Reposted from National Law Review. 2017 will be a year of truth for Argentina’s ambitious renewable energy program (“RenovAR”), which launched in 2015 and set a mandatory renewable energy target of 20 percent by the end of 2025, with incremental targets every two years. In addition to implementing positive reforms in the energy sector, the RenovAR program signifies an effort to overcome the country’s below-investment-grade credit rating, as well as fresh memories of Argentina’s sovereign default in 2001 and the bevy of protracted investor disputes that ensued. To this end, the program incorporates features such as government-sponsored project financing, guarantees supported by multilateral institutions, fiscal incentives, and put options allowing project owners to short-circuit dispute resolution procedures in the event of key default scenarios.
Rounds 1 and 1.5 of the auctions tendered through the program in September and October of 2016 prompted heavy oversubscription resulting in approximately 2.42GW of awarded capacity with prices averaging US$59.7/MWh for solar and US$59.4/MWh for wind in Round 1 and US$54.9/MWh and US$53.3/MWh in Round 1.5. The projects are due online in 2018. Looking forward, if events unfold as scheduled: Round 2 of the auctions should be announced by the end of April 2017; power purchase agreements (“PPAs”) resulting from Rounds 1 and 1.5 will continue to be signed; regulations facilitating renewable energy supply to large consumers (i.e., consumers with power demand exceeding 300kW) will be announced and implemented; and critical financing will (need to) materialize.
Ultimately, the success of the RenovAr program will depend largely upon the ability of developers and large consumers alike to marshal the financing, technical, and legal expertise necessary to realize sufficient returns in a high-risk, low-price environment. Given the country’s risk premium of approximately 300 points in interest differential rates (as compared to its investment-grade neighbors), traditional project financing is not readily accessible for the new projects. The guarantees offered through the program have done little to reduce this premium, as investors show wariness of the associated red tape and appear instead to be adopting a wait-and-see approach to the country’s creditworthiness. As a result, financing will likely pose a considerable bottleneck to the 5GW of new capacity (including 2.8GW of thermal capacity previously awarded in 2016) that will need to be installed in the next two years. Indeed, such capacity will require approximately US$2 billion in equity and US$4 billion in long-term debt—sums that are particularly challenging given that the average prices of the renewable energy tenders are as much as US$10-20 below what a market survey indicates are the prices necessary to provide sufficient returns to compensate for Argentine risk.
These prices reflect the competitive participation of Chinese capital and technology in the winning bids. By contrast, many of the other bid winners lack financing commitments and have delayed entering PPAs to seek additional concessions and guarantees. Others have already entered negotiations to sell their projects, either because the returns are too low or because the projects require further work to meet the international standards necessary to attract long-term investment. In the meantime, the PPAs for Round 1 (for which prices were higher) were signed in January 2017, leaving approximately 730 days to reach the finish line on more than a gigawatt of renewable energy capacity. The search for returns on Argentine renewables is on.