Can Argentina convince renewable investors to return?

Bnamericas Published: Wednesday, June 24, 2020
Can Argentina convince renewable investors to return?

Argentina must find ways to shield investors from the long-term risks associated with its political and regulatory instability if it wants to expand its renewable energy growth. 

Sebastián Kind, former renewable energy undersecretary in the previous administration of Mauricio Macri, says renewable investments were underpinned in his term by a power purchasing agreement framework that provided guarantees to offset real and perceived risks faced by investors.

“A 20-year PPA means five administrations in a country that is used to changes in the rules within a single administration or even every year,” Kind said during a webinar hosted by the US-based Wilson Center. 

“[Argentina’s risks include] offtaker delays, non-payment, convertibility, weak or non-trusted local law enforcement, sovereign defaults, etcetera.”

Faced with all these risks, investors have traditionally been unwilling to commit their capital. Therefore, Kind’s team designed a program for renewable energy development that could offset country risk and bring the quality of the investment as close as possible to what can be found in an investment-grade market. By doing this, the framework would also lower the cost of the investment, leading to more competitive final prices.

The result of this policy was a series of tenders known as RenovAr, which awarded four rounds for 6.3GW of new capacity split between 240 projects. 

RenovAr used an innovative financial structure, which essentially worked to shield investors from a significant portion of the risk they would normally be exposed to.

“We brought a triple-A warranty to backstop the application of sovereign warranties. What we are saying here is that we jumped out of the offtaker commitment and into the sovereign commitment and into the sovereign risk in order to shield this program out of the offtaker and out of the country or fiscal risk. We brought a powerful set of warranties that bring about this shift we are talking about,” Kind said.

The policy brought Argentina some US$7.4bn in new investments over 2019 and 2020 from countries such as China, Italy, Japan, the Netherlands, Brazil, Norway and Germany – and local investors committed US$2.3bn.

It also led two major wind turbine suppliers, Vestas and Nordex, to build local factories. In total, Kind estimates that RenovAr created 11,000 jobs and added 5GW in new capacity.

The current administration of President Alberto Fernández has criticized this financing model on several occasions. Earlier this month, production minister Matías Kulfas said his team would deploy a new strategy for renewable development and implied the model championed by Kind amounted to a form of subsidy for the sector.

“It is clear this [renewables] sector developed during the previous administration based on a law passed in 2015 where there is basically a long-term contract that sets an assured revenue stream and a pre-set price, and some conditions that imply a subsidy for the sector,” Kulfas said.

The fact that the law that spurred renewable growth in Argentina was passed in 2015, under the presidency of Cristina Fernández de Kirchner and with almost unanimous bipartisan support, means the renewables sector will be able to survive a change in power, according to Kind.

Fernández de Kirchner is currently Argentina’s vice president.

Kind argued that the slowdown in renewable investment in Argentina is not related to a change in government. Instead, it can be explained by the fact that the country is going through a sovereign debt restructuring and financing conditions have profoundly deteriorated since the beginning of 2019, he said.

“If a lot of the macro [economic] things could be adjusted, renewables is still one of the cheapest options in the country,” said Kind, who added that  many projects, such as the large-scale development of unconventional formation Vaca Muerta, also require capital and are unlikely to see significant progress until financing conditions improve.

“In order to deploy the gas of Vaca Muerta we also need a lot of capital — capital the country is not in a good position to receive for different reasons … Hopefully the economic situation in Argentina will change very soon and international capital will flow back to the country for different kinds of infrastructure,” he said.

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