WIND ENERGY

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Argentina Powers its Way through Renewables

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Despite having abundance of renewable resources, Argentina has always had an inclination towards the non-renewable energy in its energy mix. However, in 2016, the incumbent government announced its intentions to explore the renewable resources, especially wind, to ensure that about 20% of the energy mix is contributed to by green energy by 2025 (a shorter-term goal entailed 8% of the energy to be contributed to by renewable resources by the end of 2017). Both local and foreign players have welcomed this announcement and have started pouring in investments into related projects. However, the path to achieving the targets does have obstacles other than investment, such as lack of speedy financing and poor energy transmission.

At the time of the 2015 elections, Argentina was going through an energy crisis. Owing to a shortage of local energy generation, Argentina had been dependent on imports to meet its energy requirements post 2010. This was underpinned by lack of incentives for local and foreign investors to invest in the energy sector and the de-dollarization of energy tariffs (which prevented private, especially foreign investment into the sector, since most companies were not confident about the stability and value of the Argentina peso).

Also, despite Argentina’s abundance of renewable sources, the country’s energy mix was heavily dependent on non-renewable sources, which were imported from neighboring countries – gasoil from Venezuela and LNG from Bolivia. Thus, when pro-business candidate, Mauricio Macri, took office in 2015, his government adopted several reforms to uplift the country’s energy sector, with a prime focus of promoting the use of renewable energy. In October 2015, the Macri government introduced a new program called, RenovAr, to attract local and foreign investments in Argentina’s renewable energy sector.

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The RenovAr program aims to achieve 20% share of renewable energy in the energy mix by the end of 2025. It has also set a target of achieving 8% of its energy from renewable sources by the end of 2017 (which in absence of the government’s statements of the latter being achieved at the time of preparing this publication, it is fair to assume that the 2017 target was unlikely to have been met). These targets appear rather ambitious, considering that just recently, in 2016, only 1.8% of power demand in Argentina was supplied through renewable energy.

These targets appear rather ambitious, considering that just recently, in 2016, only 1.8% of power demand in Argentina was supplied through renewable energy.

The RenvoAr program has been designed to provide a host of fiscal benefits and financial support to companies interested in investing in the development of renewable energy projects. These include (but are not limited to) exemption of import duties for all projects commencing construction before the end of 2017; accelerated fiscal depreciation of applicable assets; early VAT refund for assets and infrastructure; exclusion from minimum presumed income tax for eight years from project commencement; exemption from dividend tax (subject to reinvestment in infrastructure); extension of income tax loss credits to 10 years; tax deduction of all financial expenses; tax credit on locally sourced capital expenditure.

However, the tax benefits were the highest for projects commencing before the beginning of 2018 and will diminish gradually up till 2025. In addition to these benefits, the government has set up a sector-specific trust fund called Trust Fund for Renewable Energy (FODER), to provide payment guarantees for all tendered power purchase agreements (PPAs) and to also support project financing. This further helps secure investors who have historically been hesitant to invest in Argentina. The government has allocated ARS 12 billion (US$860 million) to the trust fund. Also, the World Bank has approved US$480 million in guarantees to support the PPAs under the RenvoAr program.

Owing to a great deal of benefits and securities offered, the RenvoAr program has been modestly successful. In Round 1 of the RenvoAr program held in October 2016, the government awarded contracts for 1,142 MW capacity (through 29 contracts) instead of the initial plan of 1,000 MW. This was due to a great deal of interest in the auction, which received 123 bids for more than 6,300 MW. The awarded projects included 707 MW of wind energy projects and 400 MW of solar energy projects. The average prices for the projects were US$59.70/MWh for solar and US$59.40/MWh for wind.

The second round of auctions held in November 2016 (Round 1.5) witnessed equal success with a total capacity of 1,281 MW being auctioned off through 30 contracts. The 765 MW of wind energy was auctioned at an average price of US53.3/MWh, while the 516 MW of solar projects were auctioned at an average price of US$54.9/MWh, signifying a visible drop in prices over the two rounds. The auctions were expected to increase renewable energy contribution to Argentina’s energy mix to close to 6% and to bring in about US$3.5 billion in financing over the next two years.

Argentina’s Renewable Energy Potential

Wind Energy — Argentina has immense potential for wind energy generation. As per various estimates, a region that has an average wind speed of and above 5m/s has a good potential for wind energy generation. In Argentina, about 70% of its territories have an average wind speed of 6m/s, while one of the country’s regions, Patagonia, has an average wind speed of 9m/s. In fact, Patagonia is among the top three wind corridors globally.

Solar Energy — The northwest region of Argentina boasts of being among top four locations globally for having the greatest thermal solar power potential. About 11 provinces across Argentina have high potential for installation of photovoltaic panels, which is the most widely used solar generating technology in Argentina.

 

In addition, Argentina also has an immense potential to source energy from small-hydro, bioenergy, and biomass projects.

After two hugely successful auctions, the government had planned the third auction (Round 2) in summer 2017, however, the round was later pushed to November 2017 due infrastructure bottleneck. The country has limited transmission nodes in areas with good wind and solar potential and also require to boost the transmission infrastructure to go hand in hand with the RenvoAr program. About 5,000 kilometers of transmission lines would be required over the next three years to match the expanding capacity.

In addition to avoiding infrastructure bottlenecks, the government pushed back the next round of auctions to ensure there were no financial bottlenecks as well. With the winners of the 2016 auctions still seeking financing by mid-2017, the government did not wish to start another auction before the earlier projects were structured.

The Round 2 of the auction (which was held in November 2017) also saw significant success and auctioned off about 2,043 MW capacity instead of the initially planned 1,200 MW. The tender was largely oversubscribed and received 228 bids representing 9,403 MW of capacity. The auctioned bids included about 816 MW of solar power capacity at an average price of US$43.46/MWh and about 993 MW of wind energy at an average price of US$41.23/MWh. This round is expected to bring in a further US$2.5-3 billion in investment.

While the three rounds of auctions can easily be termed as success, it is important to note that most contracts were bagged by local players instead of large international players (such as Spain’s Acciona and US-based AES Corp). This was primarily because large international companies still consider Argentina to be a slightly risky market and the price quoted by them reflected this risk (whereas most local players quoted much lower prices).

Moreover, with every proceeding auction, the average price declined significantly (from US$59.70/MWh and US$59.40/MWh for solar and wind, respectively in October 2016 to US$43.46/MWh and US$41.23/MWh in November 2017). Following this trend, the ceiling for the next auction have been announced as US$41.76/MWh for solar and US$40.27/MWh for wind (however, the date of the next auction has not been announced). This raises major concern, especially for international players, that the prices have declined to a point where projects may not be economically viable. This is valid considering that the Argentinian market holds some risk as well (the country has a credit rating of B+ as per S&P and B3 as per Moody’s). Lower prices may also act counter-productive because in case the winning projects fail to get financing in accordance with the low output prices, the overall confidence in the renewables program may fall.

Lower prices may also act counter-productive because in case the winning projects fail to get financing in accordance with the low output prices, the overall confidence in the renewables program may fall.

However, international players can come into play with regards to president Macri’s another policy that promotes generation and use of clean energy. As per a new rule passed in September 2017, large power consumers are allowed to directly meet their renewable power obligations (8% by 2017 and 20% by 2025) through private supply contracts. This is expected to further pour in investments worth about US$6 billion over the next three years and also lead to the installation of close to 4GW generation capacity. Several players, such as Argentina-based Luft Energia (which has partnered with US-based PE firm, Castlelake) are focusing on this route to enter Argentina’s lucrative renewables energy market, rather than competing in a price-war in the auctions.

EOS Perspective

Generation and use of renewable energy definitely holds an important place for president Macri and his government is definitely pulling many strings to advance the cause. The three rounds of auction up till now can be termed as success by almost any measure, however, it is too early to comment if the government will be able to reach its ambitious targets. While the RenvoAr program and the FODER trust fund provide real benefits and security to investors, the smooth and timely financing of these projects, especially with declining bidding prices, still remains to be a challenging task. Moreover, the lack of transmission infrastructure leads to further uncertainties regarding the program’s success.

The government has probably remained slightly short of its 2017 target of meeting 8% of its energy needs from renewable sources, however, it is on track to achieve its goal of 20% energy-mix being contributed by renewable energy. Thus, it is safe to say, that while Argentina’s renewable energy goal may be a little too ambitious, the government does seem optimistic about achieving it on the back of a solid incentive program, the World Bank’s support, and keen interest from foreign and local energy players.

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Japan’s Quest for Renewable Energy

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Japan, for many years the symbol of safe use of nuclear energy, started to revise its focus on atomic power following the 2011 tsunami and Fukushima plant meltdowns. After the accident, atomic plants were shut down, and in 2012, the government declared its commitment to the diversification of energy sources, working towards making the country renewable energy-powered.

Yet this wishful thinking was soon confronted with the reality of slow growth of renewable energy generation. In April 2014, a new energy plan re-designated coal as an important long-term electricity source, with similar importance given back to nuclear power. While Japan is unlikely to abandon fossil fuels and nuclear power in any foreseeable future, the shifting focus and public reluctance to atomic power gave start to a more dynamic development of renewable power generation technologies.

Several projects across solar, hydro, biomass, and to a lesser extent geothermal, had already been developed prior to Fukushima accident, but it is now the time for Japan to embrace its renewable energy potential at a larger scale.

Read our report – Japan’s Quest for Renewable Energy

 

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Wind Energy in South Korea – Aiming High

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Over the past couple of years, South Korea has undertaken considerable efforts to research and develop renewable energy generation across technologies such as fuel cell, solar, wind, geothermal heat, and tidal power. While supporting growth in several renewable energy sectors, the country has focused on expanding wind power generation in particular, given Korea’s access to strong and steady winds due to its long coastal line and mountainous terrain, as well as relatively well developed wind power technology and related skill set. We take a look at current state of affairs in the renewable energy sectors in Korea as well as the development of wind energy capacity goals set by the country’s government.

Read Our Detailed Report.

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South Africa: Clearing the Air with Renewable Energy

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South African ailing energy sector seems to have found a new lease of life in clean energy. In 2012, South Africa witnessed investment of $5.5 billion in new renewable energy projects, leaving behind some well-known usual suspects such as Brazil, France, and Spain. With the local government looking at renewable energy as a long-term answer to the country’s energy problems, we evaluate the scope for private sector involvement in developing South Africa’s energy infrastructure.

In March 2013, Eskom, the national electricity provider in South Africa, warned about the possibility of power outages during the coming winter season. As soon as the news spread, millions of South Africans were left reflecting on the energy crisis of 2008, which brought the mining and industry sectors, and thereby, the economy, to a halt.

Increasing winter demand and planned electricity network maintenance are putting pressure on the power system. In May this year, long before the peak winter season, South African power system capacity exceeded demand by just 0.17% (let’s just point out that the recommended reserve margin for a power system is 10-15%). With consumption expected to increase further during winter (June and July), Eskom will be forced to look at extreme measures to prevent scenarios similar to those of 2008. Some of such measures include power buy-backs from large consumers, and triggering of ‘interruption clauses’ included in contracts, through which Eskom can cut supply to consumers in case of tight supply situations, in return for discounts.

While these measures could help deal with the short-term spike in demand this year, the South African government is looking for alternatives to achieve long term sustainability of the country’s energy sector. Investment in clean energy (particularly renewable technologies such as wind and solar) is one of the possible solutions contributing to solving the country’s energy supply problem. While achieving energy sustainability, clean energy investments will also help South Africa adhere to its commitment to achieve a 42% cut in carbon emissions between 2011 and 2025, by reducing dependence on coal for power generation. Furthermore, renewable energy projects can come online on a shorter horizon compared with coal and nuclear power plants.

Let’s focus on clean energy

According to a 2013 report published by Bloomberg New Energy Finance, South Africa stood 9th in the world with US$5.5 billion worth of new clean energy investments in 2012 (a whopping 20,563% growth over 2011). Majority of this investment (US$4.3 billion) has gone into developing solar photovoltaic (PV) technology based power plants, with the remaining being spread across wind, concentrated solar plants, landfill, biomass and biogas, and hydro-projects.

The onset of clean energy investment projects in South Africa is correlated with the introduction of the Integrated Resource Plan (IRP) in 2010, as well as Department of Energy’s Renewable Energy Independent Power Producers Procurement (REIPPP) program in 2011. As a part of the 2010 IRP, South African government outlined its plans to increase electricity generation capacity by additional 18,500 MW by 2030. About 42% of this additional capacity is envisaged to be generated through renewable energy technologies.

Introduction of REIPPP program in 2011 facilitated private sector’s involvement in electricity generation. Through this program, the government plans to procure 3,725 MW of renewable energy from independent power producers by 2016. A significant focus has been laid on procuring power generated through onshore wind and solar PV technologies. The REIPPP program sets up a bidding system through which independent power producers can bid for power generation allocations. Electricity thus generated is purchased by Eskom on a 20-year Power Purchase Agreements (PPAs). The tariff for purchasing electricity is decided through a bidding process. Some independent producers cashed on the first mover advantage, and received tariffs as high as R2.6/KWh ($0.26/KWh) during the first phase of bidding in 2011 (more than Eskom’s electricity price). With increasing competition, these tariffs have fallen in the successive bidding rounds to as low as R0.89/KWh ($0.09/KWh).

Private sector holds the key

One possible mode of involvement is continued private sector participation in the REIPPP program, selling the generated electricity to Eskom at rates agreed in the PPAs. However, several independent power producers (IPPs) have raised concern about the attractiveness of such a system, where only a single buyer (Eskom) is present in the market.

IPPs feel that lack of certainty about feed-in-tariff structures and a single buyer model are likely to deter large scale investments from the private sector. In 2012, the South African Independent Power Producers Association put forward a proposal to set up an independent grid to challenge Eskom’s dominance of the transmission (grid) network.

In March 2013, the South African government passed the Independent System and Market Operator (ISMO) Bill, which will create an independent entity by 2014, to manage procurement of energy from Eskom’s power generation business and independent power producers. Establishing an independently operated power grid would encourage competition in the power generation sector while keeping a lid on prices.

Another possible form of investments could be in the shape of independent (off-grid) solar/wind power projects by large enterprises (particularly in mining sector) to meet part of their internal demand. Industries could reap several benefits from these independent projects. Benefits of a solar power project could include:

  • Several large energy consumers are required to operate diesel generators to meet the surplus demand from their operations. Even though the current cost of producing solar energy is higher than what is procured from Eskom, the cost is lower than that of electricity produced through diesel generators. In the short-term, solar energy projects could replace generators, as an additional input source of energy

  • The national energy regulator (NERSA) recently approved an annual 8% hike in electricity tariffs charged by Eskom till 2018. With price of solar PV panels expected to decline further, the cost of solar energy production could even be lower than Eskom’s prices 5-6 years down the line

  • Furthermore, solar power plants have an effective life of 25-30 years, greater than the typical 20 year PPAs offered by Eskom. Independent projects enable more efficient utilization of electricity generation capacity over a longer horizon, compared with the REIPPP program

Foreign investors also to step in

With the removal of subsidies on renewable power in several European countries, South Africa becomes an ideal investment location for both foreign renewable energy developers and infrastructure financing organizations.

Participation of foreign firms in the REIPPP program has increased in subsequent bidding phases. Working as a part of a consortia, several foreign developers, such as Abengoa (Spain), Gestamp Wind (Spain), SolarReserve (USA), and Chint Solar (China), have already won bids for setting up power projects, working in partnership with local developers and BBBEE partners.

International financial institutions, such as European Investment Bank and IFC (member of the World Bank Group) have also invested in several renewable energy projects being undertaken by international developers in South Africa. In 2012, European Investment Bank agreed to provide €50million ($64.9 million) for the Khi Solar One Project being undertaken by Abengoa.

So is the energy sector out of the woods?

With a power crunch looming, the mining and industry sector companies are left searching for options to keep their operations running, or risk large-scale shut-downs during the winter season. With the declining cost of setting up and generating renewable power, investment in renewable energy projects could be a sensible option to achieve sustainability of power supply, over both short and long-term.

Setting up of an independent transmission company will go a long way in reducing Eskom’s dominance over the electricity networks, urging more private sector participation in the REIPPP program. But, is this enough? Will there be further deregulation/liberalization of the renewable power generation sector to additionally boost competition in the market? The fate of private sector investments hinges on government’s willingness to risk its control over probably the most important utility system.

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