Argentina

Argentina

Wind boom could be shortlived as economic crisis hits

Argentina's Renovar programme has made the country a promising emerging market, but now recession and a lack of grid capacity are starting to take hold.

Busy times… The pace of development is brisk at present, with the government expecting 5GW to have been installed by the end of 2020 (pic: Genneia)
Busy times… The pace of development is brisk at present, with the government expecting 5GW to have been installed by the end of 2020 (pic: Genneia)

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Argentina’s surging wind industry has run into turbulence as the country’s economic troubles make financing more difficult.

Two years after the country launched its renewable-energy programme, developers in Argentina are on a roll, with new projects being added nearly every month.

The latest was Genneia’s 50MW Villalonga wind farm in Rio Negro on 6 March. A week earlier, authorities cut the ribbons on the 125MW Bicentenario site in Santa Cruz province, owned by petrochemicals firm PCR.

By the end of next year, the government expects to have added 5GW of capacity, a major step towards its target of generating 20% of the country’s electricity from renewables by 2025.

"Argentina is one of the world’s success stories in renewables," said Maximiliano Morrone, the government’s director of renewable energy promotion.

Argentina’s growing energy needs and capacity factors reaching 50% on the windswept Pampas have made it a hot destination — not only for developers, but also for manufacturers such as Vestas, which opened a hub-and-nacelle assembly plant outside Buenos Aires last November to meet more than 1.5GW worth of orders.

But the sector is now facing headwinds after Argentina ran into one of its periodic economic crises.

Last year, the value of the Argentinean peso plunged 50% against the US dollar as investors fretted over the government’s ability to reduce the fiscal deficit, forcing president Mauricio Macri to seek a record $57 billion bailout from the International Monetary Fund.

In December, the country entered its third recession in five years as the government slashed public spending to meet the IMF’s tight macroeconomic targets.

Projects already in development have been protected, in part by guarantees backed by the Inter-American Development Bank put in place for just this kind of financial turbulence, said Morrone.

Prohibitively expensive

Developers without financing in place have seen the cost of capital funding soar.

"Capital markets have largely closed their doors to Argentina — we’re no longer sexy," said Ezequiel Mirazón, energy, utilities and mining leader at PwC Argentina.

With interest rates in double digits and the country’s credit default swap spread tripling during 2018, it has become prohibitively expensive to finance all but the most competitive wind and solar projects.

"It’s put at risk a significant number of projects that were unable to complete the necessary financing," said Doris Capurro, CEO of Luft Energía, which developed the first wind farm to be built under the Renovar programme of renewable-energy tenders.

Adding to the uncertainty is October’s general election, where economic turmoil, high inflation and spending cuts could leave Macri struggling to win a second term.

Currently ahead in most polls is his predecessor, Cristina Fernández de Kirchner, whose record of state intervention in the economy may further scare investors.

Conscious of the dramatic deterioration in conditions since the first contracts were awarded, the government is showing flexibility.

In February, energy secretary Gustavo Lopetegui announced an extension of up to 12 months to the deadline by which projects awarded contracts under the second Renovar tender must be online.

To qualify for the delay, projects must agree to tighter criteria, choosing two out of a 30% national content requirement, a shorter supply contract, or a lower installation incentive.

Then in March, the government announced a two-month extension of the deadline to present offers under the third round of the Renovar programme, originally due at the end of the month.

Even with the extra time, some less attractive projects may disappear. But the crisis is attracting a second wave of less risk-averse investors, which could acquire equity in existing projects on very attractive terms, Capurro said.

The government is keen to play down the difficulties facing the sector. Out of 6GW of renewable capacity contracted under the Renovar programme or with private consumers, more than 80% have been financed and are either operating or under construction, Morrone said.

This includes 57 out of 69 wind projects with contracts.

Struggling grid

A bigger hurdle facing the development of renewables is the lack of transmission capacity in Argentina’s transmission grid.

Some lines are already operating close to capacity, especially those linking regions with the greatest potential for renewables, such as Patagonia or the north-west.

Following delays in building the necessary infrastructure, this year’s third-round tender focuses on smaller projects (500kW-10MW), which can run on medium tension lines, where the situation is less critical.

The government is working on a fourth tender for larger projects, which could be launched in early 2020, Morrone said.

But more larger-scale projects can only be added once the government has tendered contracts to expand capacity on key routes.

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