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Argentina prepares for the renewable energy big time

IN DEPTH | Argentina is one of the world's most exciting wind markets but one with plenty of bottlenecks to navigate, writes Alexandre Spatuzza in Buenos Aires

Of all the world’s emerging wind markets, Argentina’s may well be the most exciting, with the first of 3GW of projects contracted in 2016 due to come on line this year and 1GW to be awarded annually until 2025.

But the country’s recent economic problems and its late arrival on the scene means the multi-gigawatt wind build-out is unlikely to be smooth, with plenty of potential bottlenecks and hazards blocking its path.

Despite being the windiest country in South America, Argentina has only managed to install 228MW of wind, while neighbours such as Chile, Brazil and Uruguay have built gigawatts over the past decade.

But it has not been for want of trying. The power-hungry country launched its first renewables programme, Genren, back in 2009, with state electricity company Enarsa contracting about 800MW of wind at prices over $110 per MWh. But the lack of clear regulations and incentives — plus ongoing economic difficulties resulting from its devastating $93bn default on international debts in 2001 — led most investors to abandon their projects.

Only 200MW of wind was eventually built under Genren, the largest projects being the 77.8MW Rawson in Chubut province and the 50MW Arauco in La Rioja.

Although a law was passed with multi-partisan in 2015 to ensure that 20% of Argentina’s energy comes from non-hydro renewables by 2025, it wasn’t until December 2015, when market-friendly Mauricio Macri was sworn in as president, that the wind industry was finally able to turn a corner.

Macri renegotiated the country’s outstanding sovereign debts, which enabled the central and federal governments to access international credit markets; freed up the foreign exchange markets; opened up the country to exports (including wind turbines and solar panels); and helped to reduce interest rates.

Macri’s government then obtained support from the World Bank, which helped to design the model for a new renewables programme — and, crucially, agreed to guarantee future power-purchase agreements (PPAs).

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Energy regulations were rewritten in a matter of months, and a new renewables auction programme, RenovAr, was launched by Sebastian Kind, undersecretary for renewable energy at the Ministry of Mines and Energy. The first tender results were announced in October 2016, with 708MW of wind projects, 400MW of solar and 1.2MW of biogas awarded 15-year US-dollar-denominated PPAs. It was so oversubscribed that a “Round 1.5” was announced the following month, awarding contracts to 765MW of wind and 516.2MW of solar.

The government then renegotiated 500MW of old Genren wind projects last year and opened up the non-regulated (corporate) market to renewables, for which another 1GW are expected to be built over the next two to three years.

Results of a second RenovAr tender were announced in November 2017, resulting in a further 993.4MW of wind and 816.3MW of PV being awarded, alongside 233.3MW of biomass, biogas, small hydro and waste-to-energy.

Round 3 is expected to be announced in September, but developers are concerned over a lack of available transmission, which could result in that tender being put back to early next year.

The 34 RenovAr wind projects contracted so far are spread across nine provinces and players range from large multinationals to local developers and provincial power companies.

“Of the all 147 projects in RenovAr, 20-25 are now under construction and this year we will see the first projects inaugurated,” says Omar Diaz, tax and renewable energy lead partner at KPMG Argentina. “This government has done everything to attract investors in all sectors, but renewable energy has been the first to reach success and bring concrete results.”

If everything goes to plan, more than 1GW of wind will be installed by the end of 2019, with more than 10GW of renewables up and running by 2025.

But there is no guarantee that everything will go to plan.

Challenges

The potential pitfalls are numerous and wide-ranging, varying from high-cost financing through to a lack of transmission lines and suitable cranes.

The cost of finance, like in most countries, is heavily influenced by confidence in the national economy and credit ratings from Moody’s, S&P and Fitch. At the moment, Argentina’s credit rating is a “below investment grade” B2 or B+ — albeit an improvement on the default ratings it had until late 2015.

As a reference, the country’s 30-year sovereign debt issued in 2016 will pay interest of more than 7% a year, and shorter corporate issues are around 6%.

“The cost of capital is still high, but early investors in the market are willing to face reduces rates of return as they see conditions improving in the long term,” says Diaz.

However, the economy is growing and may improve faster if the investment ratings are revised upwards this year. A capital markets reform — which has already been passed by the Senate and now has to be approved by the lower Chamber of Deputies — is expected to further boost trading, reduce financing costs and free up financial flows, while Argentina is also negotiating to become a member of the Organisation for Economic Co-operation and Development (OECD), which would boost economic confidence further.

The impact of the country’s long years of default have affected more than just the financial sector. Investment in the country’s electricity infrastructure and construction industry has lagged behind its neighbours.

The lack of transmission lines is probably the biggest problem facing the domestic wind industry. The southern Patagonia region may be among the windiest places on earth, but if wind farms cannot export their power to the population centres in the north, then they will not be built.

Many developers have been able to bypass this problem by locating 1GW of RenovAr projects in the Buenos Aires province, the country’s main industrial and commercial hub. However, the success of the third and future RenovAr rounds largely depend on the success of a planned government tender for about 4GW of new transmission lines, which in late April was still being modelled and will involve public-private partnerships for the first time.

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In the southern province of Chubut, for instance, 445MW of RenovAr projects have been awarded, but once these are built, there will be no transmission capacity left for future projects. This has led to prospective developers slowing down wind measurement campaigns in the province.

“If the government doesn’t contract the transmission lines, there is no point in holding Round 3,” says Alfredo Bernardi, president of the newly created Wind Power Chamber, CEA.

Other bottlenecks around logistics, bureaucracy and a lack of trained might also cause delays, says Marcelo Alvarez, president of the Chamber of Renewable Energy, Cader.

For example, when Vestas was transporting a 62-metre turbine blade to the 100MW Corti project last year, local police seemed to be unaware that they were supposed to close the whole road — which resulted in a truck trying to drive under a blade, but instead crashing into it, the site manager, Alfonso Martinez Blanco, tells Recharge.

Vestas’ country manager, Andrés Gismondi, explains: “We are currently facing several problems related to the construction of the wind farms that are linked to the lack of enough capabilities in the sector, but also, in general, [these problems are] related to a country that spent several years without competitive and open business on the energy sector with cost-effective installations.”

The ports of Puerto Madryn, in Chubut, and Bahia Blanca, in Buenos Aires province, currently don’t have enough room to store large wind components, but they are being expanded by their respective port authorities. Customs officials had to be trained to understand how to oversee imports of large components — but the smaller components are still facing weeks of bureaucratic handling before being liberated. Companies and labour unions want at least 70% of workers at construction sites to be local — even though they lack proper qualifications. There is also lack of specialist transport to take heavy components from ports to project sites; plus there is a severe shortage of cranes suitable for the wind industry.

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“There are a few main cranes in the country, but even some of them are not suitable for today’s requirements on the wind farm installations in terms of height and loads for the newest turbines,” says Gismondi.

In fact, there are only a handful of adequate cranes in Argentina, which have to be shared by the 34 wind projects across nine provinces. So if projects are not planned properly, in conjunction with each other, the whole industry’s schedule could be threatened. Unsurprisingly, OEMs are now negotiating with foreign crane suppliers, including from Brazil.

Despite these early problems, Gismondi, believes that the country is on the right path. Vestas and Nordex have so much confidence in the Argentine market that they are both planning to build nacelle and hub assembly plants in the country to comply with progressive local-content rules starting from Round 2 projects.

“As with any new market, it takes time to develop the whole the sector,” he says. “But it is clear that the renewables are growing strong in the country and there is high interest of local and foreign investors, manufacturers and service providers to start operations here soon. Many of them have already arrived.”

For Diaz, the government and the private sectors will be able to conquer all the potential difficulties — and the completion of the first RenovAr projects will confirm this.

“The RenovAr programme was very ambitious from the start,” he says. “Problems still need to be overcome, but investors are looking closely to see whether it is going in the right direction, so when we see photographs of completed wind farms, it will prove it is.”

Chubut the leader

Chubut is the biggest and most important of the six provinces for the wind industry in Argentina’s southern Patagonia region. With just 2.3 people per square kilometre, endless roads, broad horizons and dry easterly winds at a constant eight metres per second or more, it’s a developer’s paradise.

Most of the land on the eastern side of Chubut — the plains below the Andean foothills — is owned by farmers with huge estates, which enabled companies to buy land for wind projects, instead of leasing them, which is the norm in most parts of the world, including Argentina’s more developed regions, such as Buenos Aires province.

Out of the 2.5GW of wind contracted by the government in the RenovAr tenders, about 18% or 445MW are located in Chubut.

The province’s main port, Puerto Madryn, is now being expanded to allow hundreds of tower sections, blades, nacelles and hubs to be imported and stored.

But whether Chubut emerges as the crown of the Argentine wind industry — as it should, due to its location and strong winds — will depend on new transmission lines being built to link it to the more populous northern regions.

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