Argentina shows strong potential for renewable energy investment opportunities

5 minute read
06 May 2016

In an effort to address its energy needs, Argentina has announced that it is looking to develop US$5 billion in renewable energy by 2018.

The key points from the April announcement of Argentina's ambitious renewable energy program include:

  • Renewable energy, as a share of power consumption, must rise to 8% by December 21, 2017 (from 1.8% currently).
  • Growth of this scale requires between 2,000 and 3,000 MW of development.
  • The country has set a target to increase its total renewable energy share to 20% by December 31, 2025 (approximately 10,000 MW and between US$15-20 billion of investment).

Such a program would normally be of tremendous interest to active participants in the renewable sector, including developers, financiers and contractors. Unfortunately, Argentina has been on the outside of international development and financing for the last 15 years.

Why Argentina is now a viable market for investment

Frozen out of international markets since 2001, Argentina is coming in from the cold. With the election of President Mauricio Macri at the end of 2015, it is attempting to create a more market-friendly environment for international development and financing.

Argentina's reintegration with the international financial community is taking shape through its commitment to numerous financing and renewable energy activities. These activities should help to change global attitudes towards Argentina as a viable market for investment - particularly in relation to renewable energy.

Important achievements with respect to government financing include the following:

  • Argentina recently completed a bond offering, initially set at US$15 billion and settling at US$16.5 billion, which attracted bids of approximately US$70 billion. Nearly 750 accounts placed a combined 2,000 orders for the four bond maturities offered under New York law.
  • Given the oversubscription, Argentina was able to offer debt yields of 8% for 30-year bonds and 7.5% for 10-year debt. Such yields are considerably lower than other debt issuances by other emerging economies in Argentina's peer group.
  • Approximately two-thirds of the demand came from the U.S., while 25% flowed from European investors.
  • In February, Argentina reached a US$4.7-billion agreement with its holdout creditors. In April, the U.S. District Court of Appeals in New York affirmed a prior ruling to lift an injunction that had barred Argentina from paying certain creditors.
  • Argentina has lifted significant foreign exchange and tax restrictions and plans to lift the remaining restrictions on currency trading in the coming months.

Key aspects of Argentina's renewable energy program

As part of this ambitious new program:

  • Argentina will create a trust fund for renewable energy projects called FODER (as per its acronym in Spanish) to provide payment guarantees and project financing to proposed projects.
  • A promotional tax regime has been created to support renewable energy development, consisting of a combination of tax exemptions, deductions, credits and accelerated capital cost depreciation.

In respect of the tendering process, it is worth noting that:

  • A procurement call is expected to be issued by the Ministry of Energy and Mines in the near future offering power purchase agreements (PPAs), set to a minimum of 15 years, to prospective bidders.
  • Award rules will be based on price and non-price criteria, including local content integration, CAPEX efficiency, time to COD, and amount of FODER financing requested.
  • Large, unbundled power users (those with an average power demand greater than 300 KW) may opt out of the tendered PPAs and source renewable energy directly from developers - thus creating an alternative market for developers and equipment providers.
  • The program applies to all investments in electric power generation, auto-generation and co-generation by using renewable energy sources throughout Argentina.

What this means for international investors

International renewable energy investors and participants who are willing to take the time to carefully examine Argentina's new program will find that it offers a number of attractive opportunities.

The country has carved out a well-defined program for renewable energy and has gone a long way toward restoring the confidence of the international financial community. The combination of tax and financial incentives create a substantive basis from which projects can be developed and financed.

The Argentine government's request for proposals is expected to be issued in the second quarter of 2016, and we will provide a further update to you at that time. In the meantime, please contact us with any questions you may have about Argentina's renewable energy program and related opportunities.

Gowling WLG is an international firm with a top-tier energy practice, a keen focus on renewables and a particular strength in Latin America, where we hold long-standing relationships across the region. Having worked with investors on many Latin American energy and infrastructure projects, we encourage you to reach out to us if you are interested in exploring this exciting new program.

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