The purpose of this paper is to address the question of how a developing country, like Mexico, can reform its electricity industry at the same time as addressing climate change issues.
The objective is to provide a tool that policy makers could use to make better and more informed decisions if they decide to liberalise the power sector in Mexico. The problems they would face are difficult to address in an analytically tractable way using conventional economic models. Also, these problems are too idiosyncratic to solve by translating empirical experience from other markets. In response, a system dynamics model has been developed in order to test the impact of a range of different environmental and energy policies.
The paper finds that a reform setting where competition is allowed in fossil fuel technologies; while the public company (CFE) keeps control of hydro and nuclear capacity produce the most well rounded scores in terms of efficiency, CO2 emission reductions and political feasibility. The results could improve the policy implementation process by shedding light on the circumstances and policy choices that can exacerbate or minimise effects.
A simulation of this kind would increase the understanding of these kinds of policies by providing structured insights into key uncertainties. They can also foster new ideas – in the energy sector have underpinned major policy initiatives. But results should be taken with caution, as complete validation of models is impossible.
These results add to the policy implementation literature. For the case of Mexico that has not engaged in a specific model of deregulation, the use of simulation model would be very useful to predict flaws in the design of the new regulation and to prevent unwanted scenarios to happen.
A judicious implementation of an electricity reform can help achieve lower carbon emissions reductions which would be beneficial against the climate change problem.
To the author's knowledge, the approach of analysing ex ante the environmental outcome of electricity reform using a simulation model in a developing country has not been treated in literature.
