Forbes – An innovative approach unlocked Argentina’s renewable energy market, making it “the most interesting in the world” in just three years. And now, the approach could open the door to billions in renewable investment in developing nations worldwide.
From 2016 through 2019, Argentina’s government awarded contracts for 6.5 gigawatts (GW) of new renewable energy capacity, helping make wind and solar the country’s cheapest unsubsidized sources of energy. Roughly 5 GW of this capacity is already either in operation or under construction, attracting nearly $7.5 billion in new investment and creating more than 11,000 new jobs.
When fully operational, these projects will push renewables to 18% of Argentina’s total power supply – a breakthrough considering they were at just 1.8% before 2016 – and could avoid more than 2 gigatons of carbon dioxide (CO2) emissions over the next 20 years.
The key to this growth was overcoming political and financial barriers to create market stability and connect foreign investors with abundant renewable energy resources. Now, that innovative power sector transformation approach is being taken abroad – and it could add 75 GW of new renewables along with $110 billion in new investment to developing nations in the next 20 years.
Defaulting on renewable energy development
Argentina’s renewable energy market boom would have seemed surprising just a few years ago. In 2001 the country suffered a $100 billion default, losing 75% of its national currency value and setting off foreign exchange restrictions. The government kept energy prices artificially low and efficiency standards loose, fueling 3% annual power demand increases from 2008 to 2016. Energy bill subsidies rose from 1.5% of government spending in 2005 to more than 12% within a decade, making them the main source of a growing budget deficit.
Low power prices and a yawning gap between power demand and supply, exacerbated by insufficient public investment in new generation capacity and domestic energy sources, left Argentina highly dependent on expensive imported liquid fuels and natural gas – and poorly positioned to attract energy sector investment.
Meanwhile, renewable energy’s potential loomed large: Argentina is home to the Western Hemisphere’s best wind resources and some of the world’s best solar resources, located in sparsely populated regions without extensive barriers to development.
But despite significant renewables potential and rising demand for generation, very little capacity came online: A 2011 tender awarded 1 GW in new renewables contracts at average megawatt hour (MWh) prices of $127 for wind and $572 for solar, but only 70 megawatts (MW) of capacity were actually built, leaving Argentina dependent on fossil fuels, aging hydropower facilities, and nuclear energy.
A pro-renewables administration taps Argentina’s clean energy potential
But renewable energy’s outlook in Argentina changed with the 2015 election. New President Mauricio Macri’s Ministry of Energy and Mining aimed to diversify the country’s energy supply by attracting international private investment to the power sector and de-risking renewable energy projects.
From 2013 to 2015 Senator Marcelo Guinle, hailing from Argentina’s windiest region, worked with Sebastian Kind, who would later become the undersecretary for renewable energy, to draft a 20% by 2025 renewable portfolio standard (RPS). The bill also contained interim RPS goals of 8% by 2018, 12% by 2019, and 16% by 2021; as well as provisions for large energy consumers and a public trust fund to help guarantee investments.
The bill passed in September 2015 with near-unanimous legislative support, setting the stage for reform in 2016. The Macri administration estimated reaching the 8% RPS target would require $4 billion in investment and reaching the 20% RPS target would require up to $12 billion, so it developed a financial mechanism named “RenovAr” to attract foreign investment and reduce renewable energy project prices.
RenovAr’s contractual framework included complementary power sector policies like long-term bankable power purchase agreements (PPAs), incentives for fast project completion, a competitive scheme to allocate existing grid interconnection capacity and avoid curtailment, federal tax and national content incentives, and loan guarantees to reduce investment repayment risk.
But Argentina’s renewable energy sector truly reached investment grade when RenovAr secured $730 million in partial project guarantees from the World Bank over two funding rounds. This protected investors against contract defaults, spurred several other international financial institutions to invest in the market, and made Argentina’s renewable energy market “the most interesting in the world at the moment,” according to IFC Director Lizabeth Bronder.
“Remarkable” energy sector accomplishments
In July 2016, the government released a request for proposals to purchase 1 GW of new renewable energy capacity through a September reverse auction, and received more than 6 GW of proposals across 120 projects from 75 companies. Around 40% of bidders opted for the World Bank guarantee, and the country awarded 1.1 GW of new projects at an average price of $60 per MWh.
Argentina then held three additional auctions between 2016 and 2019, awarding more than 4.8 GW of new renewable energy contracts across 190 projects. As these projects come online, they are expected to attract $7.5 billion in financing according to the Secretariat of Energy, or more than 10 times the World Bank’s guarantee. “RenovAr is the right way to go,” said former World Bank President Jim Young Kim.
In addition to RenovAr´s four auctions, another 10 legacy projects that had been awarded but not developed were completed under a similar contractual framework, and a new private corporate PPA market emerged, adding more than 60 wind and solar projects. In total, 6.5 GW of new renewables capacity will come online and provide 18% of grid supply by 2020, with an average of two projects coming online per week for the next year, according to Undersecretary Kind.
Argentina’s renewable energy boom created wide-ranging economic and climate benefits. According to the Secretariat of Energy, renewable energy project prices fell by a factor of five from around $240/MWh in 2015 to $50-$60/MWh in 2016-2019, making wind and solar the country’s cheapest unsubsidized sources of energy. Nine new manufacturing plants were built in the country, creating 11,000 new project development and equipment manufacturing jobs.
“For every 1,000 MW in renewable energy, the country saves $300 million annually in liquid fuel, and it reduces carbon emissions by two million tons,” said Undersecretary Kind. “That’s roughly equivalent to taking one million cars off the road.”
The country’s renewable energy market seems primed to continue its success. After entering Ernst & Young’s Renewable Energy Country Attractiveness Index for the first time in 2017, Argentina rose to ninth globally and first in Latin America during 2019. The country also represented the third-largest 2018 global market for Vestas, the world’s largest wind turbine manufacturer.
“What Argentina has accomplished in the energy sector in the past two years is remarkable,” said International Renewable Energy Agency Director General Adnan Amin. “Through a robust set of enabling policy frameworks, renewables are finding the limelight at an impressive speed.”
Going global with Argentina’s renewable energy success
Now, Argentina’s success could go global with the assistance of a Climate Breakthrough Project award to Undersecretary Kind, who is adapting the RenovAr model to other emerging economies through the Global Renewable Energy Mass Adoption Program (GREENMAP).
GREENMAP intends to create renewable energy markets in countries with underdeveloped renewable energy resources and longstanding financial barriers arising from political or economic instability. By setting up standardized tool kits and credit enhancement instruments, model contracts, established eligibility criteria, and international funding guarantees, GREENMAP aims to attract renewable energy investment and reduce project prices.
The upside could be massive, says Undersecretary Kind: 75 GW of new renewable energy capacity, $110 billion in new greenfield investment, and 3 gigatons avoided CO2 emissions within the next 20 years. GREENMAP is targeting at least 15 countries where dependence on fossil fuel imports has reduced energy access, increased energy prices, and pushed up greenhouse gas emissions, while worsening economic and environmental conditions.
“This is an immediate means to decarbonize the global energy mix, increase energy security, and reduce energy poverty in many countries, putting them on a path to low-carbon and resilient development,” said Undersecretary Kind. “Fighting climate change and expanding energy access are challenges that can be overcome through sound policies aligned with the international financial system.”