Summary: A new government, a decade’s worth of pent-up demand, uncommonly abundant wind and sun and water. Five things the country must do to begin to regain credibility and attract the $5 billion it needs over the next two years.
About the Author: Carlos St. James is an advisor to energy investors and developers in emerging markets. He founded the Argentine Renewable Energies Chamber; is a board member of the Latin American & Caribbean Council on Renewable Energy; founded and is chairman of the Middle East-Americas Energy Council; and is publisher of the Latin American Energy Review.
Argentina’s Energy and Mining Minister Juan José Aranguren has his work cut out for him. The summer season is here — and with it the blackouts from lack of electricity.
He has begun on the right path by acknowledging the emergency and hiring a qualified team. But to really establish credibility, they’ll need to be equally forthcoming on how new energy sources will be brought online quickly — especially the renewable energy targets they’ve inherited.
The original renewable energy law of 2006 established a target of eight percent renewable energy production over 10 years. Yet 2016 is here and the percentage of renewables in the energy matrix is less than two percent. This is a failure not of the law itself but of executive branch policies over the past decade which kept investors and lenders at bay.
A new renewables law enacted just a few months ago pushes the eight percent target back a year. That gives the country very little time to attract the roughly US$5 billion in fresh capital it needs to meet it. A tall order indeed: Argentina as a whole received around US$10 billion annually in total foreign direct investment during the Kirchner years.
But the new law has some fresh takes which might appeal to investors. It was written by Sebastián Kind, the new Undersecretary for renewables. Sebastián is one of the original board members of the Argentine Renewable Energies Chamber, an organization which has worked to establish consistent rules on behalf of the private sector over the last decade.
For example, the new law sets a ceiling price of US$113 per megawatt-hour of electricity. This is very attractive pricing for an investor. To put it in perspective, prices for wind energy in the United States have recently been set as low as US$25/MWh, and in Brazil they have been tendered at US$57/MWh. To say that the potential returns are extraordinary is not an overstatement.
The laundry list of actionable items is long, but here are five basic items needing to be addressed soon.
Shut down ENARSA. President Néstor Kirchner set up this energy company in 2004 as a way to set up a parallel YPF of sorts when the oil giant was still in foreign hands. It has evolved into a badly managed, ill-reputed entity serving mostly as a middleman. There is nothing ENARSA does that can’t or shouldn’t be done by either the energy ministry or the now re-nationalized YPF.
Ensure hard currency returns. A solid PPA (Power Purchase Agreement) is a key piece of a viable project: a creditworthy, long-term buyer of electricity at pre-established prices. Under the last administration a project developer could sign a 15-year PPA in dollars with ENARSA. But it had to include a clause allowing the government to unilaterally amend it — including pricing. What good is a long-term agreement if one of the parties can pull the plug at any time and for any reason? The new administration should bend over backwards to show investors they respect their intelligence and value the capital they bring to the table.
Invest in transmission lines and regional integration. This is the sector’s dirty little secret. There has been no real investment in the transmission grid for years. Nor has the country advanced two other viable solutions: facilitating the use of micro-grids and residential solar energy generation, called net metering. Also, Andean countries are working on becoming interconnected all the way down to Chile. Argentina needs to join groups like these; they will open new doors to investment and to energy markets.
Embrace corporate PPAs. The new law shifts responsibility towards corporate energy consumers, and the burden falls overwhelmingly on medium-sized businesses. They will have to buy renewable energy or face stiff penalties. This aspect is particularly timely because it aligns with a shift taking place globally towards companies signing agreements directly with IPPs (Independent Power Producers) in the form of either standard or synthetic PPAs. This can prove a boon to law firms and financial intermediaries able to bundle various smaller energy buyers in ways that satisfy investors and bankers.
Make the most of supranationals’ renewed interest. Argentina has a longstanding confrontational relationship with organizations like the IMF. Give it up. There is no better or greater source of big money than entities like the World Bank and Inter-American Development Bank to provide long term infrastructure financing or guarantee hard currency availability — something investors will require. They could prove quite valuable in providing soft guarantees for those bundled PPAs.
There is growing enthusiasm for opportunities in Argentina after a long investor drought. Long-term clean energy assets have an enormous amount of pent-up demand and are likely to be among the winners.
(This article first appears on the Buenos Aires Herald as an Op-Ed (see here.)
© Latin American Energy Review 2016
About the Author:
Carlos St. James is the founder of the Argentine Renewable Energies Chamber (CADER, by its initials in Spanish); board member and was elected the first President Of the Latin American & Caribbean Council on Renewable Energy (LAC-CORE); 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.