Financiers wary of Argentina's renewable energy push

Financiers wary of Argentina's renewable energy push

Argentina M&A Project & Infrastructure Finance Special Reports

Add Argentina to the list of countries in Latin America that are courting investors to develop renewable energy projects.

Hoping to reduce the country’s costly reliance on fossil fuel imports, President Mauricio Macri has embarked on an ambitious plan to boost Argentina’s renewable energy output to 20% of its total power supply by 2025, up from under 2% currently. The push comes even as the country foresees 6% annual increases in its electricity demand.

The renewables strategy is a crucial part of Macri's efforts to stabilize Argentina’s finances. For years a net exporter of energy, Argentina has suffered from a lack of investments that has left the country heavily dependent on imports, weighing heavily on its bulging fiscal deficit.

Argentina is off to a slow start to develop its renewable energy potential, trailing Brazil, Chile, Mexico and Uruguay. Still, analysts say its geography — from wind-swept Patagonia to large, semi-desert regions in the north — hold enormous potential.

To meet the clean energy targets, Macri last year launched the RenovAr renewable energy auction program and held two renewable power tenders, auctioning 59 projects with 2.4 gigawatts in capacity valued at $4 billion. The program has attracted heavy interest, with companies in the first auction offering to build six times more capacity than the 1 GW the government had targeted. A second auction was also successful. Agreements call for the projects under contract to be operational in 2018.

The government plans to hold four more auctions in 2017, which Macri has declared "Argentina’s year of renewable energy".

Despite the enthusiasm for further auctions, many companies that won projects in the first two rounds are still looking for financing.

"That’s the one missing link in Argentina’s program right now — the financing," says one energy industry source familiar with RenovAr. "Of all the stakeholders you need to bring to the table to get the deals done, the bankers are still saying, ‘Let me think about it some more’."

Part of the financing challenge stems from Argentina’s reputation with investors. While Macri has taken steps to rebuild market confidence and credibility, some investors are still waiting to see if his pro-business policies signal a permanent change.

To make the projects alluring to investors, Argentina is offering power purchase agreements (PPAs) of up to 20 years. "That’s longer than in Chile or Mexico," where PPAs are typically 15 years, the industry source says.

Argentina has also sought to make projects attractive by offering at least three layers of guarantees, including a national trust fund and the World Bank.

Earlier this year, the World Bank approved a $480 million guarantee to support private investments in the RenovAr program. The 20-year backstop is for Foder, an Argentine trust fund of around $12 billion pesos ($722 million) earmarked to help finance renewable energy projects.

"A challenge is to ensure that most projects will receive adequate long-term funding," says Gabriel Goldschmidt, head of infrastructure for Latin America and the Caribbean at the International Finance Corporation (IFC), the World Bank’s private investment arm.

Some larger companies are turning to their own balance sheets to finance projects, Goldschmidt says. "For entities that are established locally and internationally, corporate financing is always a possibility," he says.

Project finance can be a challenge, though, Goldschmidt says. "However, one element that is favorable is that the PPAs are in dollars. Therefore, projects can obtain dollar financing with longer tenors more easily than in the local markets," he says.

Risk mitigation

Argentina’s RenovAr has several features that set it apart from many traditional renewable energy programs. 

Top of the list is Foder. No Argentine government agency holds an investment-grade credit rating, which poses a challenge for sponsors and developers that want to finance their projects through PPAs issued by Cammesa, the country’s electricity market administrator. Fitch described Cammesa in February as "a counterparty with a weak financial profile", and one that is dependent on cash from the sovereign.

Foder, made up of treasury funds and money from the Argentine government-administered pension fund Anses, operates as a payment guarantee and project finance account. The fund guarantees payments for the PPAs under the RenovAr program in the event Cammesa misses a payment.

"It’s one of the innovative characteristics of how the program was structured," Goldschmidt says.

Argentina is also structuring its auctions differently to those of its neighbors, the industry source says. "In every other country, bids on solar, geothermal or wind projects are all bundled together, and often the lowest price wins," he says. "So you end up with different technologies that have different price points, all competing against each other."

Argentina, meanwhile, has set it up so that biomass companies, for example, can compete specifically for biomass projects.

"In Mexico and Chile, where the solar people have to compete with the wind people, solar increasingly wins out because they have the cheapest prices," the source says. Argentina's approach does a better job at encouraging a range of renewable energy sources, he says.

Many of the opportunities lie in Argentina’s distant territories. Certain regions of the country are grappling with a lack of transmission lines, with a large chunk of Argentina’s transmission capacity nearly full after last year’s two auctions. Some estimates say Argentina may need to add around 5,000 kilometers of additional transmission lines to meet demand in the next three years.

RenovAr 2.0

Given the success of the first two auctions, known as RenovAr 1 and RenovAr 1.5, Argentina’s Energy Minister Juan José Aranguren has said the government is planning as many as four more later this year, with the hopes of attracting up to $7 billion in investments.

Javier Rodríguez de Colmenares, the head of infrastructure and energy at the Inter-American Investment Corporation (IIC), says the timetable could be overly ambitious with some of the financing issues still unresolved.

"There is maybe just enough money to fund the RenovAr 1 and 1.5 auctions on an equity and debt basis," he says. "So it would be reasonable to wait for these projects to achieve financial closing before getting RenovAr 2.0 up and running."

Rodríguez says multilateral institutions remain committed, with the Inter-American Development Bank (IDB) considering A/B loans of up to 15 years, similar to the facilities that it used in Costa Rica and Uruguay.

The development of renewable energy projects in Argentina is not only limited to the RenovAr auctions. The state-owned energy company YPF received a $200 million syndicated loan for the construction, operation and maintenance of the 100 MW Manantiales Behr wind farm in a project financed in September by the IIC and the IDB.

"Anyone following the auctions can see that the pricing is very competitive compared to almost any other source of energy," Goldschmidt says. LF