Risks and rewards in Argentina’s upcoming renewables tender

Summary: Argentina has announced the initial details of its 1000 MW renewables tender. There remain a number of uncertainties, but while investors are plentiful and reaching for the brass ring in search of that perfect ready-to-build project, lenders are conspicuous by their absence. A textbook situation for on-balance sheet financing with declining sovereign risk.

About the AuthorCarlos 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.

LAC-CORE Finance SummitHe was recently named Summit Chairman of the upcoming LAC-CORE Finance Summit held at the Ritz Carlton in Miami, Florida this October — in which various Argentine government officials, developers and investors will play an active role.

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The last of the large Latin markets has re-launched its renewables sector — and this time it seems destined to succeed, at least in the short term. Argentina, the third largest economy in the region but with only a few utility-scale wind farms operating, announced Round One of “RenovAr”, a 1000 megawatt (MW) tender seeking 600 MW of wind, 300 MW of solar photovoltaic, and a smattering of minors: biomass (65 MW), small hydro (20 MW) and biogas (15 MW). Winning bidders will be able to sign 20-year power purchase agreements (PPAs) in USD with CAMMESA, the wildly over-leveraged, government-owned offtaker now getting a facelift thanks to a partial World Bank (WB) guarantee.

Round One’s timetable is tight given the significant number of unknowns; final winners will by declared on September 28. Extra consideration will be given to those that promise quick commercial operation dates (COD) and do not seek to tap into the government’s own financing option (for more on the government’s FODER trust see here).

The government has also finally acknowledged that reaching the 8% renewables mix target by early 2018 is unlikely. This one gigawatt of new capacity will only move the needle to about 4.5% but no one really cares. What the market does want is evidence of credible forward movement; it is far more important to begin to believe that there will be about 1000 MW of new renewables business a year for the next decade, and under consistent rules.

The pressure for early COD

Last year, one of Energy Minister Aranguren’s first acts was to declare a two-year national energy emergency — ending December 2017, when these 1000 MW of renewables should be coming online. Thus the government wants to ensure that winners have two key traits: (a) more than adequate financial resources to complete them, and (b) the experience and track record to build them quickly. There is no margin for error, no time for amateurs.

The World Bank comes to the rescue

As has been acknowledged by the government itself, offtaker CAMMESA “pays late — but always pays”. Aware that this isn’t good enough anymore, FODER will provide certain guarantees. They have stated publicly and often that before any bids are submitted offtaker risk will become “AAA” thanks to WB guarantees, an unfortunate case of poorly chosen wording. I suspect the term is being used not in its very specific meaning of an actual classification issued by a debt rating agency, but rather as a broad statement of, “you won’t have to worry about CAMMESA paying late anymore.” Given the refreshing amount of candor and transparency provided to date by the new administration, this is forgivable.

RenovAr Round One TimeTable 2016
RenovAr Round One Timetable. Source: Argentine Ministry of Energy. Click on graph to enlarge.

The WB will provide a guarantee for $500 million, details of which have been promised by August 8th (bids are due August 22nd), and will be broken down to $500,000 per winning MW and be specifically assigned to each project.

The stated goal of this guarantee is to reduce financing costs to levels closer to that of Argentina’s neighboring (investment grade) countries and therefore attract lower pricing on the bids themselves. But as counterintuitive as it may sound, this is more likely to reduce competition in Round One for reasons discussed farther down.

The WB guarantee really serves a longer-term, structural purpose. The renewables law was approved under the previous government with another political party in control. The current Macri administration is wisely trying to make clear that renewable energy is a national policy issue, not a pet project belonging to any given party. This in turn comes from the very real concern that in a few years a new party in power might dismantle it, doing things like asset expropriation, elimination of incentives, forceful conversion of the dollar-denominated PPAs into pesos, restricting profit repatriation — and similar topics that are truly at the heart of investor’s concerns about long term investing in the country. The WB guarantee attempts to address these concerns.

Unfortunately all these promises have already been made and broken in the past. The mining industry was once given similar guarantees and in writing; the country once also tied its very currency to the dollar. In the end the promises weren’t kept. But in a world of excess liquidity chasing diminishing returns, it is often easier to overlook these realities.

Asset Finance: Balance Sheet vs. Project Finance

Globally, there are two main sources of asset finance for renewables projects. Only one is an option in today’s Argentina, regardless of guarantees:

  • non-recourse project finance is defined here as a project put together by a developer typically contributing 20-35% of the capital and using bank financing for the rest. The lender’s primary source of repayment is the cash flow derived from the project itself with no recourse to the developer, just the underlying project assets;
  • on-balance sheet funding, where a utility or large corporate has the wherewithal to finance a project using its own balance sheet: stock market proceeds, bank lines of credit, green bond issuances, etc., and (this part is important) where cost of capital comes from the company’s overall balance sheet – not a specific project.

The non-recourse project finance option isn’t really available at present: it is by definition a higher risk financial product, and there’s already plenty of risk to try to mitigate in Argentina. The commercial banks that typically finance such things have made clear they are not ready to return to the country until a little more credibility has been established. The development banks and export credit agencies (ECAs) that perhaps should be stepping up have a different mindset and are not necessarily profit-driven: they are slow to turn around. So some creative financing might become available for Round One, but it will take a lot of lawyering to get a commitment, and time is of the essence.

Hence this first tender will be especially favorable to utilities and Big Corporates who can and will do this on-balance sheet (large investment funds may choose a similar path). Here the interests are aligned with the government’s needs: these are the ones with the deep pockets, lower cost of capital, and ability to build quickly.

This first tender will be especially favorable to utilities, large corporates and investment funds who can do this on-balance sheet.

The potential gains for a winner are impressive: in a year or two, once projects are operational and as country risk continues to fall, they’ll be able to re-finance or spin off debt on very attractive terms. The fact is, perception of Argentine country risk is dropping like a stone, so there is a case for building assets in the short run.

Conclusion

Round One is likely to be oversubscribed, especially on the wind side. Without the WB guarantee the same would happen but with far more erratic and higher bids. It won’t loosen the purse strings of financiers such as ECAs or commercial and development banks just yet.

But it will serve the purposes of the balance sheet bidders, whose cost of capital will not change because of the guarantee — but at least it ensures that they participate and establish the much-needed inertia to get the industry moving. They have astutely plucked the best projects gathering dust from the failed 2011 GENREN tenders and will make them a reality.

The pre-Christian era Roman playwright Terence is credited with coining the phrase, fortis fortuna adiuvat: fortune favors the bold. It may prove to be the case for early investors into Argentina — but you will also have to be quick on your feet and have well-honed instincts to succeed.

© Latin American Energy Review 2016

In case you want additional background reading on the subject, please see:

A matter of faith: Argentina’s new renewable energy regulations (April 2016)

Argentina’s upcoming renewable energy tenders: Wind projects (March 2016)

How Argentina is transforming into a viable renewable energy market (February 2016)

Getting WACC’d in Latin America: How renewable energy policies affect cost of capital (February 2016)

Why Latin America prefers investing in wind energy over solar (February 2016)

Dismantling energy subsidies in Latin America (January 2016)

Three LatAm countries missing out on the renewables extravaganza (January 2016)

Argentina increases energy imports from neighbors (January 2016)

Five things Argentina can do to boost renewables (January 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.

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