Background
In October 2015, Argentina issued Law No. 27,191 (“Renewables Law”) to expand Law 26,190, which established a national regime for the production and use of renewable sources of electricity. The Renewables Law extends this regime and adds national renewable energy targets, establishes guarantees and financing for renewable energy projects and defines minimum renewable requirements for large consumers.
The goal of the Renewables Law is to facilitate the generation of at least 20 percent of Argentina’s national power supply from renewable sources and generate 10,000 MWs of renewable power for the country by 2025.
The Renewables Law establishes the following national targets for renewable energy:
31 Dec 2017 Ø min. 08% of total electricity consumed
31 Dec 2019 Ø min. 12% of total electricity consumed
31 Dec 2021 Ø min. 16% of total electricity consumed
31 Dec 2023 Ø min. 18% of total electricity consumed
31 Dec 2025 Ø min. 20% of total electricity consumed
All large energy consumers with demand over 300 kW must source their electricity in accordance with the national targets described above.
In order to achieve these targets, the Government established the RenovAR program (“RenovAR”) to facilitate the expansion of renewable energy projects and build capacity. RenovAR seeks to increase the amount of renewable generation capacity developed by private investment through auctions to purchase renewable energy generation from private-sector led independent power producers (“IPPs”). Under RenovAR, an auction was held in October 2016 to add 1.1 GWs of renewable energy to the grid, and an additional 516 MGWs of photovoltaic solar capacity was auctioned in November 2016. The Government is expected to auction an additional 10 GWs of renewable energy capacity by 2025.[1]
The off-taker for the renewables auctions is Compañía Administradora del Mercado Mayorista Eléctrico (“CAMMESA”), the national utility company and administrator of the national wholesale electricity market.[2] Power Purchase Agreements (“PPAs”) are issued to sellers by CAMMESA for a maximum term of 20 years and --
1. provide for the type of energy and technology to be supplied,
2. describe generation capacity,
3. state the price to be paid by the off-taker,
4. describe the conditions that the seller must meet to receive and maintain a PPA payment guarantee (infra),
5. describe the payment guarantee obligations, and
6. establish the payment of PPAs as a priority.
(See endnote 3.)
FODER
As a result of the Government’s 2001 default on sovereign bonds, no agency of the Government of Argentina has an investment-grade credit rating, making it difficult for sponsors and developers to finance their projects through PPAs issued by CAMMESA. To address this issue, the Renewables Law provides for the creation of Fondo Fiduciario para el Desarrollo de Energías Renovables (“FODER”), a national trust fund for renewable energy.[4]
FODER consists of a payment guarantee account (“PGA”) and project finance account (“PFA”). It provides payment guarantees for PPAs tendered by CAMMESA, and offers project financing assistance to project sponsors. Argentina initially funded FODER with ARS$12 billion. In the first auctions, the World Bank provided an additional guarantee of $500,000 per MW of capacity per project contract in the event of termination of the PPA. FODER’s key guarantee and risk mitigation provisions are as follows:
Payment Guarantee
A PGA is created to guarantee payments for electricity under all PPAs tendered through RenovAR. It is implemented through escrow accounts (Cuentas de Garantia) that are designed to cover ongoing PPA payments and payment obligations stemming from the rights of IPPs to sell their projects to FODER, or their put option (infra). This account must always have on deposit at least 12 months’ worth of payments due by the off-taker under the PPAs. Although this account is primarily funded by fees paid by consumers, if at any point FODER does not have enough funds, Argentina’s Ministry of Finance must replenish the account. This mitigates the risk that CAMMESA will lack sufficient funds to purchase power under the PPAs. Winning bidders take advantage of FODER’s protections by signing an accession agreement with the FODER trustee at the time the PPA is signed.[5]
FODER also provides winning bidders the option to “put” the power project back to the Government, which can be exercised in the event of --
1. extended non-payment by the off-taker under the PPA,
2. Argentine currency becoming inconvertible or non-transferable,
3. material adverse changes to FODER’s laws or operations without the IPP’s prior consent,
4. early termination of the PPA, the World Bank guarantee or the FODER accession agreement, or
5. the off-taker’s non-compliance with an arbitral award or judgment.
Any of these events will, after the exhaustion of a specified cure period, allow the winning bidder to sell the project to FODER for an agreed amount, to be paid in US dollars.
FODER purchase payments are guaranteed by the World Bank, which has committed up to US $480 million to keep FODER funded in order to backstop Government repurchases of eligible projects from IPPs that exercise their put option. At the sub-project level, the guarantee is limited to a maximum of US $500,000 per MW.
The guarantee structure may be illustrated as follows:
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(See endnote 6.)
On the other hand, FODER has a purchase option over each tendered project in the event CAMMESA terminates a PPA due to default, including failure to achieve a critical milestone, giving FODER the right to purchase a project, as-is, from the winning bidder for 70 percent of the book value of the project, in US dollars. These values are determined the same way for put options.
Project Finance
The PFA is funded by a combination of treasury funds, public offerings, and Administración Nacional de la Seguridad Social (“ANSES”), the Argentine government-administered pension fund, savings from the offset of fossil fuel purchases and the World Bank. The PFA is used to offer long-term project loans and provide interest rate subsidies and equity contributions to renewable energy generation project companies. A subsidy is provided for facilities of up to 300 MW through a feed-in tariff of 11 cents per kWh for solar projects and 1/2 cent per kWh for wind, geothermal, biomass, biogas and hydro projects.[7]
Conclusion
The guarantees and risk mitigation measures established under the Renewables Law, in particular the additional World Bank guarantee, were critically important to the success of Argentina’s renewable energy auctions in 2016, and will remain so in future auctions for the foreseeable future. They can also serve as a model, in whole or in part, for emerging markets with below investment-grade credit ratings that wish to facilitate the development of national energy resources.
