Summary: Argentina published the initial set of regulations for its renewables law and is rapidly moving towards a public tender, with billions at stake. There are still a lot of unknowns and additional resolutions will be forthcoming — but until then, it is a market where instinct will have to play an unusually large role for investors.
About the Author: Carlos St. James is an advisor to energy investors and developers in emerging markets. He co-founded the Argentine Renewable Energies Chamber in 2005; has been a board member of the Latin American & Caribbean Council on Renewable Energy since 2010; and publishes the Latin American Energy Review in his free time.
He was recently named Summit Chairman of the upcoming LAC-CORE Finance Summit in Miami, Florida this October, in which Argentina’s situation will play a major role.
He will also be a panelist on an Argentine-centric renewable energy webinar on April 28 and pontificate at a breakfast briefing to be held in Buenos Aires in mid-May.
The Argentine government recently published Decree 531, which regulates the new & improved renewables law 27191 of last year. To recap: Argentina needs to meet an 8% renewables target by 2018 and is practically starting from nothing. It then needs to continue to work towards a 20% renewables mix by 2025, which means reaching 10 gigawatts of installed capacity.
But the immediate need is to reach this first 3000 megawatts (MW) by 2018, which suggests an upcoming tender for close to 2000 MW.
Decree 531 is extensive but leaves many questions unanswered; yet it is still a good starting point. The Ministry of Energy and Mines has made clear they will continue to regularly publish decrees and resolutions to fill in the many missing blanks. What follows are some highlights and thoughts in preparation for the upcoming tenders which will offer 15+ year, dollar-denominated power purchase agreements (PPAs) to winning bids.
Resolution 108 is dead
A number of wind and solar projects had signed PPAs at very attractive pricing [about $220 per megawatt-hour (MWh)] with the previous administration under what was known as Resolution 108; none were able to raise sufficient capital. As explained in this earlier analysis, the new Macri government immediately put them all on hold pending further review, and Decree 531 puts a nail in their coffin. This was a good decision.
However, these same projects are likely to be the first to rise from the dead in time for the 2016 tenders (coming on perhaps a bit too quickly), along with many projects from the failed GENREN tenders of 2010 that are ready to build as soon as they get investors and PPAs.
The incentives to invest are strong and plentiful and favor use of local content. They also need further specification and definition, but include:
- Elimination of all import duties for projects begun before 2018;
- Accelerated depreciation;
- Anticipated refund of the value-added tax (VAT);
- Exception to the minimum tax;
- Exception to dividend tax;
… and a few others. Tax incentives will be strongest for projects commencing in 2017 and decrease each year.
The offtaker risk issue
Offtaker risk is one of the biggest hurdles to overcome, but the government says they’re getting it under control.
The offtaker is the government-owned Compañia Administradora del Mercado Mayorista Electrico SA (“CAMMESA”). CAMMESA employs top notch technocrats and terrible accountants. Its annual reports are rich in technical data, but it has not published financial statements in years. It is known to be very heavily indebted, bearing the brunt of accumulated energy subsidies of the previous government. According to local press, over $1 billion and too much to continue to carry.
The new government — to their credit – acknowledges that CAMMESA is “sometimes slow to pay” but quickly adds that it “always DOES pay”. This is a true enough statement. But not nearly good enough for a country with an unfavorable reputation seeking some $20 billion in new renewable generation over the next decade.
The Ministry of Energy and Mines indicates it is working to get a multilateral bank guarantee that will “make CAMMESA’s ability to pay AAA” and render offtaker risk negligible. This may or may not happen, and I wouldn’t underestimate Argentina’s ability to persuade. But if you ask me, the guarantee will not be quite that strong nor will it be in place in time for the first tenders this year. Which could spell opportunity for those participating in it.
But this gives you an indication of the urgency felt by the government: rather than wait a year and have most economic/financial matters resolved — and attract lower prices at a later-dated tender — they are willing to go forward based on promises of heavenly rewards to investors, paying a higher price to start. The ceiling bid price for tenders is $113/MWh.
FODER: The Trust Fund
The Fondo de Energias Renovables, FODER, is the government issued trust fund that will house the guarantees that make all this business viable. It will be comprised of two parts:
- An $800 million+ Project Finance Account (PFA) to be funded by the Argentine Treasury and multilateral banks. Given that Argentina’s reserves are about $25 billion at best, we see here one reason why the Macri government has been so actively looking to address outstanding conflicts with bond holdouts: only if this is resolved can the country go to multilateral banks and seek a guarantee for FODER in lieu of putting up the cash themselves; they have many needs for fresh capital after a decade of no investment. The PFA will provide long term project financing for the winning bidders.
- A Payment Guarantee Account (PGA) to be funded by consumers via an additional tax on their monthly bills. The PGA will grow to have up to one year’s worth of combined payments due from CAMMESA to the renewable energy projects.
The following diagram shows the flow of funds (click on pictures to enlarge). It was prepared by the Ministry of Energy and is a work in progress. I’ve seen earlier versions of this diagram; it continues to be improved upon and multilaterals will no doubt have a say as well once they step in. It is not definitive.
How will the tenders determine winners?
Lowest bids in USD/MWh will of course be very important. However, we believe the government will probably use a matrix to select winners that includes:
- Lowest price per MWh;
- Quickest to come online;
- Greatest use of local content (local content is not required but incentivized);
- Geographic diversity;
- Smallest use of FODER’s financing (which in any event will give preference to local content finance)
“… [the government] will look especially favorably on developers with track records and a proven ability to build quickly, operate effectively, raise equity and obtain bank financing without tapping into FODER.”
Technologies will compete against each other, so there will be a wind segment (by far the largest in this first tender), a solar PV, mini-hydro, biomass, geothermal, perhaps others. It is unlikely that in this first tender they will seek bids for concentrated solar power (CSP), marine technologies or offshore wind.
So now what
Argentina has enormous potential and shovel-ready projects. As outlined in this earlier analysis, there are over 6 gigawatts of wind deals alone seeking capital. Given the country’s need to comply with the 8% target by 2018 as well as to declare an end to the national energy emergency, it will look especially favorably on bids from developers with track records and a proven ability to build quickly, operate effectively, raise equity and obtain bank financing without tapping into FODER.
The government is working at breakneck speed to reduce risk to investors and appears credible in its insistence on transparency. But for the investor, until more information arrives it remains a matter of faith: Is this a legitimate turnaround situation that will last? What constitutes an accurate cost of capital? As was wisely stated in this recent Wall Street Journal article on Argentina’s economic reforms, many investors are kicking the tires and honing their instincts.
© Latin American Energy Review 2016
About the Author:
Carlos St. James is the Managing Director of Santiago & Sinclair, LLC, a financial advisory firm focused on renewables in emerging markets. Carlos co-founded the Argentine Renewable Energies Chamber (CADER, by its initials in Spanish) and was its first President until 2011; is a board member and was elected the first President of the Latin American & Caribbean Council on Renewable Energy (LAC-CORE); is the founder and chairman of the Middle East-Americas Energy Council (MEAMEC); and founder and publisher of The Latin American Energy Review. His private sector background is focused primarily on finance and bringing together stakeholders so that deals get done. He advises governments on renewable energy policy, counsels private equity firms seeking to enter the region; and brings together stakeholders, including investors, for new energy projects.
He obtained his undergraduate degree in international economics from DePaul University and his masters in international relations from the Fletcher School at Tufts University.