Assessing dependence and governance as value chain risks: Natural Gas versus Concentrated Solar power plants in Mexico
Introduction
Mexican policy-makers have sought to address the challenge of transforming the Mexican economy and its energy system to meet the Nationally Determined Contribution (NDC) pledge under the Paris Agreement (SEMARNAT MEXICO, 2015). Under the former government, one of the most ambitious initiatives was the energy reform.1 Among its main goals was to deliver a low(er) carbon and self-sufficient power system based on clean production, transmission and distribution of electricity (Banacloche et al., 2020a) which included broad targets in renewable investments (SENER, 2018). The new administration2 has side-lined the development of renewables in favour of fossil fuel generation, especially natural gas combined cycle power plants (Secretaria de Energía and Gobierno de Mexico, 2019). Mexico's new energy policy is not aligned with the achievement of the well below 2 °C and 1.5 °C limits established in the Paris Agreement (Climate Action Tracker, 2020; Rebecca, 2021).
Besides the negative impact of increasing carbon emissions, this change in the energy policy also implies changes in trade patterns and higher dependence on imports. The country has a wide range of energy resources, including oil, gas and a vast potential for the development of renewables, especially solar (IRENA, 2015). While Mexico is within the top ten oil producing countries, it is highly vulnerable to oil price volatility, and it is dependent on NG imports from the USA (EIA, 2020). For this reason, the recent shift to a more fossil fuel-based power system could aggravate the vulnerabilities associated with this situation. As an alternative, concentrated solar power (CSP) could contribute to a decarbonised Mexican power system while reducing the country's high fossil fuel energy dependence. CSP's attractiveness is based on its decarbonisation (Arancibia-Bulnes et al., 2014; Kabir et al., 2018; SENER, 2012) as well as its dispatchability via thermal energy storage (Achkari and El Fadar, 2020; Mehos et al., 2016). Additionally, the economics of CSP are also improving showing a costs decline over the period 2010–2019 at 60%, which will likely continue (Lilliestam et al., 2020).
Integrated sustainability assessment to support the decision making process allows to identify and decompose diverse economic, environmental and social impacts. For example, for the Mexican case, Rodriguez-Serrano (Rodríguez-Serrano et al., 2017a) showed that investing in CSP could reduce CO2, contribute to economic growth and help create new high-quality jobs; at the same time, CSP could also reduce the overall employment because many CSP components are imported. Nonetheless, there are other aspects essential for a low-carbon energy transition that renewables deployment could affect such as geopolitical risks associated to the economies involved in the value chain. These effects have not yet been thoroughly investigated in combination with the mentioned assessment methods. Among other possible variables, in this work we focus on dependence and governance aspects of the value chain as important aspects affecting the geopolitics, defined as “the analysis of the interaction between, on the one hand, geographical settings and perspectives and, on the other, political processes”(Cohen, 2015). This approach offers two main advantages. On the one side, it allows identifying which value chain maximizes direct and indirect diversification thus preventing relying in a limited number of direct and indirect suppliers. On the other side, it allows establishing the quality of those supplier economies in terms of governance thus avoiding the inclusion of low governance countries in the value chain of components.
The research on how to address geopolitical aspects along the value chain is relevant in the assessment of energy investments for several reasons found in the literature. Renewable energies differ in many respects from fossil fuels and so do the geopolitical consequences of their production and consumption (Commission on Geopolitics of Energy Transformation, 2019; Goldthau et al., 2018; Scholten and Bosman, 2016). Valero et al. (2018) and Frenzel et al. (2017) analysed the global material requirements of the energy transition from fossil sources to renewables and concluded that it will imply accepting the dependence on raw materials, some of which may entail significant supply risks due to the lack of governance in supplying countries (Ali et al., 2017).
The geopolitics of renewables are likely to be different. The risks of fossil resources which are determined by their geographical availability around the world would not be as relevant for renewables (Overland, 2019) and in case, could be positive due to more decentralize (Criekemans, 2018). As pointed out by Kim and Karpinsky (Kim and Karpinski, 2020), the Covid-19 outbreak has underlined the need to watch out for the security of supply of critical minerals for a clean energy future. In this regard, the geopolitical analysis of energy issues should also be adapted to the new world of renewables in which the demand for materials will increase significantly, making this the most vulnerable step for renewable energy system (components manufacturing, storage, and required smart/digital technologies) (European Commission, 2020). Energy policies must simultaneously address geopolitical issues that revolve around the security of supply (trade, environmental and economic and resource management policies) (Bouzarovski et al., 2015).
Given the above, it is important to expand the traditional sustainability assessment of energy projects to include geopolitical analysis for the entire value chain of energy projects, including the identification and analysis of new and hidden dependences, but also the governance quality in the countries involved in the supply chain. In this paper, we expand the existing Multirregional Input Output (MRIO) method (Leontief, 1936; Wiedmann et al., 2007; Wiedmann and Lenzen, 2018, Wiedmann and Lenzen, 2008) to include these issues. MRIO methodologies are well suited to assess these aspects due to the explicit consideration of the transnational value chains between different countries and sectors in the global economy. The inclusion of governance and import dependence aspects in MRIO assessments is partially included through the analysis of international carbon trade (e.g. dependence on traded carbon is analysed by an MRIO methodology (Andrew et al., 2013). Mancini et al. (Mancini, 2018) review the social-oriented assessment of global value chains including a wide range of indicators including a kind of actors value chain involved in raw materials flows around the world. Additionally, the social analysis of CSP deployment (Rodríguez-Serrano et al., 2017a) included governance as an aggregated social indicator by using the Social Hotspot Database (SHDB) (Benoit Norris et al., 2013). As a way to improve existing frameworks, we propose to deeper geopolitical approach by quantifying dependence and governance along the value chain. As such, two methodological contributions are developed. First, we add the consideration of geopolitics by including the analysis of diversification and governance along the entire value chain. Second, specifically for governance indicators, we improve the approach from previous works by incorporating a wider range of governance indicators without aggregation, more clearly interpretable. Furthermore, to probe the proposed method, we apply the proposed extended model to a case study of CSP power plant investments in Mexico, in comparison to a NG power.
The novelty of the proposed method combined with its application to compare two relevant energy technologies in Mexico contributes to enlarge the existing body of knowledge in many ways. First, the proposed method enlarges and improves the existing literature on sustainability assessment of global value chains (MRIO) by considering diversification and governance indicators. By doing so, the proposed method allows to assess and compare alternative energy investment projects. This is done considering not only the traditional sustainability impact indicators but also governance and diversity quantitative indicators associated to the direct demand of goods and services as well as the embedded contribution of indirect suppliers. Furthermore, in order to validate and illustrate the proposed method with a case study, two alternative energy technologies in Mexico have been assessed and compared: a CSP power plant and natural gas combined cycle (NGCC) power plant. Two sensitivity scenarios based on the insights from the literature and stakeholder consultation have been conducted.
Section snippets
Method: Extension of the MRIO model
The methodological basis of this paper is the extension of the MRIO model by including indicators to measure import dependence and governance quality levels along the value chain. The reason to focus on dependence and governance arises from the concept of geopolitics. The first component of the analysis is the dependence relationship between countries along the value chain in their roles as importers and exporters. The potential relevant role of one supplier drives to a dependence on it, so the
Results and discussion
The results, and corresponding discussion, have been split in three sub-sections according to the different aspects and level of analysis undertaken. Dependence analysis results are included in Table 3 where the results for the metrics HHI and E (for the direct demand and for the total output) are shown. Also, the ratios Edirect demand/Emax and Etotal output/Emax are presented. The governance results are sub-divided by whole value chains analysis under study and the disaggregation by supplier.
Conclusions
Our research quantifies the diversification of supply and the governance levels along the value chain of two alternative energy investments in Mexico (NGCC and a CSP power plants), by using a set of indicators which allow to point out potential geopolitical risks. The results showed that the NGCC supply chain has a lower level of supplier diversification than that of CSP and a generally higher level of geopolitical risk. This is because NGCC suppliers along the value chain score worse in most
Declaration of Competing Interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.
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