'Argentina is now sexy'

ARGENTINA: The country may be a latecomer to the Latin American wind boom, but ambitious targets and radical economic reforms mean this is the perfect time to grab a slice of the pie.

Direct delivery… Gennaia is building a 24MW extension to its 77MW Rawson wind farm after signing a private contract with a cement producer

Argentina has long lagged behind its neighbours in adopting new technologies, including wind power, even though the country depends on imported fossil fuels that have been draining state coffers. Today, wind represents less than 1% of Argentina's electricity supplies, compared with 5% in Chile, 8% in Brazil and 23% in Uruguay.

But renewable energy is finally taking off. In September 2015 congress approved a law setting the ambitious target of securing 20% of the country's power supplies from renewables by 2025, largely through annual tenders to supply grid operator Cammesa.

The Renovar programme has proved a remarkable success. The first round, held a year after the law was approved, attracted offers for more than five times the 1.2GW of renewables capacity it sought. Contracts were awarded at an average price of $59/MWh, far less than Cammesa currently pays for electricity.

Buoyed by the success, the government called a follow-up tender just two months later, which awarded contracts to another 1.2GW of projects that had not made the cut in the first round. In both tenders, more than half the demand was awarded to new wind farms.

Most of these projects are now advancing rapidly to comply with the 2019 deadline and are either closing financing deals or are about to enter construction, says Doris Capurro, CEO of developer Luft Energia. Work is about to start on the 100MW Corti wind farm in the province of Buenos Aires, where Luft is partnered with US private-equity firm Castlelake, she says.

Delays at a few projects, largely down to problems securing financing, means the target of sourcing 8% of electricity supplies from renewables by 2019 may not be met, but Argentina has still made a very promising start.

As well as the state tenders, the coming months and years should see the emergence of a new market of private contracts between generators and consumers after the government published rules for such deals.

In early October, Genneia, one of Argentina's leading developers, signed the first private contract with cement producer Loma Negra. The 20-year contract will cover 60% of the power produced by a 24MW extension of the existing Rawson wind farm in Chubut province, currently under construction.

However, for now, most major consumers are holding back from direct negotiations with suppliers until they can evaluate whether this is more competitive than buying from the state, adds Capurro.

Renovar 2, the programme's second tender round, with another 1.2GW renewables capacity on offer, took place on 19 October. Developers presented 58 wind projects with more than 3.8GW of capacity, or almost seven times the 550MW quota initially set aside for wind.

Bidders included international companies such as Acciona, Enel Green Power and GE, but the largest bids were made by local companies — cement producer Petroquimica Comodoro (7 projects, 556MW), power generator Central Puerto (five projects, 443MW) and Genneia (five projects, 348MW).

Almost half of the proposed capacity (1.88GW) is located in the eastern province of Buenos Aires, with most of the rest distributed between Patagonia (1.06GW) and Comahue (578MW).

The offers, which are subject to a ceiling price of $56.25/MW, are due to be opened on 23 November. "In the first [round], the majority of winners were local groups and provincial states...

Now we see many more foreign investors," Ezequiel Mirazon, energy and mining leader at PwC Argentina, said before the bids were submitted.

Economic reforms

The growing interest in investing in Argentina's wind-power potential has also been driven by the remarkable improvement in the country's business climate over the past two years.

After taking office in November 2015, president Mauricio Macri launched a series of economic reforms, loosening controls on foreign exchange, lifting restriction on imports and withholding taxes on commodity exports.

He also reached a deal with holdout creditors in the US, which had refused to agree to a restructuring of Argentina's debt after it defaulted on nearly $100 billion in 2001. All this happened at breakneck speed, introducing the country back into the global economy.

Inevitably such radical change creates friction. Plans to scrap energy subsidies have been slowed after mass protests and court challenges.

But with the economy now picking up again, the mood seems to be changing. In congressional elections on 22 October, Macri won a firm mandate to continue with his economic reforms.

His Cambiemos party won senate seats in the five main populations centres, the first time any party has done so since 1985.

This has renewed confidence among potential investors to take the plunge in a country that just a few years earlier expropriated its largest energy firm, YPF.

As investors grow more comfortable with Argentina, capital costs are beginning to fall. The yield on government bonds have fallen from 8% to 6% over the past year, and are likely to fall again after the elections in October. "If we speak again next year, I suspect costs will be even lower," says Mirazon.

With rates of return on projects in Argentina still relatively high compared with more mature renewables projects in the region, foreign players are fighting to win a foothold in the country. "Argentina is now sexy," Mirazon reports one North American investor told him. "The moment to enter is now."

Local banks also see a significant opportunity in providing project finance to renewable-energy projects, although not at any cost.

At the recent annual Argentinean Renewable Energy Congress in Buenos Aires, bankers warned developers not to bid too low in the imminent tender, as that would leave projects unviable.

Hurdles to overcome

A significant barrier to development is infrastructure. The country's grid is already operating close to capacity on some key lines.

Earlier this year, the government announced plans to tender around $3 billion worth of work to expand transmission capacity throughout the grid.

This will take several years, so to increase the pressure to complete the work, projects that win in this year's tender will receive take-or-pay contracts to ensure an income even if they cannot inject power to the grid.

Until the new lines are completed, Capurro predicts a rush to develop projects near centres of consumption.

The boom in renewables investment will also put pressure on transport infrastructure. The port of Bahia Blanca in southern Buenos Aires is preparing to receive more than 300 wind turbines over the next year.

There is also a lack of local qualified labour, creating opportunities for companies in neighbouring Brazil, Chile and Uruguay, as well as further afield.

But these hurdles seem minor compared to the huge potential the country is finally uncovering with its drive to push renewables.