Argentina Launches Innovative Renewables Program
Argentina will hold a public auction on August 22, 2016 to buy 1,000 megawatts of renewable energy under an innovative program called “RenovAR” that includes a “green trust fund” to provide security and confidence to investors.
The government wants 600 megawatts from wind energy, 300 megawatts from solar energy, 65 megawatts from biomass, 20 megawatts from small hydroelectric plants and 15 megawatts from biogas.
The bid documents are expected to be published on July 1, 2016 and be available for purchase from the government on July 2, 2016. Winning bids will be announced on September 28, 2016.
Argentina has set an aggressive program to reach 20% renewable energy by the end of 2025. Currently, 1.8% of power demand in Argentina is supplied through renewable energy.
The FODER Advantage
One of the key features of the new framework is a sector-specific trust fund, the “Trust Fund for Renewable Energy” or “FODER,” that has been set up to provide payment guarantees for all tendered power purchase agreements (“PPAs”) as well as project financing assistance.
Argentina allocated ARS 12 billion (US$860 million at current exchange rates) to FODER. FODER is divided into two separate accounts.
The project finance account is funded by a mix of treasury funds, public offerings, ANSES (the Argentine government-administered pension fund) and multilaterals, and will be used to offer long-term project loans as well as to provide interest rate subsidies and equity contributions to renewable energy generation project companies.
A separate payment guarantee account will be used to guarantee payments for electricity under all PPAs tendered through the RenovAR program. This account must always have an amount on deposit equal to at least 12 months’ worth of payments due by the offtaker under the PPAs. Although this account is primarily funded by a specific charge to consumers, if at any point FODER does not have enough funds, then Argentina’s Ministry of Finance has an obligation to replenish the account. This mitigates the risk that the Administrator of the Wholesale Electricity Market (CAMMESA), which depends on the Argentine state, will lack sufficient funds to purchase the power contracted 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.
FODER also provides the winning bidder with an option to “put” the power project back to the government that can be exercised in any of six situations. The put can be exercised if the offtaker fails to make payments over a certain period, it breaches an Argentine court judgment under the dispute resolution clause in the PPA, the Argentine currency becomes inconvertible or non-transferable, there is a change in certain Argentine laws, the project is expropriated, or there is an early termination of the PPA, the World Bank guarantee (described below) or the FODER accession agreement.
The occurrence of any of these events will, after the exhaustion of a specified cure period, allow the winning bidder to sell the project to FODER in exchange for payment in US dollars of a pre-determined amount equal to the book value, without depreciation, of the project's assets, calculated on the basis of the winning bidder's most recent audited financial statements. This FODER purchase payment will be guaranteed by the World Bank up to US$500,000 per megawatt of capacity contracted for from the particular project.
On the other hand, FODER has a purchase option over each tendered project that it may exercise in the event that the offtaker terminates a PPA due to an event of default (including failure to achieve a critical milestone) by the winning bidder. FODER has the right to acquire the project, as is, in exchange for payment in US dollars to the winning bidder of an amount equal to 70% of the stated book value, without depreciation, of the project assets, also based on the winning bidder's most recent audited financial statements.
The August tender follows enactment of an Argentine law last September, called Law No. 27,191, that laid out the framework for the push to increase the share of renewable energy as a percentage of the total Argentine electricity supply.
Below are answers to the most common questions being asked by potential bidders.
What is Law No. 27,191?
Law 27,191 sets mandatory renewable energy targets through the year 2025 for all consumers. The law sets targets of 8% renewable energy by December 31, 2017 and 20% renewable energy by December 31, 2025. The Ministry of Energy and Mining will tender renewable energy PPAs for 100% of the mandated target, with the costs of these PPAs being passed on to consumers. Power users with an average power demand greater than 300 kilowatts (labeled “large users”) will have the option to opt out of the tendered PPAs and instead to source renewable energy directly or through self-consumption projects. However, large users who opt out will have to meet annual renewable energy goals and will be subject to penalties if they do not reach them.
Does Law No. 27,191 provide any incentives for renewable energy projects?
Yes. Law No. 27,191 provides for various fiscal and local supply chain incentives for renewable energy projects.
The fiscal incentives are greatest for projects starting construction before 2018 and decrease gradually over time until 2025. Fiscal incentives include exemption from import duties (for projects starting construction before 2018), accelerated depreciation of assets, VAT refunds, exemption from a minimum deemed income tax, exemption from dividend tax (if there is reinvestment in infrastructure), extension of income tax loss credits to 10 years (from five years), a tax deduction for all financial expenses and a tax credit on locally supplied capital expenditures.
There are also local supply chain incentives. For local suppliers and manufacturers, there will be a FODER sector-specific development credit line and an import duty exemption for equipment parts and supplies. If independent power projects purchase locally, they will receive priority access to FODER project financing and a 20% tax credit on locally supplied capital expenditures (subject to certain terms).
What are the terms of the PPAs?
The offtaker will be CAMMESA on behalf of distribution utilities and large users. Each PPA will have a maximum term of up to 20 years from the commercial operation date. The PPA will also specify the type of energy and energy technology to be supplied, the amount of energy committed to be delivered per year, generation capacity, the energy price to be paid by the offtaker, conditions that the electricity seller must meet to preserve the PPA performance guarantee, the contractual penalties for noncompliance, FODER’s payment guarantee obligations and the PPA's position as first priority for payments by CAMMESA.
CAMMESA will make monthly payments under the PPA for the electricity delivered by the project during the relevant month. The amount of each payment will be the product of the awarded annual price and an incentive factor to be defined for each project. The incentive factor gradually reduces over the PPA's term.
How does the bidding process work?
CAMMESA has already released preliminary versions of the bid documents for public comment. CAMMESA is collecting comments through June 12, 2016 on the draft bid terms and conditions and the PPA that will be used for the public auction in August. The final bid documents and PPA will be released after the government has had time to sift through the comments.
Each bid must comply with specified legal and technical requirements for qualification including, among other items, providing certain legal and accounting documentation, a description of the project, an evaluation of the availability of necessary resources, a description of the technical characteristics of the offer, details of technology and estimated energy production and confirmation that environmental clearances have been received for the project.
The bidder must also obtain a “certificate of inclusion” to participate. To obtain this certificate, the project owner must register as an agent for participation in the wholesale power market and must file certain fiscal and tax information and submit details of the project. The bidder must also post a bond together with the application for the certificate for 10% of the total value of all tax benefits requested.
Each bidder should (individually or collectively) have a minimum net worth of US$500,000 per megawatt of capacity offered, have experience in construction and operation of projects with similar technology that are at least a third of the size of the proposed project, and provide the required bid-stage guarantee in the form of a bond, standby letter of credit or surety for US$50,000 per megawatt of capacity offered. The bond must be for a term of 180 days and be automatically renewable for an additional 90 days.
The winning bidder must also provide a performance guarantee when the PPA is signed to guarantee completion of the project. The performance guarantee should be in the form of a bond, standby letter of credit, surety or cash-collateral deposit to a controlled account for US$250,000 per megawatt of capacity contracted for. It must remain in place until at least 180 days after the commercial operation date. Winning projects must reach commercial operation within 730 days after the PPA is signed (with limited exceptions) and must have a minimum capacity of one megawatt (with the exception of small hydroelectric plants, which must have a minimum capacity of 0.5 megawatts).
How will the successful bid be chosen?
The government will weigh five factors when deciding which bids to accept. They are the price (in US dollars per megawatt hour), the location of the project and interconnection node, the committed date to reach commercial operation, compliance with the requirements in the bid documents and compliance with the requirements to obtain the certificate of inclusion. There will be an electricity price ceiling for bids.
What are the key deadlines for the bidding process?
The preliminary versions of the bid documents have been released and will be available for public non-binding consultation and comment until June 12, 2016. Any comments must be submitted in writing to CAMMESA. The final bid documents, as well as the bid terms, are expected to be available for purchase from CAMMESA on July 2, 2016. From July 2 until August 8, 2016, there will be a period of consultations with interested parties. On August 8, 2016, the trust contract setting up the FODER trust will be executed. Also on August 8, CAMMESA will publish the final version of the term sheet and World Bank guarantees. Bidders will need to submit their offers by August 22, 2016. The winning bids are expected to be announced on September 28, 2016. The PPAs and guarantee contracts between FODER and the winning bidders will be signed on October 28, 2016.
About Chadbourne's Latin America Renewable Team
Chadbourne is a market leader in renewable energy globally with over 25 years of experience in Argentina, including landmark transactions for leading Argentine companies. IJGlobal, a leading project finance publication, awarded Chadbourne the “2015 Legal Advisor of the Americas” award and ranked Chadbourne as #1 Global Project Finance Legal Advisor for Onshore Wind transactions by volume and #1 Thermal Solar transactions by volume. In addition, Chadbourne's Tres Mesas 148.5 megawatt wind farm deal in Mexico won IJGlobal’s 2015 “Latin American Wind Deal of the Year” and its Tres Hermanas wind farm deal in Peru won 2015 “Best Renewable Energy Financing” at the LatinFinance Project and Infrastructure Finance Awards. The Tres Hermanas wind farm deal also received the Chambers USA 2016 “Energy/Projects: Power (Including Renewables) Firm of the Year” award. Chadbourne has led the largest wind farm and largest solar projects to date in Latin America and numerous renewable energy projects in Chile, Mexico, Peru and Uruguay, and across the Caribbean and Central America. Chadbourne's dedicated Argentine team includes partners Talbert Navia, Allen Miller, former Governor George Pataki, Todd Alexander, Raquel Bierzwinsky and Margarita Oliva from the New York office and Ken Hansen, Peter Fitzgerald and Rohit Chaudhry from the Washington, DC office. The team’s scope covers representation of sponsors, commercial banks, multilateral agencies and renewable energy private equity funds focused in Latin America. Chadbourne also has an entrepreneurial approach of introducing joint venture partners on the equity side and financing sources, such as commercial banks and multilateral agencies, on the debt side.
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