Grasping the Argentinian Opportunity - Market and Financing for Renewable Energy Assets

29/06/2017 | Rachel Andalaft, REA Consult
Tags: argentina

With new leadership in place, Argentina is attempting to put its best foot forward and impress the world with the investment opportunities it has to offer. And the country is learning faster than its neighbors!

Argentina is doing what it takes for their renewable energy market to grow. Not only is the current government putting policies in place to encourage foreign investment, but they are also actively advertising their desire to be invested in. The country’s 2025 goal targets 20 percent of energy consumption to be from renewable sources - up from their current level of 1.8.

Renewable Energy Auctions

Evidence of this commitment can be seen in their new RenovAR program. Under the umbrella of this program Argentina has launched renewable energy auctions. The Argentinian government’s original goal, was to have a first round auction for investment opportunities with 1,000 renewable energy megawatts on the grid up for grabs. During this round, more than 6,000 megawatts of renewable energy were proposed by 75 different companies for 123 different projects. This significant oversubscription allowed the government to get the variety of renewable energy that they’d planned —their original goal being more than half of the energy coming from wind, a third from solar, and the rest from biomass, small dams, and biogas.

An example of one interested party is the Inter-American Investment Corporation. In late 2016, they granted a $200 million loan to the Argentinian YPF Energia Electrica S.A. This will allow the company to construct, operate and maintain a 100 megawatt wind farm. Another big name that is seeing the opportunity in Argentina is Tesla. Recently, the innovative company sent representatives down to Argentina to discuss solar energy investment possibilities with government officials, including the Cabinet Chief to Governor Juan Manuel and Javier Montero, the Minister of Environment and Sustainable Production. Tesla is specifically interested in the Salta Province, both because of its strong security policies over productive project development and because of its natural conditions.

Interest in Argentinian renewable energy extends beyond the Americas. Neoen, a French renewable energy project developer wants to invest U.S. $250 million into a solar project. This project, which will hopefully commence before the end of 2017, will likely consist of a 200 megawatt plant. This will be Neoen’s first renewable energy project in Argentina, but not in Latin America. They already have a solar plant up and running in El Salvador and have plans to continue expansion in the region.

And then, there is China. In April, the Chinese government met with several members of Argentina’s Ministry of Finance. The topic of discussion was investment in Argentinian renewable energy. The goal was to get China to finance a 300 megawatt solar project. The project, which will be constructed in one of Argentina’s northern provinces, will be comprised of three separate plants, each with a power of 100 megawatts. The Export-Import Bank of China will likely put U.S. $400 million towards the project.

The window of opportunity remains wide open. In the coming months, the Argentinian government is planning another auction. This investment opportunity will be aligned with additional tenders that will be on offer for both thermal power generation and new transmission line capacity. The first auction was oversubscribed and created 1.1 gigawatts of projects. The second auction had a similar turnout, with 1.3 gigawatts of projects being awarded. The third and upcoming auction is expected to have a similar turnout.

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Securities for Investors and Financiers

Most importantly, Argentina has done its homework when it comes to attracting financing. In a previous article, I wrote about how the renewable sector in Brazil suffered greatly from the fact that BNDES has taken the role of the commercial sector, instead of moving on to slicing the risks and foster a stronger capital market (read more). Well, Argentina is proving my point.

Macri’s government realized the need to provide investors with additional protection. And for this reason, they created FODER. FODER is Argentina’s renewable energy trust fund, which allows the government to guarantee payment for each of their tendered power purchase agreements and assistants for project financing. The fund itself is separated into two accounts. Multilaterals, the Argentine government-administered pension fund, treasury funds, and public offerings fund the project finance account. A specific charge to consumers, which is supplemented by the Argentinian Ministry of Finance when necessary, is a payment guarantee account for power purchase agreement electricity. A new law establishes that the Argentinian government is required to put at least half of the savings that are created, profits and interests from projects being financed, and charges on power consumption into the fund. The government has already allocated about U.S. $860 million towards the divided FODER account.

A further source of security is provided by the World Bank, which gives first auction round benefits for the proposals that are accepted. They have guaranteed PPA termination payment to protect those companies from country related risks.

Is There Enough Opportunity?

There is a worthwhile amount of opportunity for renewable energy investment within Argentina. Not only does Argentina still have a heavy reliance on fossil fuels, but they also have the third biggest power market in all of Latin America. In fact, their power demand is so high that they went from being a power exporter before 2010, to being a power importer. And it is precisely this power deficit that has the government motivated to find ways to generate much more power.

Additionally, the previously mentioned Argentinian goal of increasing renewable energy generation to 20 percent by 2025 is formalized within the new Law No. 27, 191, which also sets a target of adding 10,000 megawatts of power to the country’s grid by the same year.

Argentina has a great amount of biomass, solar, and wind energy that is ready to be utilized and turned into power. This is especially true for wind energy. With average wind speed of 9 m/s in Patagonia and 6 m/s countrywide, Argentina could become a regional, if not global leader in the deployment of wind energy.

It is this potential of wind energy in Argentina that has made it the cheapest energy source in that first auction. While hydropower came in at $111.10 per megawatt-hour, biomass came in at $110, and solar power came in at $59, wind power managed to be at $49.10 per megawatt-hour. The government expected these low prices from wind energy and these prices will provide significant savings to the fossil fuels that the country currently depends on. These prices for wind energy will allow Argentina to have some of the cheapest wind power in the world - not the only record currently held by Brazil.


Author

Rachel Andalaft, REA Consult

Rachel is the founder of REA Consult, a management and consultancy company for sustainable investments. Based in Brazil and Germany, Rachel has international experience with the implementation of more than 1.6 GW of conventional and non-conventional renewable energy assets.

www.rea-consult.com


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