FUNDAMENTALS OF BUSINESS OPPORTUNITIES IN RENEWABLE ENERGY IN ARGENTINA Argentinas electricity market Current status As it might already be known, in Argentina

a the electricity crisis is somewhere nearby given the lack of new investment in the energy sector since 1998 (the last investment was in AES Parana 540MW, Combined-Cycle power station). It was worsened by the Economic and Social crisis of December of 2001. Since then, the Argentine Government has been actively working to create an appropriated environment to promote investment. In that sense, it has already started a negotiation process of the concession contracts of the public services and with the players in the Electricity Market. Some of the contract with the distribution companies has already been renegotiated and new tariff schemes are in effect. Nevertheless, electricity costs for the residential clients are still well below international ranges.
thousands of u$s per kWh

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 MW that generates 120,000 GWh. It is forecasted that the expected economic growth will require to install about 700-800MW of new capacity per year, of

which 200 MW will come from renewable resources to reach the target established by the national government on the diversification of the energy matrix. The experts estimate an investment in installing capacity of US 1,200 million per year during the next decade so as to fulfill with this forecast.

Figure 2 Annual electrical generation per source

(Source: CAMMESA/National Secretariat of Energy)

The Argentine Chamber of Investors in the Electricity Sector and the Argentine Company of the wholesale electricity market (CAMMESA) have issued reports in the past years warning about the potential bottle-necks in the economic growth because of the lack of investment in infrastructure of electricity generation. However and up to now, the Argentine economic growth has been taking advantage of beneficial weather conditions to generate hydro energy.

(Source: CAMMESA/National Secretariat of Energy)

Figure 3 Installed capacity per source

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

Figure 4 Evolution of National Electricity Demand

(Source: CAMMESA/National Secretariat of Energy)

Renewable Energy Sources

Likewise, the Argentine Government is aware that it is needed to develop a long-term strategy to isolate the electrical matrix from the hydrological conditions (e.g. recently Brazil, highly dependent on the hydrology, rationed the electricity consumption because of a dry year). On the other hand, thermal generation, either using fuel-oil, gas-oil or, for the most modern combined cycle power plants, natural gas are increasingly exposed to the explosively raising international prices and domestic availability of fossil fuels, being helped by importing increasing volumes of natural gas from Bolivia. The economic and energy generation paradigm is shifting from the fossil fuels technologies to renewable and environmentally sustainable ones. The country has also assumed international commitments at the Johannesburgs Platform, Kyoto Protocol and 2004 Bonn Conference, with the firm purpose of achieving 8% of its total demand of electricity supplied by 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 is focused on renewable energy. Argentina has plenty of resources to develop renewable energies from different origins: biomass, wind, water, bio-fuels, etc. Barriers and opportunities However, the investment in the renewable sector is yet not massively arriving. At some extent, it only seems to be a matter of time given that the factors 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 electrical components) are entering into the market at competitive levels due to the lower level of local labor and services costs. (ii) Current wholesale energy prices at 35 USD per MWh , but with an expected growth during the current year up to 35 USD per MWh. The National Secretariat of Energy has issued a new regulation called Resolution 1281/06 introducing the concept of New Energy/Energy Plus. It establishes that any demand above to what was consumed by any industrial and/or commercial client during the previous year has to be purchased by free agreement celebrated between that client and a generator who has

added new capacity and these agreements have to be confirmed by the Secretariat. Most of the PPA under negotiation for new projects (under development) 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 transmission sector, by the planned installation of more than 2000 km. of new 500 kV lines, completing ring circuits to give more stability to the present radial National Interconnected System (NIS) and connecting the Patagonia region, giving excellent opportunities to the development of wind and hydro energy 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 especial program to promote renewable energy was absent in the national market. Until 2009, Law 25.019 ruled a subside of 1 cent per KWh generated plus tax benefits (e.g. no minimum presumed income tax: 1% of the assets) for wind and PV generation. This Law is being replaced by the new Law 26.190, involving all the renewable sources, already in force. A grant of up to approx. 10 u$s dollar/MWh and fiscal incentives (deferral of VAT during construction, short term amortization, etc) will give new attractiveness to investments in this field.

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 wave is turning irreversibly towards niches in renewable energies because some other market forces: (i) From the Offer side: (a) Distributed Generation: As mentioned, a too radial NIS offers endless

end-of-lines and bottle-necks to solve, particularly at the countryside affecting regional economies which are growing vigorously through the participation of small and medium sized companies highly focused in local products exports. This situation demands more available energy of better quality and, in a growing number of cases, local generation. Four zones of the country are particularly stressed in this sense: Comahue (in spite of their big hydro generation which is primarily sent to Buenos Aires city and surroundings), Atlantic coast of Buenos Aires province, Mendoza and San Juan, and the Mediterranean province of Cordoba. Other strong drivers come from the tourism sector, one of the most expansive in economic terms in the last years, involving not only main cities but remote areas of the country natural sanctuaries-, and the recovering of the purchasing power of the residential sector, where the installation of airconditioning systems showed a very impressive growth during last two years. To solve the most urgent needs, the National Government through ENARSA called since 2005 for installation of distributed energy based on oil derived fuels as a intermediate step in the way to incorporate new permanent power stations. Their geographical distribution can be appreciated in Fig. 6. (b) Argentine Government Commitment: It was officially announced in Bonn 2004 the Argentine Government Commitment to generate from renewable sources 8% of the Total National Energy Demand by 2014. It includes: Biomass, Solid Waste and Biogas; Bio-Fuels; Wind; Solar; Small Hydros up to 15 MW; Geothermal; Marine; Fuel Cells and Hydrogen. In order to do this, the Government is working towards the development of promotional schemes for renewable technologies. Examples of this commitment are the above mentioned Law 26.190 and Law 26.093 on Bio-fuels promotion. Additionally, the Argentine Government has put in place a program called PERMER to supply energy to isolated residential populations as well as public offices (Schools, Police Buildings, Hospitals and so on). It is co-financed by the World Bank, based on wind, PV and hydro generation, and focused on the Southwestern and Northern part of Argentina;

Figure 6 Geographical distribution - Distributed Energy Programs

(Source: ENARSA)

Since Dec, 2009, ENARSA is actively promoting the incorporation of distributed generation based on renewable sources (1 to 50 MW each), receiving proposals for installing more than 1,400 MW as it can be seen in the 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 was constituted to finance the construction of two thermal power plants of 800 MW each one with the participation of the private generators and the Government.

INTERNATIONAL BID ENARSA N EE 001/2009

DISTRIBUTED ELECTRICITY GENERATED BY RENEWABLE SOURCES TECHNOLOGY & INSTALLED CAPACITY (MW) OWNER PROJECT PROVINCE
WIND 50 50 50 30 34 50 20 2 3 2 3 50 34 34 8,4 5 2 3 49,5 49,5 15 15 15 4 33 50 50 10 50 50 50 50 50 2,5 1 8,8 50 25 50 30 50 20 50 50 30 50 28 12,5 1,7 4,2 2,6 9,5 BIOFUELS MSW SOLAR BIOGAS PHOTOVOLTAIC SMALL HYDRO BIOMASS

Puerto Madryn I Puerto Madryn II EMGASUD Renovables Rawson I Rawson II Paran Puerto Madryn Sur Puerto Madryn Caada I Patagonia Wind Energy (Grupo EMGASUD) Caada II Puerto Madryn Norte Caada III INTERNATIONAL NEW ENERGY S.A. Puerto Madryn Norte San Lorenzo Bragado NOR ALDYL (Grupo EMGASUD) Bella Vista La Chimbera III La Chimbera I Generacion Eolica (Grupo EMGASUD) La Chimbera II Tres Picos I SOGESIC Tres Picos II Reconquista Villa Ocampo Juan P. Secco Arrufo San Martin Unitec Energy (Corporacion AMERICA) Chaco UTE - Unitec Energy (Corp AMERICA)-INVAP-San Cerro Policia I Jose Cerro Policia II TECSAN Ingenieria Ambiental s.a. (Grupo ROGGIO) Norte III UTE - ISOLUX - SIMA - GyP (Neuqun) Auquinco Loma Blanca I Loma Blanca II ISOLUX - CORSAN Loma Blanca III Loma Blanca IV DALKIA Las Lomitas Central Trmica Mendoza Lujan de Cuyo Fuentes Renovables de Energia S.A. Virasoro Koluel Kaike I Koluel Kaike II Malaspina I Malaspina II Tornquist IMPSA Milenio Las Heras Piedrabuena I Piedrabuena II Condor Cliff - La Barrancosa PAN AMERICAN ENERGY Cerro Dragon FIDUC Puerto Vilela CIRJ La Lujanita Jujuy I UTE - IECSA - Hidrocuyo Jujuy II

Chubut Chubut Chubut Chubut Entre Rios Chubut Chubut Chubut Chubut Chubut Chubut Neuqun Santa Fe Buenos Aires Buenos Aires San Juan San Juan San Juan Buenos Aires Buenos Aires Santa Fe Santa Fe Santa Fe ? Buenos Aires Chaco Rio Negro Rio Negro Bs.As. Neuqun Chubut Chubut Chubut Chubut San Juan Mendoza Corrientes Santa Cruz Santa Cruz Chubut Chubut Buenos Aires Chubut Santa Cruz Santa Cruz Santa Cruz Santa Cruz Chubut Chaco Mendoza Jujuy Jujuy

Total

1.182

147

8,4

14

22,5

54,3

256

1.438
Figure 6 GENREN projects Renewable energy technologies
(Source: ENARSA)

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

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 to develop such type of projects. (d) MDL and Climate Change Mitigation Mechanisms : In fact, all the projects in this area qualify for these programs, having the additional benefit of the so-called green certificates or, more appropriate, Emission Reduction Certificates, which can represent as average, 10 to 20% of the initial investment of the project. Large institutions -like World Bank, Corporacin Andina de Fomento, IDB-, investment funds, foreign governments from OECD countries and private companies are actively seeking to buy certificates, offering either to purchase contracts or cofinance for the project. (ii) From the Demand side: (a) Economic Growth: It was mentioned previously the average growth of the GDP but Industrial activity grew at a stable rate of almost 8% per year since 2003 (excepting 2009 due to the international crisis) and it is forecasted to stay in that trend for at least the next two years and to go back then to the historical 5% per annum. The economic growth is currently stressing the energy offer, becoming the biggest bottle-neck for the country further development. (b) Premium Demand: There are some industrial sectors (e.g. Mining) that evidence a higher growth than their peers and are located in remote areas. 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-driven generators where hybrids are the best solution to avoid contamination and reduce operating costs. Patagonia (Neuqun, Chubut, Santa Cruz and Tierra del Fuego) offers a lot of cases where this solution could be applied. And more than 50 small cities in the Buenos Aires province are serious candidates for applying it, using either wind or biomass technologies. Those are just two niches among others created by the requirements of Resolution 1281 as stated before. (c) Energy Efficiency (EE) and Co-Generation : It has been encouraged by the Secretary of Energy through high penalties to clients, including residential ones. Additionally, it has launched a program of USD 35 millions (co-funded by the World Bank) to promote EE among the utilities

and big customers. This program will start main activities by the middle of this year. Creative solutions using both: Energy savings techniques and new generation addition -especially in the case of medium-size distributors and/or big self-generators- will lead to excellent business opportunities. Technologies government for renewable energy: Actions taking by the

(i) Biomass: Because it is essential that the supply of waste fuel be always available at a competitive price, the private sector plays an important role in this technology. Argentina has an endless source of biomass as a result of the extensive agricultural and forestry activities. At present, through the above-mentioned PERMER, the Secretary of Energy is seeking opportunities in the Northeastern region, with installed capacity of 1 to 5 MW. (ii) Small Hydro: An official inventory shows more than 150 projects of up to 30 MW. Some of them are existent projects which need refurbishments and/or addition of capacity, others are irrigation projects where the main civil works are already built (dam, intake, spillway) and new investment is restrained to electromechanical equipment and power house. Premium energy demands will make these projects economically viable. PERMER is also working in this technology, although at small scale. It auctioned and installed equipment in Chubut. (iii) Big Hydro: From 30 MW and up, there is another group of projects totaling about 5.000 MW. Some of them are in the process of being updated to get basic documents to go to public tender processes. The government is receptive to Private Initiatives in this area, being actives on that process local companies like IMPSA (Equipment supplier), J. Cartellone S.A. (Civil Works/ Constructor) and other brazilian companies. (iv) Wind: It has already been officially announced by the Minister of Planning that ENARSA has already signed PPA to receive the energy produced by 700 MW of wind parks to be constructed under its plan of distributed energy based on renewable (GENREN). Fig. 7, above, shows the list of such projects together with the remaining technologies involving renewable sources resulting from the International Bid leaded by the state owned company. A reference for future PPA energy prices was established for these contracts, being the maximum admitted for wind parks about 135 u$s per MWh, and general level of about 120 u$s/MWh.

Patagonia is one of the most productive regions in the world for this kind of technology, with expected projects of approximately 17,000 MW (most of them 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 high international prices of agricultural commodities in present times. (v) Bio-Fuels: Peak Shaving for the grid using bio diesel fuels is also possible. 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, even improved by the know-how acquired by the deployment of compressed natural gas for massive transportation. In 2008, the Congress approved a new Law for Bio Fuels to blend the diesel and 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 running on 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 lesser degree than is in the previous ones. It is simply because the construction costs 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 supply electricity 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 and renewable electricity areas, the National Government is launching a list of large projects, particularly in the hydro field, in order to show its interest in building them up. Among the projects that are currently being promoted by the 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, Condor Cliff, Portezuelo del Viento, Chihuidos II, Upgrading of Salto Grande and Yacyret (this last one in construction) and more than 100 small hydro

power stations. Renewable in General, including several projects of energy saving at industrial and public sites. As stated before, the National Government is participating in these projects through its energy arm ENARSA. It is a state-owned recently formally formed that would partner the private sector initiatives (fossil fuels explorations, extraction, distillation and electrical generation, as well, as renewable). Legal frame for Public-Private Asociation There are several ways to structure a transaction in Argentine. Depending upon the other party (e.g. owner of the asset and/or the contract, or a public authority to grant a concession) the transaction could be performed: (i) with the private party (e.g. Power Purchase Agreement) or (ii) with the Government through a Private Initiative. Although the latter is different from the direct hiring, it is a scheme that rewards the Project developer with competitive advantages in the mandatory public and competitive bids, a condition sine qua non to get a concession contract from the Government. On August 17th 2005, the Decree N 967/2005 included a scheme similar to the 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 of Government to participate (invest) in the infrastructure and service projects. On the other hand, local promotional schemes at provincial levels, also exists and give in some cases additional benefits to those stated by the national regimes, in both: tax exemptions and supporting tariffs.