argentinemarketbrief+2010

7/28/2019 ArgentineMarketBrief+2010

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FUNDAMENTALS OF BUSINESS OPPORTUNITIES IN RENEWABLEENERGY IN ARGENTINA

Argentinas electricity market Current status

As it might already be known, in Argentina the electricity crisis is somewherenearby given the lack of new investment in the energy sector since 1998(the last investment was in AES Parana 540MW, Combined-Cycle powerstation). It was worsened by the Economic and Social crisis of December of2001.

Since then, the Argentine Government has been actively working to createan appropriated environment to promote investment. In that sense, it hasalready started a negotiation process of the concession contracts of thepublic services and with the players in the Electricity Market. Some of thecontract with the distribution companies has already been renegotiated andnew tariff schemes are in effect. Nevertheless, electricity costs for theresidential clients are still well below international ranges.

Monthly consumption per user (kWh/month) (July/2010)

Figure 1 Electricity price for Residential users in Argentina and other LAC(Source: Montamat & Asoc. Argentina)

As a resume, the current total installed capacity is approximately 28,000 MWthat generates 120,000 GWh. It is forecasted that the expected economicgrowth will require to install about 700-800MW of new capacity per year, of

thousands of u$sper kWh


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which 200 MW will come from renewable resources to reach the targetestablished by the national government on the diversification of the energymatrix. The experts estimate an investment in installing capacity of US1,200 million per year during the next decade so as to fulfill with thisforecast.

Figure 2 Annual electrical generation per source(Source: CAMMESA/National Secretariat of Energy)

The Argentine Chamber of Investors in the Electricity Sector and theArgentine Company of the wholesale electricity market (CAMMESA) have

issued reports in the past years warning about the potential bottle-necks inthe economic growth because of the lack of investment in infrastructure ofelectricity generation. However and up to now, the Argentine economicgrowth has been taking advantage of beneficial weather conditions togenerate hydro energy.


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Figure 3 Installed capacity per source(Source: CAMMESA/National Secretariat of Energy)

Last winter, demand reached a peak of 20.843 MW, caused by extreme lowtemperatures, making the need to temporarily interrupt electrical supply toindustries and non-essential services, including residential users in severalregions of the country, also in Buenos Aires city.

Figure 4 Evolution of National Electricity Demand(Source: CAMMESA/National Secretariat of Energy)

Renewable Energy Sources


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Likewise, the Argentine Government is aware that it is needed to develop along-term strategy to isolate the electrical matrix from the hydrologicalconditions (e.g. recently Brazil, highly dependent on the hydrology, rationedthe electricity consumption because of a dry year).

On the other hand, thermal generation, either using fuel-oil, gas-oil or, forthe most modern combined cycle power plants, natural gas are increasinglyexposed to the explosively raising international prices and domesticavailability of fossil fuels, being helped by importing increasing volumes ofnatural gas from Bolivia.

The economic and energy generation paradigm is shifting from the fossilfuels technologies to renewable and environmentally sustainable ones.

The country has also assumed international commitments at theJohannesburgs Platform, Kyoto Protocol and 2004 Bonn Conference, withthe firm purpose of achieving 8% of its total demand of electricity suppliedby renewable sources which has been incorporated in the new Law 26.190,in force.

As result of this scenario, one of the alternative long-term solutions isfocused on renewable energy. Argentina has plenty of resources to developrenewable energies from different origins: biomass, wind, water, bio-fuels,etc.

Barriers and opportunities

However, the investment in the renewable sector is yet not massivelyarriving. At some extent, it only seems to be a matter of time given that thefactors at which the investors are still looking seem to start changing:

(i) Investment is higher, in terms of installed capacity, than that in

fossil fuels technologies, but domestic manufacturers of capital goods(hydro and wind turbines; biomass furnaces, power electronics, big electricalcomponents) are entering into the market at competitive levels due to thelower level of local labor and services costs.

(ii) Current wholesale energy prices at 35 USD per MWh , but with anexpected growth during the current year up to 35 USD per MWh.

The National Secretariat of Energy has issued a new regulation calledResolution 1281/06 introducing the concept of New Energy/Energy Plus. Itestablishes that any demand above to what was consumed by any industrialand/or commercial client during the previous year has to be purchased byfree agreement celebrated between that client and a generator who has


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added new capacity and these agreements have to be confirmed by theSecretariat. Most of the PPA under negotiation for new projects (underdevelopment) includes energy prices of about 70 USD per MWh and higher.

(iii) During the first steps of the recovery after the crisis, the focus

of the public and private investment has been in the transmissionsector, by the planned installation of more than 2000 km. of new 500 kVlines, completing ring circuits to give more stability to the present radialNational Interconnected System (NIS) and connecting the Patagoniaregion, giving excellent opportunities to the development of wind and hydroenergy in that region. An overall view of the main system is shown in Fig. 5.(v)Until the recent entering in force of Law 26.190, an especialprogram to promote renewable energy was absent in the national

market. Until 2009, Law 25.019 ruled a subside of 1 cent per KWhgenerated plus tax benefits (e.g. no minimum presumed income tax: 1% ofthe assets) for wind and PV generation. This Law is being replaced by thenew Law 26.190, involving all the renewable sources, already in force. Agrant of up to approx. 10 u$s dollar/MWh and fiscal incentives (deferral ofVAT during construction, short term amortization, etc) will give newattractiveness to investments in this field.


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Figure 5 500 kV Transmission System(Source: TRANSENER S.A.)

Additional market forces

On top of the upcoming changes in the above-mentioned factors, the waveis turning irreversibly towards niches in renewable energies because someother market forces:

(i) From the Offer side:

(a) Distributed Generation: As mentioned, a too radial NIS offers endless


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end-of-lines and bottle-necks to solve, particularly at the countrysideaffecting regional economies which are growing vigorously through theparticipation of small and medium sized companies highly focused in localproducts exports. This situation demands more available energy of betterquality and, in a growing number of cases, local generation. Four zones of

the country are particularly stressed in this sense: Comahue (in spite of theirbig hydro generation which is primarily sent to Buenos Aires city andsurroundings), Atlantic coast of Buenos Aires province, Mendoza and SanJuan, and the Mediterranean province of Cordoba.Other strong drivers come from the tourism sector, one of the mostexpansive in economic terms in the last years, involving not only main citiesbut remote areas of the country natural sanctuaries-, and the recovering ofthe purchasing power of the residential sector, where the installation of air-conditioning systems showed a very impressive growth during last twoyears.

To solve the most urgent needs, the National Government through ENARSAcalled since 2005 for installation of distributed energy based on oil derivedfuels as a intermediate step in the way to incorporate new permanent powerstations. Their geographical distribution can be appreciated in Fig. 6.

(b) Argentine Government Commitment: It was officially announced inBonn 2004 the Argentine Government Commitment to generate fromrenewable sources 8% of the Total National Energy Demand by 2014. Itincludes: Biomass, Solid Waste and Biogas; Bio-Fuels; Wind; Solar; Small

Hydros up to 15 MW; Geothermal; Marine; Fuel Cells and Hydrogen. In orderto do this, the Government is working towards the development ofpromotional schemes for renewable technologies.

Examples of this commitment are the above mentioned Law 26.190 and Law26.093 on Bio-fuels promotion.

Additionally, the Argentine Government has put in place a program calledPERMER to supply energy to isolated residential populations as well as publicoffices (Schools, Police Buildings, Hospitals and so on). It is co-financed bythe World Bank, based on wind, PV and hydro generation, and focused onthe Southwestern and Northern part of Argentina;


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Figure 6 Geographical distribution - Distributed Energy Programs(Source: ENARSA)

Since Dec, 2009, ENARSA is actively promoting the incorporation ofdistributed generation based on renewable sources (1 to 50 MW each),

receiving proposals for installing more than 1,400 MW as it can be seen inthe following Figure 7. Most of the projects are wind parks, but small hydro,solar and bio-fuels will also play their roles on this very aggressive program.

(c) Public-Private Investment in Generation: A fiduciary fund wasconstituted to finance the construction of two thermal power plants of 800MW each one with the participation of the private generators and theGovernment.


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INTERNATIONAL BID ENARSA N EE 001/2009

DISTRIBUTED ELECTRICITY GENERATED BY RENEWABLE SOURCES

WIND BIOFUELS MSW BIOGAS

SOLAR

PHOTO-

VOLTAIC

SMALL

HYDRO

BIOMASS

Puerto Madryn I Chubut 50

Puerto Madryn II Chubut 50

Rawson I Chubut 50

Rawson II Chubut 30

Paran Entre Rios 34

Puerto Madryn Sur Chubut 50

Puerto Madryn Chubut 20

Caada I Chubut 2

Caada II Chubut 3

Puerto Madryn Norte Chubut 2

Caada III Chubut 3

INTERNATIONAL NEW ENERGY S.A. Puerto Madryn Norte Neuqun 50

San Lorenzo Santa Fe 34

Bragado Buenos Aires 34

Bella Vista Buenos Aires 8,4

La Chimbera III San Juan 5

La Chimbera I San Juan 2La Chimbera II San Juan 3

Tres Picos I Buenos Aires 49,5

Tres Picos II Buenos Aires 49,5

Reconquista Santa Fe 15

Villa Ocampo Santa Fe 15

Arrufo Santa Fe ? 15

San Martin Buenos Aires 4

Unitec Energy (Corporacion AMERICA) Chaco Chaco 33

Cerro Policia I Rio Negro 50

Cerro Policia II Rio Negro 50

TECSAN Ingenie ria Ambiental s.a. (Grupo ROGGIO) Norte III Bs.As. 10

UTE - ISOLUX - SIMA - GyP (Neuqun) Auquinco Neuqun 50

Loma Blanca I Chubut 50

Loma Blanca II Chubut 50

Loma Blanca III Chubut 50

Loma Blanca IV Chubut 50

DALKIA Las Lomitas San Juan 2,5

Central Trmica Mendoza Lujan de Cuyo Mendoza 1

Fuentes Renovables de Energia S.A. Virasoro Corrientes 8,8

Koluel Kaike I Santa Cruz 50

Koluel Kaike II Santa Cruz 25

Malaspina I Chubut 50

Malaspina II Chubut 30

Tornquist Buenos Aires 50

Milenio Chubut 20

Las Heras Santa Cruz 50

Piedrabuena I Santa Cruz 50

Piedrabuena II Santa Cruz 30

Condor Cliff - La

BarrancosaSanta Cruz 50

PAN AMERICAN ENERGY Cerro Dragon Chubut 28

FIDUC Puerto Vilela Chaco 12,5

CIRJ La Lujanita Mendoza 1,7

Jujuy I Jujuy 4,2

Jujuy II Jujuy 2,6

Total 1.182 147 8,4 14 22,5 9,5 54,3

IMPSA

UTE - IECSA - Hidrocuyo

256

1.438

NOR ALDYL (Grupo EMGASUD)

Generacion Eolica (Grupo EMGASUD)

SOGESIC

Juan P. Secco

UTE - Unitec Energy (Corp AMERICA)-INVAP-San

Jose

ISOLUX - CORSAN

OWNER PROJECT PROVINCE

TECHNOLOGY & INSTALLED CAPACITY (MW)

EMGASUD Renovables

Patagonia Wind Energy (Grupo EMGASUD)

Figure 6 GENREN projects Renewable energy technologies(Source: ENARSA)

It is the interest of the Secretary of Energy to promote the investment of bigindustrial clients and distributors in electrical generation through the


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construction of small and medium size plants through a new program of PPP(Public-Private Partnerships).

ENARSA is also authorized to act as partner to other private investors todevelop such type of projects.

(d) MDL and Climate Change Mitigation Mechanisms: In fact, all theprojects in this area qualify for these programs, having the additional benefitof the so-called green certificates or, more appropriate, EmissionReduction Certificates, which can represent as average, 10 to 20% of theinitial investment of the project. Large institutions -like World Bank,Corporacin Andina de Fomento, IDB-, investment funds, foreigngovernments from OECD countries and private companies are activelyseeking to buy certificates, offering either to purchase contracts or co-finance for the project.

(ii) From the Demand side:

(a) Economic Growth: It was mentioned previously the average growth ofthe GDP but Industrial activity grew at a stable rate of almost 8% per yearsince 2003 (excepting 2009 due to the international crisis) and it isforecasted to stay in that trend for at least the next two years and to goback then to the historical 5% per annum. The economic growth is currentlystressing the energy offer, becoming the biggest bottle-neck for the countryfurther development.

(b) Premium Demand: There are some industrial sectors (e.g. Mining)that evidence a higher growth than their peers and are located in remoteareas. Those areas, although plenty of renewable resources (hydros,biomass, bio-fuels, etc.), have no access to the NIS.

The same could be applied to small villages currently supplied by oil-drivengenerators where hybrids are the best solution to avoid contamination andreduce operating costs. Patagonia (Neuqun, Chubut, Santa Cruz and Tierradel Fuego) offers a lot of cases where this solution could be applied. Andmore than 50 small cities in the Buenos Aires province are seriouscandidates for applying it, using either wind or biomass technologies.

Those are just two niches among others created by the requirements ofResolution 1281 as stated before.

(c) Energy Efficiency (EE) and Co-Generation: It has beenencouraged by the Secretary of Energy through high penalties to clients,including residential ones. Additionally, it has launched a program of USD 35millions (co-funded by the World Bank) to promote EE among the utilities


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and big customers. This program will start main activities by the middle ofthis year.

Creative solutions using both: Energy savings techniques and newgeneration addition -especially in the case of medium-size distributors

and/or big self-generators- will lead to excellent business opportunities.

Technologies for renewable energy: Actions taking by thegovernment

(i) Biomass: Because it is essential that the supply of waste fuel be alwaysavailable at a competitive price, the private sector plays an important role inthis technology. Argentina has an endless source of biomass as a result ofthe extensive agricultural and forestry activities. At present, through theabove-mentioned PERMER, the Secretary of Energy is seeking opportunitiesin the Northeastern region, with installed capacity of 1 to 5 MW.

(ii) Small Hydro: An official inventory shows more than 150 projects of upto 30 MW. Some of them are existent projects which need refurbishmentsand/or addition of capacity, others are irrigation projects where the maincivil works are already built (dam, intake, spillway) and new investment isrestrained to electromechanical equipment and power house. Premiumenergy demands will make these projects economically viable. PERMER isalso working in this technology, although at small scale. It auctioned andinstalled equipment in Chubut.

(iii) Big Hydro: From 30 MW and up, there is another group of projectstotaling about 5.000 MW. Some of them are in the process of being updatedto get basic documents to go to public tender processes. The government isreceptive to Private Initiatives in this area, being actives on that processlocal companies like IMPSA (Equipment supplier), J. Cartellone S.A. (CivilWorks/ Constructor) and other brazilian companies.

(iv) Wind: It has already been officially announced by the Minister ofPlanning that ENARSA has already signed PPA to receive the energyproduced by 700 MW of wind parks to be constructed under its plan ofdistributed energy based on renewable (GENREN). Fig. 7, above, shows thelist of such projects together with the remaining technologies involvingrenewable sources resulting from the International Bid leaded by the stateowned company.

A reference for future PPA energy prices was established for these contracts,being the maximum admitted for wind parks about 135 u$s per MWh, andgeneral level of about 120 u$s/MWh.


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Patagonia is one of the most productive regions in the world for this kind oftechnology, with expected projects of approximately 17,000 MW (most ofthem future hydrogen energy production-related).

Small power scale is also used by PERMER in remote areas and medium-size

wind projects will have a key role in rural development pushed by the highinternational prices of agricultural commodities in present times.

(v) Bio-Fuels: Peak Shaving for the grid using bio diesel fuels is alsopossible. Ethanol was once developed from sugar cane during the 70s-80s,but it has been abandoned some years ago due to market conditions.Conditions are getting better again and the technology is still available, evenimproved by the know-how acquired by the deployment of compressednatural gas for massive transportation.

In 2008, the Congress approved a new Law for Bio Fuels to blend the dieseland gasoline consumption by 5% of bio fuels (Bio-diesel and ethanol,respectively). As a consequence there is a standard production of biodiesel,ENARSA is incorporating through GENREN a number of power plants runningon this fuel and commercial price is competitive against oil based fuels.

(vi) Solar: PERMER is also working in this kind of technology but at a lesserdegree than is in the previous ones. It is simply because the constructioncosts are so high that without very special purchase contracts,subsidies/grants and so on, PV is not economically viable.

Nevertheless, PERMERs programs are using this technology to supplyelectricity to residential and public services (schools, hospitals, police offices,etc) in remote isolated places of the country.

Governments projects portfolio

Together with the actions described before for distributed energy andrenewable electricity areas, the National Government is launching a list oflarge projects, particularly in the hydro field, in order to show its interest inbuilding them up. Among the projects that are currently being promoted bythe Government in Argentina we could spot the followings:

Nuclear: ATUCHA II (under construction)

Thermal (1600 MW): The Combined Cycles mentioned above

Hydro (More than 3000 MW): Garab, Corpus Christi, La Barrancosa, CondorCliff, Portezuelo del Viento, Chihuidos II, Upgrading of Salto Grande andYacyret (this last one in construction) and more than 100 small hydro


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power stations.

Renewable in General, including several projects of energy saving atindustrial and public sites.

As stated before, the National Government is participating in these projectsthrough its energy arm ENARSA. It is a state-owned recently formallyformed that would partner the private sector initiatives (fossil fuelsexplorations, extraction, distillation and electrical generation, as well, asrenewable).

Legal frame for Public-Private Asociation

There are several ways to structure a transaction in Argentine. Dependingupon the other party (e.g. owner of the asset and/or the contract, or apublic authority to grant a concession) the transaction could be performed:(i) with the private party (e.g. Power Purchase Agreement) or (ii) with theGovernment through a Private Initiative.

Although the latter is different from the direct hiring, it is a scheme thatrewards the Project developer with competitive advantages in the mandatorypublic and competitive bids, a condition sine qua non to get a concessioncontract from the Government.

On August 17th 2005, the Decree N 967/2005 included a scheme similar tothe Brazilian one, the Public-Private Partnership (PPP) under which the

private initiative will become a national regime rather than individual one(per province, municipality, etc.) and will allow the different levels ofGovernment to participate (invest) in the infrastructure and service projects.

On the other hand, local promotional schemes at provincial levels, alsoexists and give in some cases additional benefits to those stated by thenational regimes, in both: tax exemptions and supporting tariffs.

argentinemarketbrief+2010

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