Argentina launches first round in renewables

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Yesterday, Argentina’s president, Mauricio Macri, announced the much awaited renewable energy auction. Under the name of RenovAr, the program seeks to add 1 GW of energy from renewable sources in the coming years. On Thursday, the government published pre-bid documents for the first auction to take place in June. These documents do not spell out all of the terms for the auction, but clarify some important points, and open up the process to comments for potential participants. The final version of the auction terms will be published July 1 and bids will be due the 8 of August.

The first auction of the RenovAr program launched this week, Ronda 1, is seeking 600 MW of wind energy, 300 MW of solar, 65 MW from biomass, 20 MW from small hydro, and 15 MW from biogas, for a total of 1000 MW. Projects can range in size from 1-100 MW and must be completed 730 days from the contract date. The bid documents do not set a price, but news outlets are citing a minimum of 70 and a maximum of USD 100/MWh. The bids will be evaluated on price as well as location of the plant, expected date of service, and compliance with local manufacturing guidelines.

Perhaps the most promising piece among the bid documents is a letter of support from the World Bank promising to provide a series of IBRD Guarantees that should help reduce the risk premium associated with long-term infrastructure projects in Argentina, which significantly increases the final price generators can offer. The World Bank is offering to pledge (subject to approval from management) $500 million to be assigned to projects at a rate of $500,000 per MW to cover risks such as early contract termination and currency distortions. This would backup the special fund (FODER) created to guarantee payments to generators.

The government has also published Resolution 72 which clarifies the procedures for qualifying and receiving the fiscal benefits established in Law 27191. These benefits include:

  • Exception of Import Duties for all project starting construction prior to 12/31/2107
  • Accelerated Fiscal Depreciation of applicable assets
  • Anticipated Refund of VAT paid on pre-COD purchases
  • Exception of Minimum Deemed Income Tax
  • Exception of Dividend Tax (subject to re-investment in infrastructure)
  • Extension of Income Tax Loss Credits to 10 years (standard is 5)
  • Tax deduction of all financial expenses
  • Tax Credit on locally supplied CAPEX (capital expenditure)

Tax benefits are stronger for projects starting prior to year-end 2017 and decrease gradually over time to 2025 (See Sec. Kind’s full presentation).

The government of Mauricio Macri has staked its legitimacy on attracting foreign investment and has been promising a decline in inflation and the resumption of economic growth for the second half of this year. If this auction succeeds, it will be a victory for the government. The benefits to the public, however, will materialize more slowly, in the form of diminished fiscal pressures, as the need to import fuel declines, and a cleaner environment. As far as prices go, we should expect the impact to be minimal, and bring scarce relief to consumers reeling from a combination of astronomical rate hikes and persistent inflation.

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