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Finance the magic ingredient in Argentina's clean-energy feast

The South American nation has plenty going for it as a renewable leader but one thing is missing, writes Alexandre Spatuzza

Argentina has the perfect recipe for a global renewable energy leader – almost.

It has unquestionably excellent solar and wind resources; power demand growing at more than 3% a year; a need to revamp an outdated power generation fleet; clear and ambitious renewables targets and legislation; and keen interest from the global clean energy sector.

But one essential ingredient to make the country’s 10GW renewables ambition a reality has yet to be secured – a sound financing structure that will guarantee returns on the investments secured so far in the first tender round and to sustain investor appetite for the following rounds.

“There is not enough money to finance all that there is to finance,” concluded Juan Srodek, local head of KBR Investment Bank, during a seminar organised by the Global Wind Energy Council (GWEC) in Buenos Aires to discuss the issue.

The stakes are high. Earlier in October, the government contracted 707MW of wind and 400MW of solar that needs to be ready by early 2018 at the latest if Argentina is to meet the country’s 8% renewables target that year. This would require between $1bn and $1.5bn in investments, according to market projections.

"There is not enough money to finance all that there is to finance"
Juan Srodek, KBR Investment Bank

The 10GW, 10-year RenovAr programme is not only a way out of a deep energy supply crisis, but also the government’s bet to quickly attract investment and create jobs. It is relying on the dynamism of renewables to overcome a depressed economy still reeling from the fallout of the 2008 financial crisis, and the more recent socially costly and unpopular realignment of Latin America’s third largest economy.

In a country that has only just started to come out of a 10-year sovereign default, the cost of financing is still sky-high – some say it could be some 10% on top of average global interest rates – despite all the goodwill generated by the pro-market Mauricio Macri administration since he assumed office in December last year.

The dollar-denominated, 20-year PPAs and the guarantees put up by the national treasury in the FODER renewables fund, which is also backed by a $500m World Bank guarantee, helped appease concerns before the tender. But investors are now doing the sums, and meeting banks and financial institutions to make ends meet for unexpectedly low power prices averaging $59.4/MWh for solar and $59.7/MWh for wind seen in Round 1 of the RenovAr program.

“At these prices it’s hard to finance and obtain the needed rate of return,” Alejandro Lew, CEO of local solar developer 360 Energy, told Recharge. Despite more than 600MW of solar PV projects registered for the tender, Lew is considering staying out of next tender rounds if prices remain low.

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Spearheading Argentina’s return to the international financial community will not be easy for renewable project sponsors.

Traditional project financing is not readily available in a country with a track record of default, dozens of uncompleted wind power projects, and a power market that still needs to remove subsidies from consumer power rates – calculated to be some 30% to 50% below real costs, despite huge recent power rate hikes promoted by the Macri administration. Risk perceptions are very still very high.

“We need to see a signal that consumer rates will eventually cover power generation costs,” said Augusto Buda, director of investment banking at the local unit of Spanish bank BBVA.

Buda believes that Round 1 – and the 400MW of wind and 200MW of solar to be contracted in round 1.5 by late November – will be financed via a mixture of equity and corporate financing, and credit from multilateral institutions such as the IFC, the IDB and the regional development banking entity CAF.

“The problem will come from Round 2 [scheduled for next year] and onwards when private banks will be called upon to finance more projects,” said Buda.

The competition for money will be aggressive in an underdeveloped capital market such as Argentina’s.

Apart from the 1GW of renewables to be tendered every year, developers will have to compete for financing with some 500MW from the failed Genren renewables programme – the 2009 scheme which is being revived by the government – another 2GW of thermal power contracted, as well as other infrastructure projects in sectors like transport and sanitation.

During the GWEC seminar, the consensus among OEMs, project sponsors and financing institutions was that around 30% of the project’s costs will come from developers’ own equity, while the remaining 70% will be from mixed, non-traditional sources.

For the projects sponsored by large, known companies such as Genneia or Pampa Energia, issuing corporate bonds abroad could partially cover financing needs, even if maturities are below 10 years – significantly shorter than the half-life of the 21 wind and solar projects contracted.

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Multilateral institutions, although ready to offer financing, are expected to only back three to four projects a year with a maximum of $400m to $500m. But this option, pointed out Mainstream’s new business director Juan Walker, is not available to all companies, since the redtape required by such organisms to meet the Ecuador Principles make contract negotiations complex and lengthy.

“It’s a never-ending questionnaire and requirements that not everyone can fulfil,” he said.

Finally there are the Export Credit Agencies (ECAs) and financing from the OEMs themselves.

China’s Envision, for example, contracted 185MW and will supply its own technology for the projects.

Provincial power company JEMSE, on the other hand, which won 300MW of the 400MW solar PV contracted in Round 1, has already announced it would partner with China’s HydroPower and would seek financing from the Chinese Exim bank.

But for that it needs to secure sovereign guarantees from the Argentine national government, something which, again, few contenders have access to.

“We have to scramble to get financing from ECAs because of the timeframe, and in the end financing will depend on the competence of each company,” said Bernardo Andrews, CFO of Argentina’s Genneia. Despite being one of biggest power companies the country, Andrews said he still has to align all the financing for the 100MW of wind it won in Round 1.

So OEMs have realised that they have a key role to play in Argentina, and some are ready to increase stakes to quickly take a foothold in the country. That especially holds true because until the end of 2018 all equipment will be exempt from import taxes, but after that the government is expected to boost local-content requirements in exchange for tax incentives.

Representatives from Gamesa, Siemens, Vestas and Acciona present at the seminar agreed they will need to play an important role in helping obtain financing for projects.

"Argentina – once the richest nation Latin America in the early 20th century – wants to be back in the game"

“We can be a catalyst for financing by improving projects and focus on developing them in the long term. But we are an industrial company, not financiers,” said Robin Palao, Gamesa’s transactions executive for Latin America.

For some, however, their roles could even be bigger, pointed out Monica Castillo, Argentina sales manager for Siemens.

“We have Siemens Financial Services which has very good relations with ECAs, but we are ready to contribute with equity to give banks time to feel confident in Argentina,” she said.

The government believes it is doing its job. As the mines and energy ministry’s legal adviser Ramiro Gomez Barinaga put it: “Argentina has done its part [creating rules, setting up guarantees and promising yearly contracts] now it’s up to the private sector to get the money.”

GWEC’s seminar was above all a sign that Argentina – once the richest nation Latin America in the early 20th century – wants to be back in the game. Around 200 people were present for the day-long event.

But reconquering its place in the international financial community will only come with a tad of creativity mixed with a sense of purpose, as the 87-year-old president of the Argentine Wind Power Association (AAEE) Erico Spinadel told Recharge later.

“Everyone has to give up something to make this work, because the alternative to not working is catastrophe,” said the nuclear engineer turned Argentina’s wind power champion, as he realised that his 30-year-old dream to see the wind-swept Patagonia plains full of spinning turbines could finally come true. 

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