Part III: The Coming Energy Crisis in Argentina
Argentina’s economic crises have historically been caused by financially driven excesses: overborrowing leading to debt defaults; currency overprinting leading to devaluations. The next crisis – and it seems another is on the horizon – will be unique in that it will likely be caused by a shortage: an energy shortage that could have a devastating effect on the economy.
About the Author: Carlos St. James 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 publisher of The Latin American Energy Review.
The margin for error in energy at present is virtually nil. Today over 85% of the country’s energy is derived from fossil fuels: mostly natural gas, a lot of oil, all with steadily declining production levels. The other 15% comes from big hydro projects and nuclear. Renewables are only about 2%, although required by law to be 8% of total energy by 2016.
Much is written about the country’s increasing dependence on imported energy sources and the dwindling money reserves to keep buying more, but less is said about the frailty of the overall energy system. Should imports dry up for an one of a number of reasons; if one of the two nuclear plants had to shut down unexpectedly; or if the increasingly erratic climate were to result in a shortage of dammed water at one or more of the enormous hydro projects, an energy crisis would quickly ensue. This recently happened to Venezuela — the country Argentina currently looks to as a model. In 2010, low water levels in their dams caused an electric generation crisis that forced it to take extreme emergency measures, including programmed outages and a drastic reduction of industrial production in Venezuela’s aluminum and steel sectors.
It is time to contemplate a contingency plan of action, and it needs to come from the private sector. Investors shy away from Argentina, especially in long term infrastructure projects like energy, because of the policies of the current administration. The government is increasingly forced to take short term remedies like acquiring basic thermal generators that run on fuel oil to generate electricity. These may be easy to install and operate, but in Europe, for example, are only used as backstops for emergencies due to their inefficiency. This is becoming an increasingly important part of the energy matrix in Argentina. Yet in the case of renewable energy such as wind, geothermal or solar, these could be brought to life more easily than traditional oil & gas – and certainly shale, which requires enormous additional investments in that sector’s value chain – and provides a cleaner and longer-term solution in addition to providing increased energy security.
In a crisis new solutions will have to be contemplated, and options that might seem unacceptable to a government might suddenly become attractive. First and foremost, it will require that financial stakeholders – the ones writing the checks: investors and bankers — be persuaded that long term opportunities are safer bets. This can only be achieved if the government sends a credible and clear indication that they will be protected. But crisis or not, perceptions do not change overnight. Given that the current administration lacks credibility in this regard, credibility itself must be outsourced. This will be achieved by getting large multilateral institutions to provide the necessary guarantees in exchange for a number of rapid institutional and legal changes. If, for example, the counterparty risk is deemed too high (i.e., investors are not sure that energy companies CAMMESA and ENARSA will pay the agreed-upon dollars for electricity generated by an investor’s renewable energy project), the multilateral banks can provide those guarantees; better yet, they act as trustees and have control of the money flows, perhaps even allowing payments to be made offshore in a perceived safer location — say, Montevideo. There are already signs of this happening: one of the three renewable energy projects that are being built has managed to get one of the multilateral development banks to do just that – although in a pre-crisis environment it took four years’ worth of negotiations and the payment streams remain in Argentina.
Argentina would be well served to take steps now to avoid its looming energy crisis; it is not a problem that can be quickly fixed, and the local energy community should begin to think up contingency plans. The storm clouds are gathering — and in plain sight to any that will look at them. While there may be a place for expanded nuclear capacity and even the dangerously contaminating and under-regulated shale sector, embracing clean energy solutions provide the best opportunities for a country with so many resources and reduces its carbon footprint, which in turn makes the country more attractive to investors in other sectors.
© Latin American Energy Review 2013
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.