March 6, 2016

Argentina Charts Course For Renewable Energy

Argentina, Latin America’s third largest power market with approximately 32,000 megawatts (MW) of installed capacity, faces the task of installing 7,000 MW, or 22.5 percent of its 2015 total capacity, in five years.

With the majority of Argentina’s current generation needs being met by costly imported fossil fuels, the nation has the economic incentive to begin exploiting its abundant renewable energy resources. In 2015 this incentive translated into a new renewable energy law mandating that eight percent of generation derive from renewable sources by 2018 and 20 percent by 2026. Whether Argentina’s business leaders and policymakers will maximize the nation’s abundant renewable energy potential and new pro-business executive branch policies to create investor confidence, bankable power purchase agreements (PPAs) and significant renewable production remains to be seen.

Driven by the need to wean itself off of expensive imported fuel, renewable portfolio standards (RPS) to achieve eight percent renewable energy generation as a percent of national consumption were originally established in 2006. Renewable energy promotion through legislation, however, dates back to 1998, with the establishment of feed in tariffs, which allow customers to generate their own electricity using renewable technology and sell the electricity back to the grid.

Yet these and other similar initiatives have failed, partially as a result of market distortions including electricity price freezes and subsidies, which translated into 2014 residential electric rates of approximately 1.1 cents per kWh (kilowatt hour) for subsidized users for clients of Edenor, the nation’s largest distribution utility. The same year, Edenor’s non-subsidized residential customers were subject to a tariff of 6.3 cents per kWh; compared to international standards, Argentina’s residential ratepayers have enjoyed some of the lowest rates globally (in 2014 residential electric tariffs were 18.7 cent per kWh in neighboring Brazil and 12.5 cent per kWh in the United States). 

Artificial residential rates that represent just a fraction of the real cost of electricity have helped reduce the incentive for residential users to shift to distributed generation, limiting the likelihood of achieving the nation’s RPS.

Currency controls, including repatriation limits, have also discouraged foreign direct investment, further diminishing the prospect of reaching the RPS defined in legislation. Accordingly, in 2015, just one percent of electric generation derived from wind and solar combined, while thermal, hydro and nuclear accounted for 63 percent, 30 percent, and six percent, respectively.

However, improvements to the renewable energy law, coupled with executive branch policy under the recently installed Mauricio Macri Administration, may provide Argentina with the momentum to achieve its renewable energy potential. Argentina’s 2015 Decreto Reglamentario de la Ley 27.191 strengthens prior legislation through tax exemptions and other mechanisms, yet the law includes two new renewable promotion schemes with the most potential for impact: a new renewable energy fund which will support PPAs, and renewable energy requirements for large energy users.

The nation’s new renewable energy fund, FODER (Fondo para el Desarrollo de EnergĂ­as Renovables), will support renewable energy projects through financing programs, including awarding loans and capital. More importantly, it will underwrite long term contracts by cosigning or providing guarantees for PPAs. The National Treasury will provide resources for the fund, which will equal at least 50 percent of cash savings offered by replacing fossil fuel generation with less costly renewable generation. To a lesser extent, demand charges and interest payments on loans will also help feed FODER and support renewable energy development.

Large users will also be subject to a new renewable energy requirement. Users with demand exceeding 300 kW will be required to meet an escalating proportion of their total consumption with renewable energy, which can be self-supplied, or purchased from a distributor, retailer or directly from the wholesale market at a price ceiling of $113 USD per megawatt hour (MWh).

Noncompliance will result in compensation at a price equivalent to the variable cost of production of imported fuel, which will be calculated using the weighted average of the imported fuel price during 12 months prior to noncompliance. This price should be higher than the MWh price of renewable energy purchases, so large users will have an economic incentive to comply.

Combined with new executive branch policy, the renewable energy law may prove far more impactful than past efforts to drive renewable development in Argentina.

Macri has already removed capital controls that have limited foreign investment. Under Cristina Kirchner, Argentina’s president from 2007 to 2015, foreign companies were limited in their ability to repatriate revenues, and were required to secure permission from Argentina’s Central Bank to convert argentine pesos to U.S. dollars or other currencies. Lack of access to dollars delayed payment to suppliers, and caused some companies to reassess the viability of new investments in Argentina. 

Partially as a result of lifting such controls, Macri expects Argentina to receive $20 billion USD of foreign investment in 2016, which would represent more than a 200 percent increase from 2014, and include renewable energy projects.

In addition, Macri’s recent decision to reduce electricity subsidies will further support renewable energy investment by increasing the $/kWh residential rate. Power prices that more accurately reflect real costs, as opposed to artificially low costs facilitate renewables’ capacity to compete and provide momentum for distributed generation.

For Argentina, electric generation is at a crossroads. Electricity demand, which has doubled on a per capita basis since 1990 and increased at a five percent annual rate for residential customers in the same period, is projected to continue to grow at a strong pace and necessitates a 7,000 MW of new generation capacity by 2021 to ensure reliability. The new 2015 legislation is designed to guarantee that renewable energy makes a significant contribution to new generating capacity. As such, the nation must promptly prove itself a viable option for renewable investment, a task it has not yet achieved.

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