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Michael Hochberg

Michael Hochberg

Michael Hochberg is an energy expert at PA Consulting Group, a global management consulting firm. Within this capacity, Michael provides regulatory support in the Mexican…

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Besides Shale, Argentina Doubles Down On Renewables

Solar panel installation

Argentina’s renewable energy supply auction, which began accepting bids on August 22nd and will conclude on September 5th, 2016, represents a meaningful market entry opportunity for investors hoping to expand their presence or break ground in Latin American power markets. Dubbed RenovAr, the auction has been classified as Round 1 of the program, and offers 1,000 megawatts (MW) of renewable energy capacity, with 600 MW assigned to wind, 300 MW to solar, and 100 MW between biomass, biogas and small hydro.

Helping drive the auction are renewable energy targets established in Law 27.191 of October 2015, which calls for eight percent of electric generation to derive from renewables by 2018, and 20 percent of generation to derive from renewables by 2026. As just two percent of electric generation currently comes from renewables, to comply with targets, Argentina must integrate approximately 2,500 MW of renewable energy capacity into its grid by 2018, and at least 7,800 MW total of renewable energy capacity by 2026. Some forecasts based on the same targets predict up to 12,000 MW of renewable energy capacity by 2026, depending on demand and economic growth.

Aside from renewable energy targets, to meet demand in general, Argentina’s Renewable Energy Chamber estimates that the country will need to install an additional 7,000 MW of capacity by 2021. Accordingly, if Round 1 of RenovAr is successful in fostering competition and securing renewable energy capacity, similar supply auctions are likely to follow.

First movers in the tenders will benefit from nuanced knowledge of the market and bidding process, local relationships, and potentially higher $/megawatt hour (MWh) prices that the first auctions are likely to produce. Investors are seemingly interested in participating, with Argentine media reporting more than one-hundred companies taking part in the RenovAr’s initial public consultation.

Yet similar auctions recently held in Chile, Mexico and Peru, were highly competitive, producing lower than expected $/MWh bids, and decreasing opportunity for return on investment.

(Click to enlarge)

1,2 Represents the average per MWh price for all technologies in the auction: wind represented ~40 percent of winning bids, solar represented ~11 percent of winning bids. Related: The Biggest Wildcard For Oil Prices Right Now

Argentina, however, has never held a successful capacity supply auction and is undergoing profound (and often unpopular) economic and political reform. In its present state, Argentina is therefore a riskier market for power generation investment than many of its Latin American counterparts. The nation’s unique set of risk factors may help apply upward pressure on bid prices, as investors seek to eliminate uncompensated risk and capture greater return on investment while remaining competitive in the bidding process.

Political Risk and Financing

Before Mauricio Macri took office as Argentina’s president in December 2015, the nation experienced twelve years of socialist rule under Cristina Kirchner, and her late husband, Nestor Kirchner. The Kirchners implemented initiatives including the nationalization of private companies, repatriation limits for foreign companies, and currency controls for businesses and citizens. Notably, the Kirchners’ rule oversaw a vast energy subsidy program, for both electricity and gas tariffs, which resulted in Argentines paying just a fraction of the true cost of energy, and helped increase residential electricity demand by seventy-five percent from 2005 to 2015. In the same period, energy subsidies increased from 1.5 percent to 12.3 percent of government spending, and also deprived the country’s distribution grid of investment, causing rolling blackouts in Argentina’s hot summer months.

Even though he has only been in office for less than a year, Macri has taken significant steps to improve the Argentine economy and reintegrate the nation into the international financial system. For example, he has already cut energy subsidies and held a $16.5 billion bond sale. However, foreign commercial banks that finance renewable generation projects may want to confirm the staying power of the Macri Administration and his pro-business policies prior to market entry. At least in the first auction, project developers may have to rely predominantly on development banks for financing. To a lesser extent, Argentina’s new renewable energy development fund, FODER, will provide limited financing for auction winners.

Even more consequential for investors, is the prospect that Macri’s proposed electricity subsidy cuts do not pass regulatory muster. On August 18, Argentina’s Supreme Court ruled that the gas subsidy cuts for residential users are illegal, as the Macri Administration did not precede the initiative with public hearings, as required by the constitution. As public hearings were not held for electricity subsidy reductions either, similar obstacles could arise for power tariffs. This risk, which may be amplified by the opposition party’s control of Congress, is likely to be taken into account by project lenders, and considered by investors and project developers when calculating bid prices.

Off-taker Risk

CAMMESA, the wholesale market administrator and off-taker that purchases power on behalf of distribution companies and large clients, has been historically underfunded. Guarantees from a new development fund (FODER), and the World Bank (up to $500,000 per MW) have been established to help mitigate nonpayment risk and facilitate financing.

FODER will underwrite power purchase agreements, guaranteeing payments and maintaining a minimum balance of one year of outlays due by CAMMESA. FODER will be funded by National Treasury, and would be supported by the Ministry of Finance in the event that the minimum balance is not upheld. The World Bank guarantee, which includes a maintenance fee that must be paid by the project developer, is optional, and would also cover nonpayment on behalf of CAMMESA. Related: Private Equity Senses Market Bottom, Pouring Money Into Texas Shale

While the guarantees make financing more feasible, it is unclear how lenders will respond. With 20 year power purchase agreements (PPAs), long-term confidence in FODER and Argentine government policy in general will be necessary. While the World Bank guarantee may provide a buffer, $500,000 is unlikely to cover the whole cost of each MW of installed capacity.

Wind’s Advantage

Out of the eligible technologies, wind is most established, and may be the safest option for investors. With proven transmission capability from Argentina’s windy Patagonia region in the south to population (demand) centers in the north, wind generation in Patagonia’s Rawson and Puerto Madryn demonstrate that projects of up to 200 MW can be incorporated into the grid within 12 – 18 months. In many areas, wind capacity factors, or the percentage of total capacity that is utilized, is greater than 35 percent. High capacity factors translate into more MWh produced and sold, ensuring that intermittent energy sources do not sit idle due to weather conditions, and helping investors safeguard market upside. According to Argentina’s Renewable Energy Chamber, 2,000 to 3,000 MW of new wind capacity can be integrated into the grid.


The northwest of the country, especially along the border with Chile (as seen in the map below), enjoys significant solar potential and could be ideal for utility scale solar, yet transmission to population centers remains uncertain. Accordingly, in Round 1 of RenovAr, it is likely that bids for wind capacity will yield more competitive prices than solar capacity bids.

A Brighter Future

For investors with the desire to do business in Argentina in the long-term, and the risk appetite to enter a nascent renewables market, the auction provides a unique opportunity. According to Erico Spinadel, President of the Argentine Wind Energy Association, “prices can reach up to $70 or $80” per MWh in the auction. Investors interested in Latin American power generation opportunities without establishing a ‘race to the bottom’ bidding phenomenon may find the right conditions for investment in Round 1 of the RenovAr program.

By Michael Hochberg for Oilprice.com

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