2013-03-01 16:42:19 - New Energy market report from Business Monitor International: "Mexico Power Report Q2 2013"
BMI View: Although Mexico's weaker economic outlook in 2013 has the potential to weigh on the power sector's growth and profitability, its booming manufacturing sector, increasingly strong private consumer and favourable demographics support an optimistic long-term growth outlook for the country and for its power sector. That said, we believe that the passage of substantive energy sector reforms will be crucial in determining the future of the country's oil & gas sector and will play a role in shaping its electricity mix. Most notably, while we continue to hold the view that gas generation will strengthen its dominant position, with cheap gas in the region fuelling the development of new type of capacity, we highlight that Mexico continues to make
progresses in its renewable expansion, in line with its General Law on Climate Change.
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We remain of the view that an estimated robust 3.07% year-on-year (y-o-y) growth for power consumption in 2012 will give way to a slightly less positive performance in 2013. With increased uncertainty as a result of a slowdown in the Mexican economy weighting on the sector, we believe that consumption growth will come in at a more modest 2.44% y-o-y in 2013. This more cautious short-term stance notwithstanding, over a multi-year time horizon we are more sanguine on the sector's prospects for growth and profitability. This outlook is underpinned not only by positive demographic and macroeconomic fundamentals, but also by sector specific dynamics. First of all, the country's low per capita consumption and relatively high energy intensity suggest that risks for long-term electricity demand are on the upside. In addition, approval of the General Law on Climate Change in 2012 as well as Nieto's government proposal to increase in investment in the electricity sector and allocate MXN269bn for the Federal Electricity Commission (CFE) signal substantial commitment to the sector.
This outlook is fully corroborated by expectations from BMI's Infrastructure analysts, who anticipate strong growth in the utilities sector, with significant investment directed to power plants and transmission and distribution grids over the medium term. That said, with Mexico relatively well placed compared to some of its regional peers in terms of its power generating infrastructure, we reiterate our view that, while new investments will be necessary to substitute ageing capacity and meet growing demand, attempts to diversify the energy mix will be a key component and driver of capacity expansion and refurbishment programmes.
From this perspective, we notice that:
* A muted outlook for the oil sector raises some questions concerning the origin of the sources used in power generation. As such, a potential energy sector liberalisation will play a key role in influencing future dynamics and shaping upside and downside risks for the power sector as a whole as well as for different generation segments.
* Most notably, given the current backdrop - especially the country's easy access to cheap North American gas - we believe that gas generation will see its already dominant position reinforced, with gas-fired generation contributing to over 57.03% of total generation by 2022.
* That said, we reiterate that Mexico's adoption of both CO2 emissions and renewable electricity generation targets in 2012 has cemented the country's desire to develop its renewables industry. The country has made significant headway in the expansion, as a number of large developments come online and the project pipeline continues to strengthen.
* However, we maintain our assessment that if Mexico is to meet the ambitious targets outlined by the legislation, a comprehensive regulatory framework will need to be put in place in order to sustain the level of investment, and thus, growth in the sector.
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