Mexico Electricity Costs Now Favorable for Manufacturing
In recent decades, US manufacturers have been cautious about manufacturing south of the border due to high Mexico electricity costs. But the country has made several notable strides towards reducing the cost of industrial electricity, and manufacturers are all too happy to invest in long-term operations there.
Mexico Electricity Costs in the Past
In the past, Mexicans were paying nearly 50% more for electricity than Americans due to a myriad of reasons, including low generation capacity, regulatory restrictions, and more. In fact, peak rates for industrial customers were sometimes more than 100% higher than those in the United States. And these high energy costs contributed to a slowing down of Mexico manufacturing. Between 1980 and 2010, Mexico’s GDP growth slowed to just 2.4%.
In 2013, everything changed. Mexico’s aggressive reform agenda included allowing foreign companies to invest in its previously state-controlled energy markets for the first time in nearly 80 years. These newly opened markets included oil, natural gas, and electricity. Within the first year, electricity prices dropped a surprising 10%.
The decrease in Mexico electricity costs continued into 2014 while manufacturing in the country increased nearly 3.5%. In 2015, a further price reduction of 2% was implemented for domestic consumption as a reaction to the increased supply of natural gas the country was experiencing. Duncan Wood, Director of the Mexico Institute at the Wilson Center, commented on the positive influence these cost reductions was having on manufacturing:
Probably of all the energy reforms that have been passed, the changes in the electricity sector are going to be most helpful to Mexican manufacturing and competitiveness.
Current Electricity Costs
Last year, wholesale electricity costs averaged about $48/MWh to $60/MWh (USD). The industrial electricity rates and residential rates in Mexico are improving. Continued public access to energy generation and mining have brought about a situation in which Mexico electricity costs are now only about 30% higher than in the US.
Additionally, Mexico has increased efficiency in its state-owned electricity provider, CFE, and begun moving away from petroleum for electricity generation, greatly expanding its electrical grid to run on natural gas. Manufacturers continue to announce large scale investments into the country, signaling renewed confidence in the profitability of doing business in Mexico.
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