Summary: With financing for the budding renewable energy sector still unresolved and increasingly tight transmission grid availability, Argentina commits to another energy auction as politics take center stage.
About the publisher: Carlos St. James is a leading advisor to energy investors, bankers and developers in emerging markets at Wood Group. He is also a board member of the Latin American & Caribbean Council on Renewable Energy (LAC-CORE) and publishes the Latin American Energy Review to help generate debate on the industry’s issues.
Argentina’s creativity is at once the country’s greatest asset as well as liability. Last year in very short order it put together two renewable energy auctions that jumpstarted the sector and turned a lot of heads, approving 2.4 gigawatts (GW) of projects (900 MW solar PV; 1500 MW wind) with 20 year power purchase agreements (PPAs) and three layers of protection to investors — including a soft guarantee from the World Bank. All stakeholders are now officially sitting at the table save one: banks, who have to put up most of the money to make all this a reality. But they are eyeing that last chair reserved for them with increasing interest.
As highlighted in this previous commentary, stand-alone project finance is the ideal financial product for renewable energies. However, it is not available in Argentina. On the one hand, local banks stopped making any kind of long term loans a long time ago; there is currently no in-country know-how among bankers on how to structure project financing. Thus it falls to foreign banks – the Spanish do this particularly well – but they remain in a wait-and-see position: not wanting to miss the enormous opportunities that abound, yet with credit committees that will still not approve the necessary loan tenors of over ten years.
But creativity and resourcefulness abounds. Solutions are being found. Larger corporates with balance sheets behind them have been going straight to bond issuances and the market readily lends to them: Argentine corporate risk is deemed safer than government risk. Export Credit Agencies (ECAs) and development banks have been filling the void to some degree for the remaining projects – but remember, their mandates are more about job creation (for turbine and solar panel manufacturers overseas) and economic development than for profitability. However, tenors on these loans are far shorter than the necessary 15+ years to pay out the infrastructure in full; lenders and borrowers are betting on a declining refinancing risk after projects are built (in the next couple years, once Argentina feels more predictable) and are likely to pocket handsome financial returns when this happens. Argentina may still be categorized as a “frontier economy”, yet it recently sold a 100-year sovereign bond (a century-long bet on the country!) that was oversubscribed 4-to-1.
Finally, the government’s renewable energy trust fund, FODER, is also gearing up to play a role as financier of last resort for the remaining projects. This may prove more difficult as the government has been issuing a lot of debt recently — riding investor popularity due to a new pro-business administration – and may be close to peaking in its ability to borrow.
But with financing establishing its own inertia and seemingly headed for ultimate success, the next bottleneck merits attention: transmission grid quality. Round 2 later this year (just ahead of elections) will undoubtedly focus on areas where grid access is still relatively unencumbered, and so the location of a given project will become an increasingly important component of success.
Here is an area where the foreign private sector can play a role in helping Argentina relearn to think long term.
Argentina has built its transmission grid in a radial format, i.e., all lines lead to Buenos Aires. This has created a mindset that in the 21st century no longer serves the country’s true energy interests and needs. In addition to planning for future demand, energy efficiency needs be placed on the front burner immediately. This will make for far more intelligent expenditures on infrastructure.
Quality of transformers at each node needs to be better regulated or specified. Right now the matter is left to the private sector, which has also lost the ability to think long term and typically buys lower-end equipment, resulting in energy losses of up to 70%. Given its delays in modernizing infrastructure, the country is in a unique position to turn a deficiency into an advantage: modernize energy infrastructure and position itself far more attractively than other countries.
For example, the four solar projects totaling 400 MW that were won in the country’s northwest region (known as NOA) will offload their energy onto high tension lines that lead to Buenos Aires. But if you take a closer look at demographic trends in the NOA over the last couple decades you’ll find more rapid population and energy demand growth than in Buenos Aires: NOA now has enormous need for energy. Rather than a handful of enormous, headline-grabbing projects, it may have been more efficient to set up a series of smaller 20-50 MW solar projects that offload to different nodes, supply energy locally, and distribute loads more effectively. Note that this would be a small step in the direction of smaller grids, a global trend that is just beginning. Argentina, the eighth largest country in the world in area — just a bit smaller than India — needs to take advantage of size for its own benefit. (In the same vein, the logic of trans-regional transmission grids becomes increasingly outdated, as outlined in this analysis.)
Similarly, investors often focus on wind projects located in the southern part of Buenos Aires province and for good reason: almost Patagonian-quality wind; not far from the demand of Buenos Aires metropolitan area; close to the port of Bahia Blanca. Yet few realize they will have to deal with not one, not two, but three transmission grid operators in that area, each seeking tolls and fighting for room to expand. They need to be made aware of unexpected costs farther down the road (literally).
This graph (click on image to enlarge) shows that Argentina has been investing in expanding its transmission grid (in kilometers) as well as its transformer base (in Mega Volt Amps*). What it fails to show is that these additions have been noticeably inadequate given the country’s much higher average economic and energy demand growth over the same period. If you have the time, overlay another graph on top showing energy demand growth during the same period and it’ll help visualize why there are energy shortages, brownouts, and node congestion in the country.
* MVA refers to apparent (as opposed to active) power. Electrical equipment such as transformers cannot be rated in active power (like watts or megawatts) because of their working principle and characteristic usage. They could be supplying zero watts and be overloaded at the same time.
Argentina’s congressional elections will be held October 22, 2017. Ex-President Cristina Fernandez de Kirchner is running for office as a senator for the powerful province of Buenos Aires and stands a reasonable chance to win, which suggests more sable-rattling about government control over investment. This is making investors, bankers and essentially any long term market participant question whether Argentina’s reforms will stick (they will). It helps explain why the country was not given “emerging market” status recently and remains a frontier economy along with countries like Sri Lanka and Kazakhstan. But it forces the current administration to hold another renewable energy auction sooner than it probably should in order to gain more positive press ahead of the polls.
I’ve learned to not bet against Argentine creativity (the 100-year bond was nothing short of brilliant) but also to never underestimate the country’s ability to shoot itself in the foot periodically. Somewhere in between fortunes will be made. Make sure you are well advised on engineering, technical, regulatory and financial matters and you will increase your odds considerably.
© Latin American Energy Review 2017
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