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Argentina’s bright spot

Argentina’s bright spot

Concept clean energy with flag of Argentina merged with wind turbine in a blue sunny sky The unanimous decision made by Argentina Supreme Court's on August 18th to block the government’s increase on natural gas and electrical bills and cap price increases at up to 400% for households and 500% for companies may have been celebrated by the end consumer, but has acted a major political roadblock in the government’s attempts to reduce the fiscal and energy deficit left behind in the so called “k inheritance”. Roughly 75% of the fiscal deficit is represented by utility subsidies, according to local daily, La Nacion, as tariffs have remained largely untouched since the economic crisis of 2002.

With this decision, the Supreme Court upheld an earlier federal tribunal in La Plata and ordered the government to call public hearings before implementing rate hikes, which is still planned on taking place.

In face of what has become an embarrassing and chaotic episode for Macri (and especially Energy Minister Juan Jose Aranguren), in a PR exercise the government announced the creation of an advisory council on energy policy on the 30th of August. One area of policy that will certainly be agreed upon is the acute need for a more diversified energy matrix to substantiate the frequent summer blackouts. Argentina’s energy deficit has not been stimulated by law itself but rather the failure of continuous government policies that have warded off much needed investment and diversification.

Argentina's Energy Matrix 2014 Source: Energia16

 Source: Energia16

Renewable energy, long neglected during the Kirchner administration, has been subject of a surge in interest due to new legislation and is seen by Macri as being key in weaning the country off imports of natural gas and other fuels and plugging the costly energy deficit. It has become Argentina’s first real investment bright spot. Passed last October by the previous administration, the new renewable law (Law 27,191) was enacted by Macri in March and pushes a previous 8% target for energy be sourced from renewables back a year to 2018, with the aim of reaching 20% by 2025. This aggressive target gives executive power very little time to attract the required fresh investment as currently only 1.8 percent of power demand in Argentina is supplied through renewable energy.

The first phase of the renewable program called “RenovAR” is a 1,000 megawatts auction consisting of:
    • 600 MW of wind energy (expected to be concentrated across the country’s abundant unexploited wind resource in the southern region of Patagonia)
    • 300 MW of solar energy (this figure might be too small for the big energy players, especially when compared to auctions of neighbouring countries)
    • 65 MW of biomass (Argentina has very minimal capacity installed to date due to the country’s historic focus on biofuel development)
    • 20 MW from small hydroelectric plants (Majority of the 30MW of current installed capacity is in the southern Andes)
    • 15 MW of biogas (Little as 100 biogas plants operational across the country, close to 9,000 plants are operating in Germany, a pioneer in the industry)

The deadline for interested parties, which officials expect to attract just over US$ 2 billion of proposals, was August 22nd, with winning bids to be announced by Cammesa1 on October 12th. There is likely to be a low level of interest in this particular auction due to how young the renewable market is, even with greater fiscal incentives for projects whose construction begin before 2018. Like all investors with an eye on Argentina’s riches, the main energy players are likely to adopt a wait and see policy to ensure the reforms under Macri are here to stay and how this initial auction plays out. Additional auctions will be held over the coming years to add the further megawatts of renewable energy demanded in the new legislation. Industry is cautiously optimistic as the country’s energy need is extensive but mid-term elections planned for next spring could significantly alter the course of Macri’s project. Renewable adoption requires more than just a favourable one-term administration but a fundamental cross-governmental shift in attitude towards the sector.

One of the key features of Law 27,191 is the allocation of ARS 12 billion for the creation of the “Trust Fund for Renewable Energy” or “FODER,” that provides payment guarantees and project financing and allows Argentina to offer an attractive PPA (Power Purchase Agreement) with terms of no more than 20 years. This should go some way towards providing security and confidence to investors and alleviating the high cost of borrowing. However, Macri will need to work hard to soften previous confrontations and gain the support of development banks such as the World Bank and Inter-American Development Bank, who both should be playing a key role in the initial auctions. To see wide scale renewable energy adaption, investors will need international commercial financing or the guarantee of hard currency availability which isn’t in place currently.

With the dramatic change in policy direction after Macri’s electoral win, the renewable market in Argentina is now following the path of its more pro-active neighbours in combining renewable energy targets with fiscal incentives. However, it will likely be over two years before widespread interest in the local renewable market is generated. Energy reform in Chile and Mexico took years, Macri has yet to break one, but positive foundations are now in place to ensure Argentina has a bright and renewable future.

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James Duncan

1. CAMMESA (Compañía Administradora del Mercado Mayorista Eléctrico) is the administrator of the wholesale electricity market.
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