Summary: Wind will once again prove to be the hottest ticket in Argentina’s renewable energy tenders, scheduled for mid-2016. There are over 6 GW of projects seeking equity, financing, technology and/or human capital in a country hungry to return to the international scene.
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; founded the Middle East-Americas Energy Council in 2014; 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 in October 2016.
Argentina is set to confirm its appeal to the wind energy sector.
In the 2010 Argentine renewables tenders called GENREN the government sought 500 megawatts (MW) of wind energy, offering 15-year, USD power purchase agreements (PPAs) to the lowest bidders. The country received 1182 MW in offers and accepted 754 MW of these at an average price of $127 per megawatt-hour (MWh).
But only two projects totaling 128 MW were ever built from this program: country risk was too high and bank financing unavailable. Today Argentina has less than 2% of its electricity coming from renewable sources despite a target of 8% that was supposed to be reached this year.
A new renewables law came out in 2015 that pushes back the 8% deadline by a year and sets an additional goalpost of 20% of renewables by 2025. Under the new framework market participants will be able to choose from a couple primary paths:
- government-sponsored tenders allowing winners to sign PPAs with a government entity (similar as with GENREN) and where a cap price of $113/MWh has been pre-announced. They’ll also be able to tap into FODER, a new government trust fund that will act as a partial finance/guarantor source for projects. (GENREN had one of these too but it was never activated.)
- private sector PPAs with large energy consumers (get used to seeing the term “Grandes Usuarios” — Big Users), since the new law also places the burden on them to purchase electricity from clean sources or face fines. Grandes Usuarios have been defined as those commercial and industrial enterprises consuming 300 kW and above — and there are an estimated 7000 of these.
The new Macri government is running at full speed on this. In comparative terms, the goals are more aggressive than Colombia’s (see this analysis); and pricing will not be nearly as tight as in the recent Peruvian auctions, where wind projects bid under $38/MWh (see that analysis here).
It is about to announce the regulations for the new renewables law and will hold a new tender in mid-year. This works to favor those projects that are already well developed, many of them left over from GENREN. But in order to bid accurately they will have to have a pretty good idea of their weighted average cost of capital (equity and debt), and this is where large international developers with track records can find some gems — assuming they get in on time.
Wind energy will unequivocally be the big winner in Argentina
Wind: the Belle of the Ball
And wind will unequivocally be the big winner. Unlike the rest of the world, Latin America has a preference for wind energy over solar, as explained in this analysis; it will be even more evident in Argentina when the new tenders are announced. Of the expected one gigawatt or more to be tendered this June-July, at least two-thirds will be allocated to wind.
So where are these wind projects seeking investors, technology and human capital? Which are credible?
The pool of wind projects is big and includes the properly-developed and the not-so-much. Our database contains 68 projects totaling 6488 MW; we know of others with bigger lists. (Click on the graphs and maps to get a better view.)
- Over a third of the potential megawatts are located in the Patagonia region (the southernmost provinces of Chubut and Santa Cruz);
- another 1512 MW or 23% are in the southwestern Comahue region, which includes the provinces of La Pampa, Rio Negro, and Neuquen;
- Buenos Aires province has 1226 MW or 19% of all projects, primarily in the southern end closest to the Patagonia. These are closest to the big energy consuming market of the metropolitan Buenos Aires area;
- another 650 MW or 10% are in the Centro region (Cordoba and San Luis); and finally
- some 590 MW or 9% in the western Cuyo region along the Andes mountains (Mendoza, San Juan and La Rioja provinces).
This is significant because the new tender will also seek greater geographic diversity to avoid having too many wind farms all centered in the Patagonia – which is what happened last time.
In the GENREN tender, a total of 17 wind projects won; 15 of them were located in the Patagonia and the other two in southern Buenos Aires province, all pretty much tapping into the same main transmission line headed north towards the city of Buenos Aires. The Patagonian projects had an average price of $126/MWh; the two Buenos Aires projects were both at $133/MWh.
These 68 projects totaling 6488 MW have an average size of 95 MW; they range from 9 MW to 1350 MW for one oversized project in Chubut province. Most of the projects are located in just three provinces, all in the lower half of the country: 19 in Chubut; 18 in Buenos Aires; and 13 in Neuquen — the same province in which the well-known Vaca Muerta shale gas deposits are located.
Local content will be important
Promotion of a local supply chain will be a big part of the new regulations. Minimum local content will not be required per se, but you can expect strong incentives to include them. For example, locally sourced equipment will have access to FODER financing and more tax incentives.
Argentina has three wind turbine manufacturers: IMPSA, NRG and INVAP. The former may be able to compete on larger projects; the latter two are likely to focus on smaller ones. Generally speaking, big projects (50-100 MW) are more likely to participate in the government tenders, while smaller ones (10-30 MW) are more likely to be found in private sector PPAs and in auto-consumption projects.
Three companies already have some concrete experience in the country: Vestas with a 78 MW wind farm and Alstom with 50 MW, both in Chubut; and local manufacturer IMPSA with 50 MW in La Rioja.
What does all this mean to stakeholders in the wind industry?
- From this upcoming tender alone some $1.5 billion of capital will be required for wind deals willing to sign long term PPAs with the government: roughly $500 million in equity and $1 billion in long term debt. An estimated 700 MW worth of wind turbines and capital equipment will be needed.
- Given the push for developing a local supply chain, it may be a good time for foreign firms to seek out local joint venture partners.
- Success of the tenders depends on macro factors such as Argentina’s continued path toward open markets and efficiency. The new tenders themselves are very likely to be fair and transparent: led by Undersecretary of Renewables Sebastian Kind and Director Mauro Soares, both come from the private sector and honed their industry leadership skills early on as board members of the Argentine Renewable Energies Chamber that I chaired; they are known to be straight shooters.
- For those Grandes Usuarios seeking private sector PPAs to avoid fines (such as automotive plants, large retailers, the mining sector, the agro-industrial complex, etc.), experienced developers/operators will have an edge over locals with no track record.
But the key stakeholder to watch closely will be FODER, the trust fund that will act as financing source and guarantee provider. If FODER proves to be weak, underfunded or expensive, the country’s second push into development of a renewable industry will fail.
© Latin American Energy Review 2016
About the Author:
Carlos St. James is the co-founder of the Argentine Renewable Energies Chamber (CADER, by its initials in Spanish) and was its first chairman and 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.