What's at stake for the energy sector in the North American Leaders’ Summit?

With Mexico, the US and Canada in the middle of negotiating a compromise on the Latin American country's controversial energy policy decisions, investors have turned their eyes to the North American Leaders' Summit.

The summit is being held on Monday and Tuesday.

Marking the first official visit to Mexico by US President Joe Biden, the meeting comes amid wide-ranging concerns, including the border crisis and the extremely violent arrest of Ovidio Guzmán, son of former drug lord Joaquín "El Chapo" Guzmán, who is serving a life sentence in the US.

A lot of focus has been put on the summit by market observers, with Mexico's leadership emphasizing its willingness to close an energy deal that would both protect the country's sovereignty and ease the concerns of its Northern partners, prompting them to abandon plans to start a full-blown arbitration case under the USMCA trade agreement. 

What such a compromise would look like remains obscure. Mexican President Andrés Manuel López Obrador (AMLO) and foreign minister Marcelo Ebrard, have touted a US$48bn clean power and manufacturing plan to overhaul the northern state of Sonora as paving the way for a deal, by making space for US investments in clean energy and electric vehicle manufacturing assets.

But the plan would retain full ownership by Mexico's public utility CFE of any power generation assets, and it is unclear whether AMLO is willing to compromise on his key policy goals. Namely, that the State retains as much control as possible over the country's electric power industry, including supply, transmission and retail distribution.

"We lack the key details or the critical route for an implementation of [the Sonora plan]," said local competition-focused think tank IMCO in a note to the press. "The commitment lacks credibility in light of the Mexican government's efforts to close the electric power market to foreign investment."

Some signs of policy flexibilization were evident late in 2022, when Ebrard broke years of lukewarm statements about climate goals and made some ambitious announcements at COP27. But Mexico's nationally determined contributions (NDCs), which were presented at the conference in Egypt, drew strong criticism from some climate advocates. 

The summit is therefore bound to help decipher to what extent the Sonora plan, as well as Mexico's new climate and clean energy stance, are likely to lead to concrete changes for investors.

These are the key agenda issues for the first meeting between Biden and López Obrador, which was scheduled for late Monday, with the attendance of Mexico's finance and economy ministers. According to Ebrard, the agenda will also see discussions on lithium and battery production.

"[Plan Sonora] is intimately connected to the high-level economic dialogue between Mexico and the US," Ebrard told reporters early Monday. "It stems from the visit made by the US economic delegation headed by Secretary of State Antony Blinken ... to coordinate actions between Mexico and the US," regarding plans to grow Arizona's semiconductor business.

Mexico's broader energy policy goals were not on the agenda of the first meeting and neither the complaint by the US and Canada regarding the USMCA dispute. 

"There are likely to be conversations on energy, but the complaint will not be resolved during these meetings," USMCA expert Luis de la Calle told Mexican news outlet Energía a Debate.

The dispute began last year and stems from a set of Mexican energy policies that the US and Canada claim hurt private investors and favor Mexico’s state-owned firms. In particular, they point to changes in dispatch priority rules and the sector's growing permitting hurdles, as well as a controversial set of natural gas pipeline regulations.

In a letter addressed to the three presidents, three of the largest North American trade groups called for a "quick resolution" of the treaty dispute, as well as two parallel disputes on automotive rules of origin and tariff quotas for dairy products. Full-blown arbitration should be avoided by all parties, the letter said.

The US Chamber of Commerce, the Business Council of Canada and Mexico's Consejo Coordinador Empresarial said recent disruptions in international trade and investment flows give North America "a limited window of opportunity to capitalize on its unparalleled competitive advantages."

The opportunity hinges in part on a clean energy transition plan that can secure access to renewables supply for companies looking to grow their operations while also meeting their emissions pledges, the chambers said.

Mexico's hostile stance towards the buildout of privately-owned wind and solar parks has been deemed by many private sector players as hampering its capacity to attract new industrial investments. US energy investors have pressed the federal government and congress for months to intervene on their behalf. The Sonora plan is widely seen as the Mexican government’s attempt to reduce these tensions and portray Mexico as an investor-friendly country.