Mexico's falling electricity rates draw manufacturers

It just got a lot cheaper to turn the lights on in Mexico.

A number of factors influenced the country's slow but steady rise as a manufacturing hub for multinational corporations, including its membership in NAFTA, other trade agreements, cheap labor costs and its proximity to the United States.

An employee inspects a Volkswagen Jetta at the company's assembly plant in Puebla, Mexico.
Susana Gonzalez | Bloomberg | Getty Images

But observers point to another recent development that they see accelerating investment in Mexico and boosting economic productivity: Electricity is getting cheaper.

The Mexican government made changes to the country's constitution in 2013, allowing foreign companies to invest in its previously state-controlled oil and gas reserves, and its electricity market, for the first time in roughly 80 years.

The reforms are part of an effort to reverse years of declining productivity growth in Mexico. GDP growth has declined from 6.4 percent in the period from 1950 to 1980 to 2.4 percent between 1980 and 2010, according to a Columbia University report prepared for Goldman Sachs on the energy reforms.

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By opening its energy markets, the government hopes it can draw investors who will help develop its remaining oil reserves, and later, its vast shale gas deposits. But the biggest impact so far has come from changes to the country's electricity policies.

"Probably of all the energy reforms that have been passed, the changes in the electricity sector are going to be most helpful to Mexican productivity and competitiveness," said Duncan Wood, director of the Mexico Institute at the Wilson Center.

"When you come to the electricity sector, peak rates for industrial consumers were sometimes 120 to 130 percent higher than what their counterparts were paying in the United States," Wood said. "When you look on average Mexicans were paying 47 percent more than Americans. So this was a huge drag, given the fact when right across the border you have some of the cheapest electricity rates in the world because of all this natural gas."

Mexico's Federal Electricity Commission chief executive Enrique Ochoa Reza, said in a speech last March that electricity rates for industrial customers have fallen between 18 and 26 percent over March of 2014.

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Mexico's border with the United States makes it an attractive place to manufacture items such as appliances, heavy equipment and cars. Most of its manufactured goods go northward to American stores. Mexican manufacturing rose by 3.4 percent in the first nine months of 2014, while Brazil and Argentina's contracted by 1.8 and 2.4 percent, respectively, according to a report from Stratfor.

The automotive sector has been particularly active in the country. Several car companies have announced plans for new factories in the country. Germany's BMW said in late 2014 that it plans to spend about $1 billion building a plant that will begin producing cars in 2019.

Nissan and Daimler will share another $1 billion factory they are building there, and Ford announced plans to build a $2.5 billion dollar plant last April. Audi is going there, too.

Many of those companies have had factories in the country before, but this rush comes as Mexico has boosted efficiency in its state-owned electricity provider, CFE, and made investments in retooling its electricity grid to run on natural gas, instead of the petroleum the country has been using.

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"At the time they considered the reforms, the price of oil was four times the price of natural gas," said David Goldwyn, of energy advisory firm Goldwyn Global Strategies. "Now, even though the price of oil has crashed, it is still two times the price of natural gas."

Roughly a year after instituting the reforms, the country had changed the electricity infrastructure enough to reduce electricity costs for industrial customers by 10 percent, Goldwyn said.

Certainly, other factors have pushed Mexican manufacturing forward. A report from Strafor Intelligence published last April said that Mexico's labor force is now 20 percent cheaper than China's, whereas Mexican labor was almost 60 percent more expensive than Chinese labor in 2000.

Mexico is the "most prolific signer" of free trade agreements in the world, according to a report by the United States-Mexico Chamber of Commerce. The numerous countries they have signed agreements with are home to 850 million people and 60 percent of global GDP.