Renewables in Argentina Opportunities in a new · PDF filePwC Argentina 3 Argentina issued new laws establishing that renewable energies should account for 20% of the national electric

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Renewables in ArgentinaOpportunities in a new business environment

March 2017

Renewables in Argentina2

Contents

Energías renovables en Argentina2

Why renewables in Argentina? 4

Auction of electric energy supply 10

What are the incentives for this industry? 14

Argentina’s new business environment 16

Financing and analysis of Renewable Energy Projects 20

Exhibit 24

3PwC Argentina

Argentina issued new laws establishing that renewable energies should account for 20% of the national electric energy consumption by 2025. At present, they represent 1,8%; therefore, big investments are necessary to achieve this goal in the upcoming years. To accomplish this, the new political and economic environment in Argentina since 2015 is the most favorable context, as the government has taken steps towards reinserting Argentina in the global agenda and has taken measures to free and integrate its economy, such as: lifting of foreign-exchange controls, settling holdout debts, readjustment of public utility rates and elimination of import tariffs, among others.

The first bidding process carried out at the end of last year was a remarkable success, with 58 projects awarded for more than 2,400 MW. But the great interest in the country was demonstrated not only by these allocations, but by the total amount of offers received, which exceeded 6,200 MW.

What were the critical factors of this success? The process was simple, efficient and transparent, implemented by a Government who listened to the investors’ needs and offered long-term purchase agreements in dollars. The role of the Argentine Investment and Trade Promotion Agency which

facilitated the presentation of proposals and their subsequent distribution was also very important.

However, this is only the beginning of a transformation process of the national energy mix, as Argentina will continue with the bidding processes in 2017 and the years to follow, thus generating business opportunities for different energy companies worldwide. Our country's potential to develop renewable energies is limitless, given the quality of the winds and the sunlight, which offer a significant distinct advantage.

It is estimated that, when this plan is completed, Argentina will obtain USD 15 billion in investments and will have an installed capacity of solar energy of 1 to 2 GWH and 5 to 6 GWH of wind energy; as a result, renewable energies will represent 20% of the electric consumption of the country.

We have included in this report the key issues for the potential investors: why to invest in Argentina, the tax environment, how the Argentina Investment and Trade Promotion Agency can help investors and what to take into account when developing their business models.

A new beginning

Ezequiel Mirazón

Energy, Utilities & Mining Leader

PwC Argentina

We hope it will be useful.


Argentina is a country with vital natural resources for the generation of wind and solar energy.

Although there were previous laws, Law No. 27191, published in 2015, established that renewables should achieve 20% of the energy matrix by 2025. Afterwards, decree 531/16 defined in more detail the objectives of the law and how to attain them.

Why renewables in Argentina?

To reach the goal of 20% by 2025, 10.000 MW should be incorporated into renewables, an objective that will come with a significant reduction of greenhouse gas (GHG) emissions and annual investments of USD 1.5 billion.

25%

20%

15%

10%

5%

0%2018 2019 2020 2021 2022 2023 2024 2025

8%

12%

14%16% 17% 18%

19% 20%

3 GW 10 GW

Source: www.minem.gob.ar

Percentage of the total demanded energy

Current situation (2016)Share of renewable energies = 1.8% | Installed capacity = 0.8 GW

5PwC Argentina

Why renewables in Argentina?

Marcelo Iezzi

Sustainability

PwC Argentina


The Government decided to implement this strategic project based on the following pillars:• Release of Plan RenovAR, which includes regular public

biddings through which the different companies submit their investment projects and the price at which they are willing to sell their capacity;

• Signing of long-term power purchase agreements (PPA’s) in US dollars that allow companies to ensure their sales without exposing themselves to potential devaluations of the peso;

• CAMMESA, the company that manages the electricity wholesale market, will administer these agreements.

The first bidding process was carried out at the end of 2016 and the result went beyond the Government’s expectations, both for the power offered and its prices, which led to a second call for bidding to improve the prices for the bidders who weren't initially selected.

Allocated Projects

Technology Projects MW USD/MWh GWh/Year

Wind 10 765 53 3,037

Solar 20 516 54 1,274

Total 30 1.281 53 4.311

Allocated Projects

Technology Projects MW GWh/Year USD/MWh

Wind 12 708 3002 59

Solar 4 400 959 60

Biogas 6 9 58 154

Biomass 2 15 121 110

SWP1 5 11 65 105

Total 29 1,143 4,205 63

1Small water projects

The second call, Round 1.5 was also successfully accepted by the market.

In this process, wind energy prevailed and, in second place, photovoltaic solar energy: between the two rounds, 22 wind projects were awarded for 1,473 MW of power and an expected annual generation of 6,039 GWh, plus 24 solar-photovoltaic projects for 916 MW of power and an expected generation of 2,233 GWh. In the aggregate, technologies based on biogas, biomass and small hydraulic developments have only 35 MW of power and offer an expected generation of 244 GWh.

It is worth mentioning that 64% of the offers received were from local investors while the remaining 36% were from foreign investors.

The weighted average price offered was USD 59, which is higher than those of the biddings in Mexico (USD 33) and Spain (USD 47), although lower than the internal prices in force.

The current installed capacity for the generation of energy in Argentina is approximately 31,000 MW, thus the allocations mentioned above altogether represent an 8% almost increase of that capacity.

7PwC Argentina

This proves that Argentina is beginning to follow the steps in renewable energy generation that most of the Latin American developed economies and neighboring countries have already taken. In this way, Argentina places value on the admirable supply of resources it has as regards winds, radiation and sunlight, as well as on the process of diversifying its matrix and increasing the generation distribution.

This decision to increase the participation of renewables in the national matrix occurs in a very special moment at a global scale. After having adopted the Paris Agreement in December 2015, which aims at limiting the global temperature increase to 2°C or less by 2100, great part of the efforts worldwide are focused on reducing GHG emissions, which mainly derive from energy generation. Furthermore, the Sustainable Development Goals established by United Nations pursue the need to guarantee the access to trustworthy, sustainable and modern energy sources for all the world population, also mentioning the need to increase the use of renewable sources.

Argentina counts on exceptional conditions for the development of renewable energies, which together with the technological improvements, the higher supply of equipment and better access to financing, make it possible to think about transforming that potential in a concrete reality in the following years.

According to the Argentine Wind Energy Association, Argentine natural resources supply for the generation of wind energy is very high, with winds of more than 6 m per second in 70% of its territory, with a direction and constant speed that allow to obtain capacity factors of 35% and higher. With these capacity factors, wind generators achieve higher efficiency and profitability and can replace fossil generation for a longer period.

In the case of photovoltaic solar generation, according to the Argentine Solar Energy Atlas, more than half of the national territory receives an annual average sunlight over 3.5 kwh/m2, which makes it technically viable for its exploitation.


The solar and wind resources combined show a development potential for the immediate future, particularly limited by the current capacity of the transmission networks, which will have to be expanded to face the higher demand of energy. As for the proposed projects, the private sector was willing to invest based on the results of Round 1, which saw an oversubscription of more than six times the requested capacity.

Apart from the wind and solar energies mentioned, Argentina also has favorable conditions for the development of biogas, biomass, biofuel and small water projects. However, given the growth of the first two and their better conditions for technological offers and locations for their installation, both the authorities and the private sector focus their activities and attention on them.

The moment also coincides with unprecedented levels of global investments in renewables. China has become the largest investor in the field, surpassing the United States and investing more than USD 36 billion globally for the

Average sunlight for December. Values in kwh/m2

Map of Argentine wind potential.Annual average wind speed at 50 metres above ground level

9PwC Argentina

development of projects based in renewables; the total amount invested by all the countries being USD 348 billion (BNEF, 2016).

Latin America has also obtained an important flow of investments in renewables, reaching almost USD 16.4 billion in 2015, with a very important participation of wind energies (slightly over 60%) and in second place, the photovoltaic solar energy (with approximately 20%). Moreover, the region maintains annual investments in renewables of more than USD 10 billion since 2006 (Source: Bloomberg).

Analyzing how these investments evolved in Latin America, compared with the ones made in the rest of the world between 2004 and 2015 (see Chart 1), Latin America multiplied its investments by 11 times while the rest of the world multiplied them by 6 during the same period.

A large part of this important increase in renewables is explained by the cost reduction (see Chart 2) and by the improvement in the design and implementation of appropriate public policies.

Source: IRENA. Market analysis en Latam

12

10

8

6

4

2

02004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Land - Based Wind -41%

Utility Scale PV -64%

LED -94%

Distributed PV -54%

Modeled Battery Costs -73%

Latin AmericaRest of the World

Source: Utility of the future. MIT Energy initiative

Chart 2: Decrease in costs of key technologies, 2008-2015

Chart 1: Development of the investments in renewable energy in Latin America and the world, 2004-2015


Auction of electric energy supplyThe auction in numbers

In this context of a gap between the increase in the demand of electric energy (3% CAGR12-15) and the changes in installed capacity (0.4% CAGR12-15), generated by a regulatory framework that has been unable to awaken interest of the private sector in the development of new generation capacity, the process of auctioning implied reactivation for Argentine electricity sector and materialized the development of 2.3 GW of new capacity for renewables generation, to start operation within a two-year period, resulting in an investment of approximately USD 3 billion.

The auction was implemented in two rounds: the first one (round 1.0) was awarded in October 2016 and the second one (round 1.5) was awarded two months later (end of November).

During the first round, 117 offers were received, of 5 different technologies (though most of the offers were wind and solar photovoltaic generation technologies), which in the aggregate represented 5.2 GW, ~5 times more power than demanded. The technology with the greater number of offers was solar photovoltaic, even when the demanded power corresponding to this technology was less than the demand of wind generated energy (0.3 GW solar versus 0.6 GW wind). In the end, 17 offers were allocated, which meant awarding 1.1 GW of renewable energy, distributed into 707 MW of wind generated energy, 400 MW of solar photovoltaic energy and 1.2 MW of biogas.

During the second round, 47 offers were received, related only to wind and solar photovoltaic generation technologies, which in the aggregate represented 2.5 GW, ~2 times more power than demanded. Among the offers for wind generation technology (19 offers received) there was no new plant proposal(i.e., one that had not applied at the first round), while among those for solar generation technology (28 offers received in total) there were three new plants. Finally, 1.3 GW of renewable energy were awarded, distributed into 765 MW of wind generated energy and 516 MW of solar energy.

Pre-qualified Awarded Pre-qualified Awarded

46%

54%

1%

36%

64%

0%1,143

x4.7

5,246

37%

63%

2,5

x1.9

40%

60%

1,281

Round 1.0 Round 1.5

Other (includes small water projects, biomass and biogas)

1. Detail of pre-qualified and awarded capacity for each round – MW. Source: Ministry of Energy and Mining

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A material success in energy policy

The auction conveyed a success beyond the already mentioned historical difficulties to accompany the demand growth rate with new investments in electricity generation assets. In this regard, deploying the new renewable capacity awarded at the auction is the first milestone in the development of an energy policy that can combine the 3 major guidelines in renewable energies: security of supply, economic competitiveness and environmental sustainability.

Need to enlarge electricity supply… …and to diversify sources… …focused on achieving security of supply

Demand Installed Capacity

Installed generation capacity vs. Demand, [yoy %, GW vs TWh/year]

4.6%

0.5%

0.0%

1.5%

2012 2013 2014 2015

3.8%

3.2%

1.1%

4.3%

2015

63.3%

30.3%

6.4%

137

Fossil

Hydroelectric

Other

Electricity generation [TWh]

Consumption of fossil fuels in 2015 [%]

> 50% imports

Natural Gas

Coal

Total

Fuel/ Gas Oil

25%

26%

100%

18%

26%

5%

Local

Bolivia

LNG

Renewable energies must be a cornerstone of our national energy strategy

Argentina generation mix appears clearly leveraged on two types of sources: large run-of-the-river power generation facilities (+30%, TWh 2015) and fossil fuel electricity generation (+60%, TWh 2015). This scarce diversification of the generation mix is coupled to the fact that +50% of the fuel used to supply/serve consumption at the fossil fuel plants is imported from abroad, emphasizing Argentine energy dependence and thus weakening the country’s strategic position as to security of supply.

Carlos Fernandez Landa

Deals

PwC España

Security of supply

In recent years, installed generation capacity in Argentina has recorded spells of growth lower than 1%, while the demand for electricity has grown at higher ratios; this created a deficit in the reserve margin of the system, which is expected to be corrected in the next years to face the greater growth in demand anticipated.

The 2.4 GW of renewable power derived from the auction can be translated into a 7% growth above the current installed capacity. Although wind and solar photovoltaic generation technologies are not dispatchable technologies and their contribution to the system’s steady-flow capacity is reduced, if Argentina makes avail of its excellent own resources for generation based on renewable technologies it is expected that these technologies, given the country’s generation profile, can contribute to power generation need at the system’s peak demand intervals.

Economic competitiveness

The average sale price of wind generated energy in the first and second round was 59 and 53 USD/MWh, respectively. In the case of solar energy, the average price in the first round amounted to 60 USD/MWh, while in the second round it decreased to 54 USD/MWh.

The prices observed in this first bidding process in Argentina are highly competitive compared with those recorded in other countries more advanced in their renewables development and with a macro regulatory framework perceived as more reliable for the various foreign parties taking part in the auction process, many of them waiting to witness political changes that ensure legal security for foreign investment.

Thus, the context of awarded prices is not far from that recorded in other geographies with excellent resources such as Peru, Mexico and Chile that in 2016 experienced record prices at global level in the renewables industry.

Even though this first auction was intended as an opportunity for those developments in a mature progress status and, accordingly, mostly in the hands of local operators, as the new regulatory framework for renewable generation turns out to be a healthy mechanism to channel interest in investments by the large global industry operators, it seems reasonable to expect that these prices become even more competitive, considering the excellent natural resources available in Argentina for the development of these generation sources.

Meeting clean energy targets

With the enactment of the Renewable Energy Law (Law No. 27191), the target was set of generating 8% (2018) and 20% (2025) of national consumption from clean energy sources, which would imply reaching 10 GW of renewable installed capacity by 2025. At present, the country has an installed capacity of ~0.8 GW.

The 2.3 GW added with the auction will represent 5.7% of the electric energy demand of 2018, which, together with the current installed capacity (0.8 GW) and 0.5 additional GW derived from Resolution No. 202/16, will make it possible to reach the 8% goal set for that year.

13PwC Argentina

Price range of photovoltaic solar technology projects awarded at auctions worldwide, USD/MWh 2016.

Source: Ministerio de Energía y Minería

Source: IRENA, Strategy& PwC

Auctions in 2016:- % of demand: 5.7%- Installed capacity: 2.3 GW

Renewables in 2016:- % of demand: 1.8%- Installed capacity: 0.8 GW

National goals for Renewable Energies, 2018-2025.

Natural resources for renewables development in Argentina.

Annual Solar Irradiation [kWh/m2- day]

-7.0

-6.5

-6.0

-5.5

-5.0

-4.5

-4.0

-3.5

-3.0

-2.5

Argentina has suitable regions for wind development

Wind intensity [km/h]

-36.0

-26.2

-20.3

-14.4

-10.0

-4.1

...and great attraction for solar applications

2018 2019 2020 2021 2022 2023 2024 2025

8%

12%

14%

16%17%

18%19%

20%

3 GW 10 GWRenewable capacity, estimated

Source: Análisis Strategy& PwC

USD/MWh

1,1001 ,038400185 120 1,853n/a162 620 7071 ,853 n/a 1,038 26 140 1,300 850 800 350 1,000 6,500

243030

66

120

27

45

29

46

60

444858

0

20

40

60

80

100

120

7378

54

37 33

53

Awarded capacity (MW)

5560


As part of this program, Argentina has recently adopted a series of laws and regulations to promote renewable energy sources.

The production of electricity by means of renewable energy sources was declared a national interest. It is required that 8% of the total electricity consumed at national level is to be generated by renewable sources by 2018, and 20% by 2025; within this commitment, a first auction was successfully held, sponsored by the World Bank and with several important participants, and a second one is scheduled for the first semester of 2017.

The pertinent legislation includes tax incentives.

In fact, with the enforcement of Law No. 26190, amended by Law No. 27191 and Regulatory Decrees 562/2009 and 531/2016, the Argentine government launched and updated promotion measures for the energy sector, with the purpose of encouraging the use of renewable energy sources for the production of electricity.

Pursuant to this system, certain tax benefits will be granted upon demand, by means of submitting one or more projects before the relevant authorities, provided that they start to be executed prior to December 31, 2017. The applicable law and regulations establish that the project will be considered started when expenditures have been made for at least 15% of the total amount of the investment.

In the case of infrastructure works, including capital assets, civil works, electromechanical and assembly works and other related services being part of a new generation plant or included in pre-existing plants that functionally operate jointly to produce electricity by means of renewable energy sources, the following benefits apply:

What are the incentives for this industry?

15PwC Argentina

• Accelerated depreciation: for the purpose of income tax (35%), the beneficiaries can opt for applying depreciation by the straight-line method, as allowed by the Income Tax Law, or depreciation by a special method consisting of three (3), four (4) or five (5) yearly and consecutive equal installments, depending on the projects considered to have started (15% at least) in 2017, between 2018 and 2021, or between 2022 and 2025, respectively; in the case of real estate assets, accelerated depreciation would result in reducing useful life to 60% (2017), 70% (2018-2021) or 80% (2022-2025). The relevant assets must be held for a minimum period of three (3) years.

• A 5-year extension period to compute tax losses from projects under promotion regime (i.e. expiration date 10 years after generation, instead of 5).

• Early recovery of VAT (21% general rate or 10.5% for certain activities) paid on the purchase of new assets or infrastructure works that has not been offset against the tax debit by means of a refund or tax credit for other federal taxes. This benefit will be effective after at least one fiscal period –month– as from the date of the investments, if the projects were considered started before December 31, 2017. If this condition is fulfilled on a later date but prior to December 31, 2021, two fiscal periods must elapse; and three fiscal periods, if it occurs after this date but prior to December 31, 2025.

• Relief from minimum notional income tax (1% on computable assets) for the relevant assets, during 8 years. However, this tax will be repealed from 2019 onwards and it grants a regular exemption for the acquisition of brand-new movable assets and works on real estate property for the year in which the investments were made and in the following one.

• A tax credit certificate to be applied against federal taxes will be granted, equal to 20% of the amount of purchases in domestic components for the project (certain exclusions apply) to the extent it can be proven that at least 60% of the total components are of domestic source (a lower percentage may be accepted as long as it can be proven that the items cannot be obtained in the domestic market, but never lower than 30%).

• Relief from import duties and other related taxes (“Statistical charge”) on the import of brand-new assets included in the project (only for imports completed before December 31, 2017). The benefit also applies to replacement items and new accessories needed to ensure start and development of the activity; their destination must be verified and coincide with the project for which those assets were imported.

• Likewise, this benefit applies to the import of capital goods, parts, components and inputs used in the production of generation equipment for electricity from renewable energy sources and intermediate assets along the value chain of such equipment, not only for the purpose of domestic sales but also for export, as long as it could be proven that there is no local manufacture of those products. These capital goods, parts, components and inputs can be sold, transferred or no longer used in the activity for which they were imported, only upon completion of the activity or the end of its useful life, whichever comes first.

To obtain the tax benefits described above, some guarantees must be provided.

Further, from the point of view of provincial taxes, Law No. 26190 invites all Argentine provinces to adhere to a system of enforcing local regulations with tax benefits to promote and encourage the production of electricity by means of renewable energy sources. Most of the provinces that develop projects of this type and are favored have already adhered to the promotion system and replicated it by granting temporary exemptions for provincial turnover tax and stamp tax (tax on contracts being formally executed).

Ignacio Rodriguez

Tax & Legal

PwC ArgentinaWhat are the incentives for this industry?


Argentina’s New Business EnvironmentArgentina has very strong fundamentals to become a regional economic engine. It is the third largest Latin American economy in GDP terms (after Brazil and Mexico), yet the second largest when measured in GDP per capita. In addition, Argentina’s population nears 43 million, 60% of which is below 35 years of age.

17PwC Argentina

Argentina has highly qualified human capital, with outstanding technical skills but also notable creativity and versatility. The country is ranked first in Latin America’s Human Development and Education Index.

Despite its size, Argentina’s infrastructure is ample and far-reaching, with more than 35,000 kilometers of roads and railway networks, 43 ports and 54 airports.

To pave the way for reform and growth, in his first year President Macri implemented several measures to normalize the economy: removal of capital controls and repatriation restrictions, floating of the exchange rate and recovery of monetary reserves, resolution of defaulted debt and new access to global financial markets, removal of export taxes on many products, among others. The results obtained were positive, and the high inflation levels inherited from the previous administration are now decreasing, with the target of reaching single-digit levels by 2018. Also, the administration

re-launched the National Statistics Bureau (INDEC) and promoted laws to foster investment and employment, amongst which is the Law for Small and Medium Enterprises and the Auto Parts Law, the Public-Private Partnership Law and the Entrepreneur Law. It also established a 4-year plan to eliminate the primary fiscal deficit and implemented a very successful tax amnesty scheme. Argentina is also making headway in the National Productivity Plan to increase competitiveness, propel production, accelerate growth and achieve full employment and better quality of life for our citizens.

Argentina’s macroeconomic indicators are projected to improve markedly beginning in 2017, with higher growth rates than those of Latin America’s average and inflation dwindling significantly. This added to low leverage at the household, corporate and government levels, constitutes a unique opportunity to invest in our country.Energías

Andrés Tahta

Executive Vice president

Argentina Investment and Trade Promotion Agency



To grow and develop as a country, we need a strong economy connected to the world. In February 2016, President Macri created the Argentina Investment and Trade Promotion Agency, an independent organization that centralizes all efforts to foster and facilitate investment and international trade.

The Agency’s mission is to become the strategic partner and the main point of contact for companies that wish to invest in Argentina and to export their goods to the world. The main goal of the Agency is to contribute to the creation of quality jobs in Argentina, fostering investment and international trade.

To attain this goal, the Agency works across the public sector: Ministries, Provincial Governments, public organizations and independent institutions (such as AFIP, IGJ, BICE, INTI, etc.), along with the domestic and international private sectors (such as business and investment groups, federal chambers and associations, etc.).

In general terms, the Agency designs the investment and foreign trade promotion strategy by sectors, and in coordination with Ministries and Provincial Governments, develops and executes the programs and plans of action to carry out investments and foreign trade operations.

The Agency is organized into the following teams:• "Invest Argentina": Promotes Argentina as an attractive

investment destination and assists investors throughout the investment process: analysis, decision-making, establishment, operation and reinvestment.

• "ExportAR": Develops and manages export promotion programs to help local companies grow their businesses in international markets and become integrated into global value chains.

• "Facilitación": Assists investors in the process of solving difficulties and conflicts that may emerge during the entire investment and trade cycles.

• "Promoción de políticas": Identifies structural obstacles in the country and works to eliminate them, whether they involve administrative processes or regulatory or tax matters that hinder investment. Even though the Agency does not have the power to eradicate these obstacles, our responsibility is to take the matter to the relevant government body to discuss and change it.

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The Agency professional team is committed to help companies understand the opportunities offered by our country and guide them through the investment and international trade processes, with clear rules, transparency and trust.


Financing and Analysis of Renewable Energy Projects

In May 2016, Macri launched Plan RenovAR, a decade-long plan to attract USD 15 billion in renewable energy investments.

The first phase of the bidding process was encouraging; The Argentine government received offers for more than 6,000 MW, and granted contracts to build 2,400 MW (1,500 MW in wind and 900 MW in solar), with estimated investments of USD 1.8 billion. The next bidding process will be in May 2017. Financing is now the main challenge most companies face.

To meet the challenge of financing, Argentina’s government implemented a sector-specific trust fund, the “Trust Fund for Renewable Energy” or FODER as part of its Renewable Energy Law. FODER provides payment guarantees for all tendered power purchase agreements (PPA’s) in addition to project financing assistance. The Argentine government allocated ARS 12 billion to FODER. The fund’s project finance account is funded by a mix of treasury funds, public offerings, the Argentine government-administered pension fund (ANSES) and multilaterals. The account will be used to offer long-term project loans as well as to provide interest rate subsidies and

equity contributions to renewable energy generation project companies. FODER is run by Argentina’s Investment and Foreign Trade Bank (BICE).

Renewable energy projects can also be financed by Project Finance, a financing scheme in which debt and equity are used to finance an energy project and are then paid back from the cash flow generated by the project. Argentina already has experience with this type of financing, which is used commonly by oil companies.

Lastly, projects can be financed by the Project for Renewable Energy in Rural Markets (PERMER), which was implemented in 1999 to help the rural low-income areas of Argentina meet their energy needs. PERMER receives its funds from a variety of sources, such as loans from the World Bank, donations from the Global Environment Facility, the Argentine Ministry of Education, provincial funds and the private sector.

Financing

21PwC Argentina

Financing and Analysis of Renewable Energy Projects

Ignacio Aquino

Deals

PwC Argentina


Macroeconomic considerations

One of the most significant aspects to consider when analyzing an investment in Argentina is the economy, with a specific focus on inflation and exchange rates.

Argentina has had high inflation rates since 2007. From 2010 to 2014 the official exchange rate remained relatively stable despite the increase of costs measured in local currency. This situation was partially reverted in January 2014 when the Argentine Peso depreciated by 26% (from 6.50 AR$/US$ in December 2013 to 8.00 AR$/US$ in January 2014). Even though the devaluation was supposed to improve Argentine competitiveness, the industries passed through, totally or partially, the devaluation effect to prices, which was translated into the acceleration of monthly inflation rates.

In December 2015 the new Macri Administration lifted foreign exchange controls and placed the Argentine peso under a managed-float regime. The peso devalued 30% on the first day of unrestricted trading, from 9.84 to 13.94 ARS per USD, and proceeded to further decline in the subsequent months, trading currently c. to 16.00 ARS per USD. Economists and investors have hailed the move as one that will ultimately stabilize the peso at levels set by the market and boost investor's confidence.

For 2017, the Argentine Government predicts GDP (est. USD 550 billion in 2016) growth of 3.5%, a USD/ARS exchange rate of 18, a government deficit of 4.2% and an inflation rate of 17% (private consultants predict inflation rate to be closer to 22%). In any event, these expectations represent a significant improvement compared to 2016. From 2018 onwards, specialists project an annual decrease in the inflation rate, predicting that it will reach 6% by 2022. The exchange rate is expected to float freely in order to maintain the current real exchange rate, thus allowing Argentine to once more be considered atractive by international markets.

Expected rate of return

When considering local investment, investors should understand certain aspects of Argentina’s expected rate of return.

• Country risk: The country risk that is usually considered in the local market is that of the EMBI+ (an index developed by JP Morgan). It is common to consider either the spot value or the one year average. The credit default swap methodology is not usual nor completely accepted. In the long run, country risk which is currently in 480 basic points (b.p.) is expected to go down to 300 b.p.

• Size premium: When estimating the Cost of Equity (the return for an equity investor) it is usual to consider a size premium, because the comparable companies used to estimate the Beta are significantly larger than the company that is under analysis. In Argentina the stock market is rather small – as a result there are usually no comparable trading companies. Consequently one will usually look in Latin America or the US for comparable companies. Considering the size of all local companies, the small cap size premium should be applied for the companies in Argentina (even the ones with the largest capitalization levels). In Argentina, a smaller premium is usually considered (between 1% and 2% depending on the size of the company or the stage of the project); no higher premiums are observed.

Restrictions to buy foreign currency and pay dividends abroad

Late in 2011, the former National Government tightened controls on currency exchange by requiring an approval from the tax authorities when converting AR$ into any foreign denominated currencies. The stated goal of this measure was to clamp down on tax evasion and money laundering. However, in practical terms and according to public statements by market experts, the true motive was to prevent the capital outflows from Argentina.

Market experts also stated that the Central Bank of Argentina had informally instructed financial institutions to obtain approval before authorizing any purchase of foreign currency to pay dividends abroad.

Although there are no restrictions under the Argentine foreign exchange regulations for the payment of interests, dividends, royalties and other commercial payments, these types of transactions would have been delayed or denied as a result of the informal restrictions.

This kind of practices and polices have been eliminated by the current government; and consequently dividend payments abroad are allowed.

Project analysis

23PwC Argentina

Sources:

• Foder: http://www.renewableenergyworld.com/articles/2016/06/argentina-launches-innovative-renewables-program.html

• Permer: https://permer.se.gob.ar/contenidos/verpagina.php?idpagina=3697

• Project Finance en Argentina: http://www.energiaestrategica.com/project-finance-argentina-condiciones-financiamiento-desarrollo-proyectos-energia-renovable/

Jonathan Park

Deals

PwC Argentina


Exhibit

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Bid Bidders Name Province Locality Price offered [USD/mwh]

Power offered (mw)

Power allocated (mw)

BG-06GLOBAL GREEN

C.T. Biogás Ricardone

SANTA FE Ricardone 118.00 1.2 1.2


Power offered (mw)


EOL-14ENVISION ENERGY 1

P.E. García del Rió

BUENOS AIRES Bahía Blanca 49.81 10 10


P.E. Vientos del Secano

BUENOS AIRES Buratovich 49.08 50 50

EOL-06 GENNEIA I P.E. Villalonga BUENOS AIRES Villalonga 54.96 50 50


P.E. Los Meandros

NEUQUEN Confluencia 53.88 75 75


P.E. Cerro Alto RIO NEGRO Pilcaniyeu 56.98 50 50

EOL-44C. T. LOMA DE LA LATA

P.E. Corti BUENOS AIRES Bahía Blanca 58.00 100 100

EOL-22 3 GAL S.A. P.E. Garayalde CHUBUT Garayalde 59.00 24.15 24.15

EOL-35CP RENOVABLES

P.E. La Castellana

BUENOS AIRES Villarino 61.50 99 99

EOL-33 ENAT S.A P.E. Kosten CHUBUTPampa del Castillo

59.41 24 24

EOL-05 ERENP.E. Vientos Los Hércules

SANTA CRUZ Las Heras 62.88 97.2 97.2

EOL-O8 GENNEIA IP.E. Chubut Norte

CHUBUT Puerto Madryn 66.00 49.875 28.35(*)

EOL-46ARAUCO S.A.P.E.M.

P.E. Arauco II (Etapa 1 y 2)

LA RIOJA Arauco 67.19 99.75 99.75

(*) This bid is pre-alloted partially in order to not exceed the limit established in Exhibit 3 The power to be allotted will be adjusted considering the

aerogenerators module, without exceeding the assigned power.


Power offered (mw)


SFV-38 JEMSE SE P.S. Cauchari 1 JUJUY Cauchari 60.00 100 100



SFV-13 FIELDFARE P.S. La Puna SALTASan Antonio de los Cobres

58.98 100 100

Bids awarded, by technology, under renewable electric power purchase agreements, according to the terms established in resolution 136e/2016 of the Ministry of Energy and Mining


Technology Region ID Province Name of the project

Bidder MW Price allocated (USD/Mwh)

SOLAR

NOA

SFV-21 CATAMARCA P.S. SaujilENERGÍAS SUSTENTABLES S.A.

23 51,9

SFV-20 CATAMARCA P.S. Tinogasta ALEJANDRO IVANISSEVICH 15 53,4

SFV-18 CATAMARCA P.S. FiambaláENERGÍAS SUSTENTABLES S.A.

11 53,7

SFV-12 SALTA P.S. Cafayate ISOLUX INGENIERIAS.A. 80 56,3

SFV-15 LA RIOJA P.S. Nonogasta FIDES GROUP S.A. 35 56,4

RESTO SOLAR

SFV-34 MENDOZA P.S. AnchorisEMPRESA MENDOCINA DE ENERGÍAS.A.P.E.M.

21 48,0

SFV-06 MENDOZAP.S. General Alvear

EMPRESA MENDOCINA DE ENERGÍAS.A.P.E.M.

18 55,0

SFV-04 MENDOZA P.S. La PazEMPRESA MENDOCINA DE ENERGÍAS.A.P.E.M.

14 55,0

SFV-01 MENDOZA P.S. Lava lieEMPRESA MENDOCINA DE ENERGÍAS.A.P.E.M.

18 55,0

SFV-02 MENDOZA P.S. Lujan de CuyoEMPRESA MENDOCINA DE ENERGÍAS.A.P.E.M.

22 55,0

SFV-05 MENDOZA P.S. PASIPEMPRESA MENDOCINA DE ENERGÍAS.A.P.E.M.

1 52,0

ROUND 1.5 - Awarded Projects: WInd



WIND

BUENOS AIRES

EOL-45 BUENOS AIRES P.E. PampaSINOHYDROCORTPORATION LIMITED

100 46,0

EOL-48 BUENOS AIRESP.E. Vientos de Necochea 1

CENTRALES DE LA COSTA ATLÁNTICAS. A

38 55,5

EOL-29 BUENOS AIRES P.E. Miramar ISOLUX INGENIERIAS.A. 98 56,4

COMAHUEEOL-19 LA PAMPA

P.E. La Banderita

FACUNDO FRAVEGA 37 50,0

EOL-09 RIO NEGRO P.E. Pomona 1 GENNEIAS.A. 100 54,9

PATAGONIAEOL-20 SANTA CRUZ

P.E. Del Bicentenario

PETROQUIMICA COMODORO RIVADAVIAS.A.

100 49,5

EOL-27 CHUBUTP.E. Loma blanca 6

ISOLUX INGENIERIAS.A. 100 53,5

RESTO EOLICA

EOL-32 MENDOZA P.E. El SosneadoEMPRESA MENDOCINA DE ENERGÍAS.A.P.E.M.

50 55,0

EOL-47 LA RIOJAP.E. Arauco II (Etapa 3 y 4)

PARQUE EÓLICO ARAUCO S.A.P.E.M.

95 56,7

EOL-37 CORDOBA P.E. Achiras CP RENOVABLES S.A. 48 59,4

ROUND 1.5 - Alloted Projects: Solar

27PwC Argentina



SOLARRESTO SOLAR

SFV-31 SAN JUAN P.S. SarmientoSOENERGY INTERNATIONAL INC.

35 53,0

SFV-46 SAN JUAN P.S. Ullum NI FIDES GROUP S.A. 25 53,7

SFV-49 SAN JUANP.S. Iglesia - Guañizuli

JINKOSOLAR HOLDING CO.LTD.

80 54,1

SFV-45 SAN JUAN P.S. Ullum N2 ALEJANDRO IVANISSEVICH 25 55,2

SFV-37 SAN JUAN P.S. Ullum 4 COLWAY 08 INDUSTRIAL 14 56,5

SFV-32 SAN JUAN P.S. Ullum3 ALEJANDRO IVANISSEVICH 32 57,6

SFV-57 SAN JUAN P.S. Las LomitasLATINOAMERICANA ENERGIA

2 59,2

SFV-41 SAN JUAN P.S. La Cumbre DIASER S.A. 22 56,7

SFV-36 SAN JUANP.S. Caldenes del Oeste

QUAATRO PARTICIPACOES S.A.

25 58,9

ROUND 1.5 - Alloted Projects: Solar

Ezequiel Mirazón Energy [email protected]

Hernán Rogriguez [email protected]

Ignacio RodriguezTax & Legal Services [email protected]

Ignacio AquinoDeals [email protected]

Marcelo IezziSustainability [email protected]

Ariel FleichmanStrategy & [email protected]

Carlos Fernandez LandaEnergy [email protected]

David Rodriguez VillanuevaStrategy & [email protected]

Contacts

OfficesBuenos AiresBouchard 557, 7th Floor(C1106ABG) Buenos Aires Tel.: (54 11) 4850-0000 Fax: (54 11) 4850-1800

CórdobaColón Av. 610, 8th Floor(X5000EPT) CórdobaTel.: (54-351) 420-2300Fax: (54-351) 420-2332

Mendoza9 de Julio 921, 1st Floor(M5500DOX) MendozaTel.: (54-261) 429-5300Fax: (54-261) 429-5300 (int. 1116)

RosarioMadres de Plaza 25 de Mayo 3020, 3rd Floor(S2013SWJ ) RosarioTel.: (54-341) 446-8000Fax: (54-341) 446-8016

©2017 In Argentina, the member firms of the global network of PricewaterhouseCoopers International Limited are Price Waterhouse & Co. S.R.L, Price Waterhouse & Co. Asesores de Empresas S.R.L. and PwC Legal S.R.L, each of which, either separately or jointly, are identified as PwC Argentina.

Andrés TahtaExecutive Vice [email protected]

Francisco [email protected]

PwC Argentina

PwC Spain


Documents

Renewables in Argentina Opportunities in a new · PDF filePwC Argentina 3 Argentina issued new laws establishing that renewable energies should account for 20% of the national electric