Populism Trumps Infrastructure Solutions (again)

Populism Trumps Infrastructure Solutions (again)

Yes, this is a piece about a country in the Americas, and about a populist President, and about an unexpected snap decision which throws out something completely practical and useful, and about how politics can really screw up the delivery of infrastructure services.

No, it’s not about the US.

On February 4, Mexico’s new President, Andres Manuel Lopez-Obrador (AMLO for short), announced the cancellation of what would have been Mexico’s fourth long-term electricity auction.

From a practical point of view, this decision makes zero sense. Mexico has been struggling for several years with the difficult cocktail of slow economic growth, not enough jobs for a growing population, violence coming in part from insufficient legitimate economic opportunities, and widespread corruption coming in part from large, inefficient and politicized public companies – notably PEMEX and CFE — the government-owned oil and electricity companies. Underlying the economic slowdown has been the price of energy in Mexico: thanks to the dramatic drop in oil and (especially) natural gas prices across the border in the United States, Mexico’s cheaper labor costs ceased being a big advantage for manufacturing firms. Cheap labor relative to the US was now offset by expensive energy. The Maquila sector, the manufacturing firms set up in Mexico’s north to sell to the large US market, went from high growth to no growth. Over the last six years, bringing down Mexico’s energy’s costs, and so restoring Mexico’s cost advantages, has been a top national priority.

Mexico’s greatest success over the last few years, arguably, has been the beginning of delivery on its low energy cost strategy. Some aspects, notably cheaper domestic gas and better natural gas transport, has moved slowly. But in buying cheaper electricity, Mexico has enjoyed spectacular success. Building from a base of highly efficient wind farms installed in the last decade, Mexico’s solar auctions have delivered commitments from private firms to deliver solar power at some of the lowest costs on the plant. The first auction, in 2015, delivered commitments from large private generating companies for power at just over $0.04 a kilowatt hour, well below average system costs – not just for Mexico, but also for the US. In the third round of auctions, in late 2017, costs fell all the way to $0.02 a kilowatt/hour – or between 1/3 and 1/4 of the cost of most power in Mexico. Or between 15% and 20% of what a US consumer would pay for electricity.

The total amounts of power being purchased under the first auctions was relatively small, with about 3 GW of new solar connected to the Mexican grid at the end of 2018. At about 5% of Mexico’s total power capacity, this is not yet enough to force system-wide costs down and to enable the lower energy costs Mexico needs to regain some its advantages relative to its northern neighbor. To get there, more auctions for more capacity were the clear path. All laid out on a plate for the country’s new President, who could be soon on his way to claiming victory on Mexico’s big economic priority.

But it’s not to be. Saying you’re smarter than your predecessor, and bad-mouthing private providers, have proved more politically appealing than continuing to deliver on an infrastructure that was working, and working amazingly well. AMLO has announced that CFE, the government-run utility, will instead be asked to expand its power generation. In a world where now dozens of countries have achieved spectacular reductions in the cost of new electricity capacity, having a state-run utility in charge of installing low-cost solar and wind plants has worked… nowhere.

A sad day for Mexico. And a reminder that the biggest obstacle to infrastructure improvements for many governments is – the government itself.