Summary: Local developers are more prevalent than originally thought in Argentina’s RenovAr renewable energy tender, while foreigners have taken more of a wait-and-see attitude. But the level of oversubscription reveals significant interest in Latin America’s largest remaining undeveloped market. A survey also provides initial impressions on where prices will end up — much higher than for any of its neighbors — as well as a grading of the energy ministry’s work thus far.
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 held at the Ritz Carlton in Miami, Florida this October 3-5, and will also be speaking at the Argentina International Clean Energy Congress on September 21-23.
Last week the Argentine government opened the initial set of envelopes in the country’s first tender since 2010, and everyone was surprised at the extent of the oversubscription. The government itself was thinking that at best they’d get something like 2000 megawatts (MW) in bids chasing after the 1000 MW being tendered, so the 6347 MW in offers received is yet another sign that Argentina is on its way back. This may be a normal level of oversubscription in other markets, but no one knew what to expect in this market with so many unknown variables.
So Who Bid?
As this chart shows (click on images to enlarge), wind and solar energy were oversubscribed while biomass, biogas and mini-hydro didn’t attract as many bids as hoped – but those were small potatoes anyway. The big surprise was solar, overbid 9.4 times to a total 2813 MW offered, even if the government only sought a paltry 300 MW – which itself reveals that the government was perhaps too focused on wind energy saving the day.
Wind was still the big winner though, oversubscribed by 5.8x to 3469 MW in bids (the government sought 600 MW).
Because Argentina is just coming out of a decade of Badboyhood, the assumption was that local firms would not particulate as actively because they do not have access to capital — either equity or debt. But this apparently didn’t take into account their boldness and desire to not miss out on a possible gold rush. This first tender is supposed to belong to the foreigners, to those big players who can access great prices for technology, that have proven experience in the region to build quickly and – perhaps most important — that can use their own balance sheets to raise the necessary capital (as pointed out in this earlier analysis, Argentine deals currently have no real access to project finance lending).
Local firms very aggressive
And yet local firms came out in force. As a matter of fact, local developer 360 Energy offered 635 MW of the 2813 MW in solar bids – 20% of the total, all from one firm. The average size of a solar bid in the tender was 49 MW (compared to 71 MW for wind), and it perhaps allowed room for more local players to participate since solar developments costs can be lower than wind. Even the public sector got involved: the government of the province of Mendoza bid on almost 100 MW of solar, and La Rioja province bid on 200 MW of wind.
Many included astute local/foreign partnerships, as in the case of Soenergy teaming up with U.S.-based Sybac Solar, jointly bidding on 121 MW of solar.
On the wind side, local players also bet big. The only company that has a true utility-scale wind farm and can claim real local experience, Genneia, bid on 347 MW – 10% of the total of 3469 MW in bids (the company does have foreign investors now). Another local, Central Puerto, bid on 285 MW. Local oil giant YPF bid almost 50 MW of wind.
Foreigners not as present
Among the foreigners, ENEL surprised by not dominating the proceedings as they have in many other countries. The company has no shortage of other energy-related investments in Argentina, so everyone can sigh a sigh of relief. It is known to be an aggressive bidder but came in with just two wind projects totaling 116 MW. Also, U.S.-based Interenergy bid on 200 MW of wind, while the Spanish Acciona bid 198 MW (and 80 MW of solar).
Herein lies a possible complication for the government: local bidders are less likely to have all their capital needs lined up; the government was counting on the presence of well-heeled outsiders — even if that came with a higher price tag.
We decided to get a feel for the overall market on expected pricing and sent out a simple anonymous survey – decidedly unscientific — that tops out at 100 participants. But it went to the right people. (Full disclosure: we have no idea how our clients may have responded.)
When asked, How many MW will the government finally approve?, 31% believe that it will be between 1201-1500 MW; another 24% believe it will be somewhat higher, at between 1501-2000 MW. A solid 21% believe the government will stick to its guns and accept only the 1000 MW they’re officially seeking (as a matter of fact, some 5% commented along the lines that accepting anything over the 1000 MW sought would defile the integrity of future tenders).
So on average it would appear the market believes that some 1400 MW will be approved.
But at what prices?
The survey questions focused primarily on how respondents felt regarding prices of winning bids.
The majority believe that winning wind energy bids will be between US$56-$70/MWh; the next largest group thinks the winning prices will be even higher — between $71-$85/MWh. No one thinks prices will come in below $45/MWh, nor above $86. A few thought it might be over $100/MWh.
In short, according to this (again, unofficial and unscientific), the winning prices for wind will be about $66/MWh.
The same price ranges were given for solar PV, and here the average price came out higher than wind, with over half believing that winning bids will be between $71-$85/MWh, and slightly fewer people thinking it’ll be in the lower $56-$70/MWh range. Smaller percentages believe it’ll end up with even higher prices.
In my book this makes little sense given that technology prices between wind and solar PV are essentially at par, and that solar radiation in the north of the country is as good as the wind in the south. Perhaps economies of scale had an effect: the average bid for wind was 71 MW, versus 49 MW for solar. (For example, the smallest wind project was one for 10 MW, while in solar there were a couple of bids for 1.6 MW projects and two more at 5 MW.) But personally I think it is a misperception and suspect actual winning solar bids will be noticeably lower.
But according to this survey, the market believes winning bids for solar projects will be about $73/MWh.
C) Biomass and Biogas
Largely small deals all of them: biomass averaging 9 MW each and biogas 1 MW. The survey suggests that prices are likely to be above or at least near $100/MWh. But in all candor, there were only a combined nine bids, so they’re the only ones who really know. The rest of us are just guessing.
Is the energy ministry doing a good job?
We also wanted to know how the industry felt about the job being done by the energy ministry, asking for answers ranging from one “thumbs up” to five. As the graph shows, a total 57% gave them four thumbs up and the average came out to 3.81/5.00. I think that’s like a solid “B” grade, or in local parlance, Sacaron un ocho. Well deserved and a sign of greater things to come from that team, all alumni of the Argentine Renewable Energies Chamber.
Will amnesty law capital be important to the industry?
There is a lot of discussion on the Amnesty Law, whereby Argentines will be able to bring back into the banking system the billions of undeclared hard currency they hold abroad and in their mattresses, no questions asked. We wondered if this might be seen as an important source of long term funding for the industry — assuming it gets invested in renewables. The consensus, by more than half the respondents, is that it will be a minor source of capital. Very few consider it a potentially critical source of funding.
Looks like the market believes the Argentine government will accept about 1400 MW in projects, with winning wind projects at $66/MWh and solar at $73/MWh. Of course the issue is far more complex, what with incentives for speedy construction and variable tax incentives. And even if these prices seems high given the continuous record of lower and lower prices in markets like Chile, Peru and Mexico, bear in mind that cost of capital is still largely unknown in Argentina.
These bids are still essentially shots in the dark, one reason the bids are higher.
But the government’s focus will remain the same as outlined in an earlier analysis, and I am inclined to believe they are more likely to approve less rather than more bidders, letting those with the strongest access to capital win — while pushing the rest into the RenovAr 2 tenders which will be right on its heels.
In any event, there are now more and more locally-owned projects that — even if they don’t win — have proven they are ready enough to participate in the RenovAr series, and will now begin to put on their best makeup and outfits in search of foreign capital suitors. Should either side need help in this, we are happy to advise.
© 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.