $15 billion for the expansion plan. It is unclear that the expansion plan will be sufficient to meet growing power demand needs and compensate for the existing aging fleet. A closer estimation to what the country will likely need by 2030 approaches $30 billion. Additionally, the government announced CFE´s planned investment in transmission and distribution of $7.5 billion and $3.6 billion, respectively, that will likely be insufficient considering a six-year lag in transmission investments. CFE will still require tariff subsidies from the state which reached $4.5 billion in 2023.

To modernize its power sector, increase the share of renewables in the power mix, and achieve its climate objectives, Mexico will need to attract private investment to the power sector.

What is Constraining Private Investment in Mexico’s Power Sector?

Mexico’s power auctions in 2016 and 2017 demonstrated that Mexico can attract private investment for solar, wind and gas power generation at globally competitive prices. Mexico’s last power auctions secured power contracts at $US20/MWh on average but were terminated when López Obrador took office in December 2018.

Figure 4: Total New Capacity from Auctions and Average Bid Price by Technology

President Sheinbaum’s administration has now secured legislation to continue her predecessor’s 54/46 power balance. Mexico passed a constitutional reform in October 2024, changing the legal status of CFE and Pemex from a “productive enterprise of the state” to a “state-owned enterprise” with “prevalence” to address state (as opposed to commercial) interests. The 54/46 mandate presents three hurdles: a policy commitment to limit private generation, a constitutional guarantee of prevalence for CFE, and federal budget constraints on CFE that limit its investment capacity and, in turn, the capacity to increase private investment to stay within the 54/46 cap, as extensive discussions with current and potential private investors suggest.

Adding to these constraints is the legal ambiguity created by Mexico’s September 2024 constitutional amendment to replace the current judicial system with the popular election of judges over two tranches in 2025 and 2027. There is no clarity on how the competence of the elected judges will be assured, and whether they will be able to function independently of other branches of government. Further, independent regulatory agencies in the energy sector were eliminated and folded into the Ministry of Energy. For energy investors, this brings into question whether they will have effective recourse through national courts and institutions if they have investment disputes with the Mexican government, or whether they must opt for potentially costly and lengthy arbitration.

These issues come together in a required review of the United States-Mexico-Canada Agreement (USMCA) in 2026. Given current trade and tariff disputes, that process for all practical purposes is already underway. The critical question for private investors will be whether the Mexican legal system and the policy environment between the United States and Mexico will give them the confidence to make 20-30-year investments in energy infrastructure. At this point, the requirements investors cite include: (1) the stability of U.S. trade policy and its impact on competitive supply chains, (2) clarity on independence and competence of elected judges and on how national courts and independent regulatory agencies will function; (3) regulations governing power generation, transmission and distribution; and (4) clarity on what “prevalence” will mean for state-owned enterprises relative to private investors.

Does the United States Benefit from Private Investment in Mexico in the Energy Sector?

The new administrations in the United States and Mexico will need to define how energy interdependence between the two countries benefits their respective interests, creates jobs, and advances a wider political agenda on immigration and security. The U.S. Administration has committed to a strategy of re-industrializing the Midwest and deporting immigrants. Still, the US will need to rely under any scenario on supply chains for inputs that it cannot produce competitively. As of April 2025, the United States has imposed 25% tariffs on products that do not comply with the USMCA, creating an incentive for Mexico to bring more products into USMCA compliance. Inevitably, there will be trilateral negotiations to adjust the shares of vehicles and parts that are produced in each North American country, and what gets imported from abroad.

The Trump Administration will likely question why private investment in Mexico’s power sector supports its agenda—and why it will not simply take away jobs from the United States. The answer is rooted in the migration benefits from Mexico’s economic growth, the restructuring of energy supply chains away from China and the competitiveness of the North American economy.

First and foremost, economic growth in Mexico is one of the strongest tools to reverse migration pressures on the southern U.S. border. From 2009-2014 Mexican migration to the United States reversed course with a net annual influx back to Mexico (see Figure 5 below).

Figure 5: Net migration from Mexico to the United States returned to positive between 2013-18 (in thousands)

Mexico’s economic strength reduced the reason to migrate and gave those in the United States a reason to return home. From 2006 and 2012, Mexico’s GDP grew faster than that of the United States, averaging 1.9% annually compared to the United States’ 1.3%. Excluding 2009 (drops in GDP following the global financial crisis), Mexico’s GDP during this period was 3.3% compared to the United States’ 1.9%. Diminishing U.S. job opportunities following the crisis also contributed to a return to Mexico as well as family reunifications and deportations. Three key factors that would contribute to U.S. trade and security objectives with Mexico are: (1) energy investment and infrastructure development to support economic growth in Mexico that deters emigration to the US and supports the return of migrants from the US; (2) cooperation on near-shoring supply chains supported through access to reliable power and other basic services; and (3) extending border cooperation to Mexico’s southern border to control flows from Central America.

As estimated earlier, for Mexico to attract migrant returns and deter new migration, Mexico will need to invest on the scale of $30 billion in power supply, transmission and distribution to stimulate growth and meet industrial and residential electricity demand. Two-thirds of that investment will need to come from the private sector. Those investments are critical to make Mexico a viable platform to bring supply chains from China and other parts of Asia closer to the United States.

While countries and companies may differ on future scenarios for climate change and energy transition, Figure 6 demonstrates that under every SPGCI global scenario for the future of power, remarkable consensus exists that increased electrification will be critical to drive economic growth in every sector of the economy.

Figure 6: Global power demand by scenario, (TWh)

To be competitive, electrification will require low-cost renewable energy, batteries to store wind and solar power when they are in excess supply, and processed minerals to manufacture batteries.

Figure 7 illustrates that China leads the world in all these categories and its dominance of these markets is expanding. Developing these sectors in the United States will take time to mobilize the capital and get the necessary permits. A key incentive for Mexico and the United States will be to bring investment to North America, with Mexico as a hub for processing and assembly. Copper and lithium are in abundant supply in South America and Mexico. Mineral processing and battery development could be anchored in Mexico and integrated with emergent battery production facilities in the United States.

Figure 7: China controls most clean tech supply chain segments in 2024

Accelerating a trend of integration across the Western Hemisphere is key to the economic success of North America—and to achieve competitiveness that increases jobs in all three countries. The automotive industry illustrates the complexity of the challenge. Vehicle parts in North America cross borders multiple times —seat belts, for example, go back and forth more than ten times. The integration of labor and technology across the United States, Mexico and Canada delivers quality and a competitive cost. Without that integration, the final products would have difficulty competing in price in the United States and as exports. Mexico currently exports north of $125 billion in car parts today from roughly $75 billion pre-pandemic, most of which is destined for North American assembled vehicles. The circle ends with reliable energy supplies in Mexico. Without that, investment will not flow to deepen industrial integration between Mexico and the United States.

Does Trade in Hydrocarbons Serve the Interests of Mexico and the United States?

At a global level, fossil fuels supply approximately 80 percent of the world’s primary energy demand. That share has stayed roughly the same since 1990. Mexico depends on hydrocarbons for 90 percent of its primary demand, and renewables for just 3%. In the United States, hydrocarbons supply 81 percent of primary energy demand. Even then, natural gas (a hydrocarbon) significantly displaced coal and reduced United States emissions to the lowest level since the mid-1990s. In both countries, oil and natural gas will remain a significant part of the fuel mix for decades – but both nations could take measures to optimize their trade relationship.

Seventy percent of the natural gas Mexico consumes—approximately 6.4 bcf/d—is sourced by pipeline from the United States at Henry Hub prices – the lowest market prices commercially available to an importing nation anywhere in the world. The challenge is Mexico’s dependence. Mexico has the capacity to substitute about 1.2 bcf/d in natural gas pipeline imports with LNG, but that too would be sourced most cheaply from the United States. Mexico has virtually no natural gas storage capacity. Disruptions in gas trade—whether through weather events in the United States, or tariffs on U.S. gas exports, and any form of extended border closure—would severely damage Mexican industry and households.

In the short term, doing without U.S. natural gas is not commercially viable for Mexico. Investments in renewable energy could eventually reduce gas demand, but that will take time to develop and deploy, and industries like steel and cement will need other alternatives like decarbonized hydrogen (which also is not yet commercially competitive). If developed in a more transparent U.S. commercial environment, gas imports from the United States to Mexico’s Pacific coast could support U.S.-Mexico joint ventures to produce and export LNG to Asia.

For Mexico’s energy security, the only real and immediate relief from Mexico’s dependence on U.S. gas would be to negotiate a provision in the USCMA trade agreement that precludes, on the grounds of national security, the imposition of tariffs and non-tariff barriers on energy trade. Energy trade would need a blanket exemption, for example, from the imposition of U.S. tariffs. In the current political environment, agreement on such a provision seems impossible to imagine.

Mexico’s heavy crude oil is optimally suited to U.S. Gulf Coast refineries, including Pemex’s DeerPark refinery in Houston. Looking at the United States and Mexico as an integrated value chain of fuels, the U.S. Gulf Coast will benefit from heavy sour crude from Mexico and sending surplus of high-quality gasoline and diesel to Mexico (where U.S. demand is declining). Mexican refineries can also improve their yields of gasoline and diesel with a share of lighter U.S. crude oil. The latter aligns with Mexican government policy to decrease dependency on gasoline and diesel imports (about half of consumption is imported supply). This policy includes a new refinery, Olmeca. But supplying Olmeca exclusively with domestic crude will decrease available crude to export (which already decreased by an average of 6% per year since 2019, given the combination of declining crude production and increased refineries’ utilization). Increasing oil production in Mexico remains important to optimize the system.

Exploiting its hydrocarbons resources will provide a relevant source of income to the Mexican government but most importantly for Pemex to face its debt payments. Pemex is the most indebted oil and gas company of the world, with about $100 billion debt plus another $20 billion in debts to suppliers. Exploration and production are the most profitable business segment of Pemex, the one able to generate cash for payments. Maintaining a crude oil export platform requires investment in exploration and development of multiple fields, at levels that exceed Pemex’s financial situation. Private investment can complement what is required by partnering with Pemex, such as happened with Trion, a 2012 deepwater discovery by Pemex, which was on hold until association with Woodside in 2016 took it to appraisal and development. So far, US$1.2 billion in investments have been executed. Production is expected in 2028. From there the project can generate an average $500 million after tax cash flow per year during the following decade, 40% of that to Pemex. The government will get US$25 per barrel produced, according to S&P Commodity Insights (consulted on December 12, 2024).

That Mexico and the United States will continue a commercial relationship in oil and natural gas seems inevitable. Cooperation on how to manage their interdependencies and to secure private investment could make it more profitable and secure for both countries.

Will the United States and Mexico Align on Energy Security?

 “Vamos a promover la eficiencia energética y la transición hacia las fuentes renovables de energía, para absorber a través de estas fuentes, el crecimiento de la demanda de energía.”

-—Claudia Sheinbaum, inauguration speech, October 1, 2024

“I will cancel Biden’s ruinous power plant rule, terminate his electric vehicle mandate—if you want to buy an electric car, that’s fine, but you’re going to be able to buy every other form of car also—and unleash domestic energy production like never before.”

—Donald Trump, “America Must have the #1 Lowest Cost Energy and Electricity on Earth,” September 7, 2023

Claudia Sheinbaum and Donald Trump have declared opposite policies on climate change and what constitutes energy security. Whether each can realize their respective intentions—or whether both countries find themselves on similar tracks—may depend on private investment.

Mexico has all the necessary resources to pursue more aggressive climate and energy security strategies. It has among the most attractive wind and solar resources in the world. There is strong demand in industry and manufacturing for increased access to renewable energy. The automotive sector needs to meet industry targets for decarbonization adopted by North American auto companies. Already, price premiums or regulatory pressures are emerging in North American supply chains for green steel and lower-carbon cement. North American companies are already eying how they meet Europe’s Carbon Border Adjustment Mechanism to penalize imports based on carbon content. At home, Mexico has demonstrated from previous auctions that renewable energy can deliver power at lower costs than other generation sources.

President Sheinbaum has stressed that she wants to intensify Mexico’s climate ambition and raise its Nationally Determined Contributions—its national goals under the Paris Agreement to reduce emissions. As suggested earlier, the challenge will be attracting private investment. That will be key to unlocking its renewable energy potential and matching it with grid, transmission and distribution capacity that will get power to consumers. Without such investments, there is no clear highway to sustainability.

Donald Trump has made clear that he intends to rescind financing for renewables, EVs and cleantech—and he has announced U.S. withdrawal (again) from the Paris Agreement. While terminating Biden’s landmark Inflation Reduction Act (IRA) would seem to require an act of Congress, the U.S. administration is already taking action to rescind and replace Biden-era actions taken through regulations — measures such as relaxing fuel efficiency standards, relaxing emission standards for U.S. power plants and redefining the regulations on what types of electric vehicles are eligible for subsidies. 

What remains to be seen is the reaction of governments and industries in what have come to be known as Republican states that are among the main beneficiaries of subsidies under the IRA: Texas, Louisiana, Georgia, Tennessee, Alabama and Florida. These states have become leaders in wind, solar, carbon capture, hydrogen, EVs and batteries. Nuclear energy, generally supported by the Republican Party, also receives IRA benefits. Political and industry leaders in these states may very well become a new constituency for energy transition that has not been seen in the Republican Party.

Indeed, for both Mexico and the United States, private investment may determine their respective actions on climate change in the coming years. Private capital and technology, for both countries, will be the key enabler. In Mexico, the direction of public policy will shape the private sector’s response. In the United States, the private sector will potentially provoke the incoming administration to rethink its views on the commercial value of energy transition and how it relates to energy security.

Finally, for both countries, two potentially unifying points on climate change could be China and carbon markets. Mexico and the United States are at two complementary ends of a spectrum on carbon markets. Many U.S. companies (in steel, petrochemicals, hydrocarbons, cement) need to buy carbon credits to reduce their emissions profile—to respond to board directives, in some cases, to lower the cost of capital. Especially with advances on regulatory measures on Article 6 of the Paris Agreement at COP29, which established the legal framework for Voluntary Carbon Markets that will support international trade in carbon credits, Mexico has greater prospects to generate carbon credits that attract capital for projects certified to lower emissions. Both countries should have an interest in capitalizing on (increasingly global) trade tensions with China to advance Mexico as a platform for developing low-carbon technologies and processing the inputs needed for batteries, EVs and electrification.

Two Nations Indivisible (with credit to Shannon O’Neill)

The potential benefits for the United States and Mexico from working together on energy and climate are not only deep, they extend to some of the toughest issues in the relationship.

For Mexico, this cooperation is fundamental to its economic viability given its dependence on US natural gas. Private investment, most likely to come from the United States, is needed to create a reliable, sustainable and more affordable power system. Trade in Mexican crude oil and US refined products has already been demonstrated to make both national refining systems more productive. To deepen investment and trade, Mexico and the United States need to build confidence around the legal and regulatory foundations of their relationship.

For the United States, a successful Mexico is key to curbing immigration flows to the United States and cooperating on repatriating migrants. Private investment in Mexico’s energy infrastructure will build confidence in near-shoring and rebuilding sensitive supply chains that are increasingly critical to the US economy.

The two nations are so distinct in character and so indivisible in interests. In 2025 they will be at an inflection point, where two new leaders take the relationship forward. Both nations would be well served to align their ambitions for jobs and competitiveness with incentives to lure private capital to invest in low-cost and sustainable technologies as key to winning a race for global leadership that will bring jobs and prosperity to North America.

Mariana Deluera contributed to the editing of this paper.

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