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Argentina: The new frontier


Rachel Parkes

Argentina’s new government is keen to finally realise the country’s renewables potential after years of false starts. Could this be a new dawn for one of the world’s most promising regions? Rachel Parkes reports.

With just 295 MW of installed wind capacity at the end of 2014 and just 10 MW of installed solar PV capacity, it is safe to say that Argentina has thus far failed to grasp the mettle as far as renewable energy is concerned. Heavily dependent on home-produced fossil fuels, which have been kept artificially cheap by government subsidies throughout the value chain, wind and solar together produce less than 0.5% of Argentina’s power mix. As such, the country’s progress on renewables has been dwarfed by its more pro-active neighbours in Brazil, Chile and Uruguay.

But following the election in 2015 of a new government, coupled with the country’s slow emergence from a torrid decade of macro-economic strife, this could be about to change.

Earlier this year Argentina’s newly-inaugurated president, Mauricio Macri, travelled from Buenos Aires to the Jujuy province in the country’s north to pledge the government’s financial support for a 3 GW solar PV complex in the region. 

Essentially a starting pistol for the government’s vigorous endorsement of renewable energy in 2016, the announcement came amid a flurry of other renewable investment commitments by public and private enterprises. In February, the provincial government in the north-west province of Mendoza unveiled a $220 million deal with Dutch PV firm Gigawatt Global for the development of a 100 MW solar installation in the city of General Alvear. This deal forms part of a $740 million plan to turn the city into a solar pioneer in the country: in addition to the solar PV plant, officials are also planning a $520 million concentrating solar plant (CSP) with a capacity of 110 MW.

Meanwhile, US chemicals firm Dow and Argentinian developer INVAP pledged $123 million for the development of a 50 MW wind farm in the Rio Negro region of Patagonia. Local wind developer Genneia also pledged $500 million over 5 years to expand its Patagonian wind portfolio – including the expansion of its 77.4 MW Rawson wind farm and a new 220 MW wind farm at Puerto Madryn.

This surge in interest has its roots in new legislation, passed in October by Argentina’s previous administration and finalised in earnest by Macri’s new centre-right government in March.  Known as Law No. 27,191, the new legislation lays out binding renewable energy targets in the form of a purchase obligation on energy buyers with annual demand of more than 300 kWh – essentially utilities and large industrial users. The targets require these buyers to source at least 8% of their energy from renewable sources by the end of 2017, with the target rising by 4% every two years to reach 20% by 2025.

The new law also grants a series of tax breaks for renewables installations, including VAT returns for capital goods purchased and accelerated amortisation of income tax.  It envisages a fixed energy purchase price for renewables projects, calculated on a project-by-project basis and it also establishes a government trust fund, Fondo para el Desarrollo de Energías Renovables (FODER), capitalised by the state from savings made on fossil fuel purchases, from which the government plans to finance renewables projects. So far, the government has pledged an initial $800 million in capital funding. The fund will also subsidise projects of up to 30 MW with a feed-in tarrif (FiT) of $0.11/kWh for solar projects and $0.005/kWh for wind, geothermal, biomass, biogas and hydro projects.

Opportunity knocks

And, there is no doubting the scale of the renewables opportunity in Argentina. According to research from the US’ National Renewable Energy Research Laboratory (NREL), Argentina’s gross solar resource could amount to as much as 7853 TWh/y, the 11th highest in the world. The best resource is concentrated in the country’s sub-tropical north-western regions, where annual horizontal irradiation averages more than 2,600 kWh/m3 in some places, according to geographic mapping firm Solar GIS. Furthermore, solar costs per MWh have fallen by more than 50% over the past five years.

But while the solar resource is indeed extensive, Argentina’s biggest opportunity lies in wind power. The country is in possession one of the world’s most promising wind resources. Overall the country has average wind speeds of 5 m/s, with 70% of the country’s territory averaging 6 m/s. In Patagonia, where capacity factors are estimated to be in the region of 45%, wind speeds average 9 m/s. 

Certainly, Argentina has made some attempts to harness this resource in the past.  The country’s previous state-wide renewable energy law, passed 2006, put in place generous 15-year feed-in tariffs for a range of technologies and laid out a national target of 8% renewables by 2016. However, the enactment of the law was delayed and it took three years for the government to publish the rules for renewables support. In 2009, the government finally auctioned 1 GW energy supply contracts via national utility Enarsa. But while the auctions yielded more that 1.4 GW of offers, and the government awarded 895 MW of capacity to 13 companies, law firm Norton Rose Fulbright notes that less than 10% of this has been completed to date, resulting in Buenos Aires putting the second tender on hold.

So why has Argentina resolved to try again now? According to Lucrecia Gomez, Argentina-based director of research at Frost and Sullivan’s energy and environment unit, Argentina’s renewed enthusiasm for renewables is partly political, following the replacement of left-wing populist Cristina Fernandez de Kirchner with centre-right Macri in 2015.

“We have a new president,” she tells Renewable Energy Focus. “That means of course that [the government] wants to change almost everything. That is the main reason for the changes in terms of regulations. But the other reason is that we have a growing economy and growing power generation demand.”

Indeed, Argentina’s GDP growth is forecast to reach 3% annually by 2018, boosted by Macri’s market-friendly policies which have already seen the country’s controls on capital and foreign exchange lifted. As a result, Buenos Aires estimates that Argentina will need to increase domestic power generation by 900 MW/y to meet demand.

Subsidies haircut

Significantly, Macri also plans to gradually phase out or significantly reduce the subsidies which have characterised Argentina’s power market over the past 12 years, and which have supported oil and gas production at the expense of renewables. Conversely, the power subsidies have also resulted in chronic underinvestment in Argentina’s fossil fuel-fired power generation fleet, which also presents an opportunity for renewables developers.

“[Argentina’s] conventional installation is really old,” says Gomez. “It hasn’t been updated for the last 40 years and 70% of that is now obsolete. Maintenance is really expensive and we need to change. With all the promotion and good press for renewables, there is a good chance that Argentina will pick up on that.”

According to the Cámara Argentina de Energía Renovable (CADER), Argentina’s renewable energy chamber, the country will need 7 GW of new installed capacity by 2021, 5GW to cover expected demand and 2 GW to cover peak demand. Around 2-3 GW will be necessary to meet the 8% target, and 10GW to meet the 20% target. However, the near-term project pipeline is still under-populated: Frost and Sullivan analysis suggests that Argentina possesses a project pipeline of just 200 MW of wind capacity that could be online within 18 months.

Investment challenge

The government estimates that the 8% target will require $5 billion in capital investment, while the 20% by 2025 target will require $15-20 billion – for which experts note foreign investment will be critical.

“The other countries in the region have all benefited from experienced global developers and technoloy suppliers to be able to kick off those industries,” says Timothy Stephure, head of Latin America Energy at IHS.  “Local players have come in afterwards and even in the initial stages and start to scale up and benefit, but Argentina on its own has very few companies with the experience and technology required.”

But questions remain about how Argentina will be able to attract the necessary finance for these capital-intensive renewables projects. Chinese financial institutions have been willing financiers of renewable energy projects in Argentina in the past, most recently agreeing to finance the 200 MW El Angelito wind farm in Patagonia.  However, beyond Chinese investors, the country has struggled to entice foreign capital into its territory.

This is partly due in part to systemic problems in Argentina’s wider economy as well its perilous domestic finances, which in 2014 saw the country go into default for the eighth time in its history. Meanwhile currency controls, designed to shore up Argentina’s volatile domestic currency, the peso, locked out international companies for whom trading in dollars is a non-negotiable part of doing global business. Likewise, capital controls which have characterised the past few years have raised the risk of investment – few investors will risk sinking cash in a country that might prevent them from taking it out again.

In addition, the unpredictable behaviour of the country’s political class makes for a difficult investment climate: the expropriation of Repsol’s stake in oil firm YPF by Fernandez’ de Kirchner’s government in 2012 sent a clear message about the government’s attitude to contract sanctity.

Moreover, Argentina has a long history of non-implementation of renewable energy policies and regulations – 2005’s National Strategic Plan for Wind never saw the light of day – so investors could be forgiven for being sceptical about this latest round of targets.

As such, the success or failure of Argentina’s renewables goals will hinge on Macri’s ability to back up the rhetoric with concrete regulatory and financial reforms, says Stephure.

“There are some details, especially on the financial side and on the regulatory side as how the system as a whole will work,” he says.” They’re talking about maybe having some auctions in May, but they haven’t said exactly what kind of auction framework there will be or how generators will be compensated. Those kinds of details are unclear. I think it remains to be seen exactly if they’re able to do the reform in a comprehensive enough way to really attract a lot of investment.”

However, experts agree that Macri’s market-friendly policies, in particular his decision to lift currency and capital controls and negotiate a deal with the country’s creditors, have yielded a cautious optimism amongst renewables investors.

“People are applauding Macri’s initial stance,” says Stephure. “There’s more optimism. It has been seen that the Macri administration has taken the more tangible options rather than just the rhetoric that we saw with previous administrations. But the overall mood of investors is still a little bit cautious due to Argentina’s recent past and inability in previous efforts to bring everything together. So I think there’s this kind of wait and see approach.”

Law firm Norton Rose Fulbright also warns that Argentina needs to address its issues with contract sanctity, in particular with regards to cash-strapped state utilities honouring power purchase agreements (PPAs) made with power generators.

“The reliability of contracts remains doubtful and creates uncertainty for wind farms which have high upfront costs,” the firm says in an April 2016 note. “This might be resolved if the bankability of PPAs is improved, for example through a government fund that would be used to guarantee payments under the contract.”

Significantly, the government is reportedly negotiating an AAA grade score with ratings agencies in order to do just this.  No doubt the country’s recent history will come into play in these negotiations, but the fact that the Argentina is now out of default will surely help lift its sovereign debt rating out of junk status.

And what of the targets?  Does Argentina stand a chance of increasing its non-hydro renewables input from sub-1% to 8% by the end of 2017, and 20% by 2025?  Gomez is optimistic, but stresses that on-going political support will be critical.

“I think they will meet the 8% target they have for 2017,” she says. “I’m not that sure that they will be able to meet the [20% by 2025] target because there could be an administration change in that time]. It will really depend on the political and economic situation.”

Ultimately, Argentina’s success depends on political and regulatory consistency – something which has not featured in the country’s recent history.  But with market economics at the heart of Argentina’s new direction, investment in Argentina’s substantial renewable energy resource has never been a more attractive option. One thing’s for sure though, Argentina cannot afford to allow this opportunity to slip through its fingers again.


ABOUT THE AUTHOR
 

Rachel Parkes is a freelance journalist and copywriter, with expertise in the Energy and Environment fields. She is a long-time contributor to Renewable Energy Focus magazine.

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Policy, investment and markets  •  Solar electricity  •  Wind power

 

Comments

ANUMAKONDA JAGADEESH said

17 May 2016
Excellent. Argentina has one of the best wind regimes in the world. The gross wind potential is estimated at 500,000 MW !There are sites with annual average exceeding 9 m/s.

Dr.A.Jagadeesh Nellore(AP),India

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