ReCharge News article: Investors adopt wait-and-see stance as doubts persist in Argentina

Modern Energy Management was  interviewed by ReCharge News to give our insights into the Argentinian renewable energy market. The full article is here:

ANALYSIS | Argentina’s renewables drive is gathering pace but some investors would rather see how the first wave of projects pans out, writes Alexandre Spatuzza

A squeeze on profitability at Argentina’s first wave of renewables projects from high loan-costs and issues over project-readiness has led several investors to adopt a wait-and-see approach before committing to new investments in the country, Recharge has learned.

“Argentina is a surprising country. It has huge resources, high power demand-growth and things are moving fast, but it is still a risky, below investment grade country,” says Aaron Daniels, managing director of Bangkok-based risk advisory firm Modern Energy Management (MEM).

MEM is currently advising at least two clients interested in investing in Argentina. But for now they are waiting to see further progress of the country’s 10GW RenovAr 2025 renewable energy build-out programme, which started with a bang last year, contracting 2.4GW of mostly wind and solar projects at unexpectedly low prices of around $60 per MWh.

Following the lead of several investors and large utilities – themselves leading players in renewables elsewhere in Latin America – that stayed out of the tenders last year, MEM’s clients believe there are still several challenges that need to be faced in the coming months before a clearer picture emerges.

The main difficulty will be obtaining adequate funding for projects in a country that is just stumbling out of a project financing blackout since the debt default of the early 2000s.

“Non-recourse project financing hasn’t been done in Argentina for 20-years, so it is still a challenging business environment,” says Daniels.

Despite government and World Bank guarantees for the 20-year PPAs, and without proper financing arrangements with local banks, bid winners have been left scrambling to raise capital for the winning projects.

Some companies have opted for corporate financing, issuing debt abroad. Argentine power company Genneia, for example, last month raised $350m in five-year bonds for around 180MW at three wind projects for which it won PPAs at last year’s RenovAr tenders.

Likewise, oil company Pampa Energia sold $750m of 10-year bonds in international markets. The proceeds will be partly used to fund the construction of its 100MW Corti wind farm that was contracted at the tender, which will also be financed by a local investment fund the company plans to create.

Both had similar interests rates, of 8.25% and 7.6% a year respectively, a cost that Daniels believes is too high, taking into account the low power prices obtained at the tenders.

“We don’t think it’s enough to get a return, especially because some capital has to be deployed to bring projects up to standard and capital-carrying costs,” he says.

That is another important issue. Although some technical requirements such as land permits and bidders’ technical qualifications were in place at the time of the tenders, many projects are below the standards needed if companies confirm their intention to obtain financing from multilateral institutions such as the IFC, the Interamerican Development Bank (IDB) of Development Bank of Latin America (CAF), explains Daniels, echoing other specialists approached by Recharge.

“Several projects have design problems, need engineering adjustments and lack full environmental licensing. There’s a lot to do before they are construction ready,” he says.

Daniels says investors are also unsure whether developers have taken into account details such as logistics, crane availability and other delays.

All this points to the possibility of projects missing the early-2018 deadline that the government stipulated in most contracts, a date aligned with Argentina’s 8% renewable energy supply goal, says Daniels, again echoing other specialists.

The other financing alternatives, says Daniels, which include tapping Export Credit Agencies, especially from the Chinese – as some local bid winners have signalled – is also complex because of red-tape, the need to put up guarantees and other issues.

In all, taking into account due diligence and all the challenges faced by projects in Argentina, the average six- to nine-month time-frame for the negotiation and approval of financing for energy projects may be prolonged.

Even so, Daniels says Argentina has been giving positive signals, including corporate debt issues to finance projects and, more importantly, last month’s signature on contracts for all the 16 projects that won PPAs in Round 1, including 707MW of wind and 400MW of solar.

Now investors will wait for the signature of the projects for Round 1.5 PPAs – still to be announced – and then follow closely their build-out progress. They may continue to look for trustworthy local partners that know the business environment and can map out risks in the country, and could even buy some of the projects with PPAs that are currently up for sale.

“The coming months will be the moment of truth for this market,” claims Daniels.

Although he believes the government will also wait for the successful roll-out of Rounds 1 and 1.5 before announcing Round 2 with higher prices and better rates of return, Argentina will be an important renewable energy market in the long-term.

“There is much interest in Latin America [and Argentina] because of similarities in culture to North America and Europe, much more than Asia and Africa. [Argentina] has nowhere to go to but up. There will be a correction because there is a lot of pressure from investors,” he says.

Original article can be seen here: http://www.rechargenews.com/wind/1213808/investors-adopt-wait-and-see-stance-as-doubts-persist-in-argentina