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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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The Argentinian Renewable Revolution

Renewable

Argentina’s government is making the push towards more renewables at an extremely fast rate. The country recently held an auction for long-term contracts totaling a potential 1,109 megawatts of power in the form of wind, solar, hydro and biomass. The winners of the auction’s 17 contracts were announced this past Friday totaling $1.8 million in investments.

Argentina relies on fossil fuels for approximately 60 percent of their energy, 7 percent more than the United States. Argentina doesn’t demand nearly as much energy with a 3,093 kWh/capita in 2013, compared to our 12,988 kWh/capita. The United States, having industrialized sooner than Argentina, is comparably more affluent and as a result spends a higher amount of energy per person in our far greater population. If we look at trends with developing countries versus those that are developed to current international standards, as denoted by the IMF and the World Bank, there has been significant progress from Argentina and other Southern American countries as a whole, making their markets more attractive.

In September 2015, Argentina’s government passed legislation demanding industrial companies obtain 8 percent of their power from renewables and 20 percent by the end of 2025, which will incomparably reduce the number of fossil fuels. If firms fail to meet this percentage, they will be charged as if they were buying imported diesel. Typically, countries that are considered to be developing, are not compliant with the verbatim of environmental treaties, but if they are to make this move towards renewable energy via corporate motivation they might see more international support going forward; which could lead to increased support for these companies and backing of the government’s contracts.

Sebastian Kind, Argentina’s undersecretary for renewable energy, was quoted as saying that they are trying to bring confidence into this industry. The government has created a renewable energy program to help companies finance these projects. The product of this was the FODER trust fund, containing $860 million worth of available loans. This means firms are able to accept loans from the government or the private sector. Related: The Rebirth Of Egypt’s Oil And Gas Sector

ABO Wind AG is investing $120 million in a 50-megawatt wind farm in central Argentina. They’re prospecting for funding this coming January for the start of construction. It’s possible that ABO will realize notable gains upon construction commencing and completion, so investors should buy correspondingly.

Companies Envision and Pampa Energia are both publicly traded corporations that, combined, swept up 708 megawatts of the available 1,109 megawatts at the auction in August. These firms are both focused on the wind energy industry and will use these rights to develop turbines within the region. The auction has thus in turn, created a plethora of business for these companies, making them both smart investment opportunities.

Argentinian oil demand will shrink because of the increased reliance on renewables. It’s unlikely this will affect the futures market for crude oil but local producers could take a hit. Petrolio Brasileiro SA, or Petrobras, is one of the primary oil producers in South America and they will directly suffer from lower demand. A pattern has been emerging for these oil companies when it comes to renewables, however, there is a significant time gap between the usage of alternatives and demand for oil slipping off. Should Argentina’s new contractors succeed, there will be a decline in oil production and consumption but until the alternative resources are proven to be cost efficient and accessible to both companies centered in Argentina and the general public, oil price will not sway.

The Argentina Peso may rise based on these future deals. Considering there will be an increase in widespread business and jobs, both results of a stimulated economy, the currency is likely to respond. The change will not be drastic at first but spreads against the Euro, and U.S. dollar will change in accordance with the shift in Argentinian currency as plans are carried out. This change in currency will be temporary, so investors should look for noteworthy accomplishments made by the relevant manufacturers.

By Michael McDonald of Oilprice.com

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