Prices versus quantities: Re-thinking electricity subsidies in the context of nearshoring in Mexico

This paper proposes a paradigm shift from price-based to quantity-based electricity subsidies, inspired by the characteristics of distributed generation technologies such as photovoltaics (PV solar). This approach, aimed at addressing the significant challenges in Mexico's electricity sector exacerbated by nearshoring, entails reallocating government budgets towards the procurement of solar panels for individuals or households. The paper examines the potential of this strategy to alleviate the current electricity sector's constraints, expand fiscal capabilities, and support Mexico's transition to a greener economy amid the realignments in the global supply chain. We argue that subsidizing quantities, rather than prices, could reduce market distortions and potentially solve long-standing investment issues in the country's transmission, distribution, and generation infrastructure. This approach would not only mitigate the immediate demand-supply imbalance but also lay the groundwork for a sustainable and resilient energy infrastructure, offering a pragmatic solution to the intertwined challenges of energy policy, fiscal responsibility, and industrial development in the context of nearshoring.