Solar

Argentina: Understanding the Political and Economic Risks of Solar Energy Development

At a first glance, it would appear that Argentina has all of the characteristics of a solar market still in its infancy yet poised to take-off at any moment. Combined, a strong policy framework, demonstrated political willpower, an excellent solar resource and a growing demand for energy all appear to provide the necessary conditions for Argentina to become a major growth opportunity within the Latin American market.

A closer look, however, serves to demonstrate how political and economic risk can debilitate even the most robust and well thought out renewable energy policies, while also revealing that some of the optimism regarding Argentina may be at best premature and, at worst, misguided.

The largest and ultimately most detrimental problem facing the Argentinean solar industry is an inability to access adequate international capital to fund project development. The 2002 default on $132 billion of national debt remains fresh in the memories of investors and has all but precluded Argentina from international capital markets and foreign investment. Consequently, hundreds of megawatts of renewable energy projects which have received contracts under GENREN, the nation’s large-scale renewable energy procurement program, are stalled due to an inability to obtain financing. In fact, to date, the only connected utility-scale solar installations have been backed by domestic investors which, in itself, is evidence of the country’s financial woes.

Further complicating the picture is the debt overhanging CAMMESA, Argentina’s national wholesale electricity regulator, which manages commercial transactions in the electricity market. Estimated to be between $400 and $600 million USD, this debt has also caused investors to be cautious of conducting business within Argentina’s energy sector.

On top of these financial and economic risks, the political risk of investing in Argentina also increased when Argentina’s president, Cristina Fernandez de Kirchner, abruptly decided to renationalize Yacimientos Petroliferos Fiscales (YPF), the country’s largest oil and gas company. Criticized by leaders throughout Latin America, the move brought up questions regarding the nationalization of other energy-related firms and also reinforced beliefs that the Argentinean government could be capricious and unstable. The World Bank has also acknowledged these political uncertainties when it ranked notoriously volatile countries such as Uganda and Yemen more favourably than Argentina in its Ease of Doing Business study.

These financial and economic risks, while certainly enough to cause potential solar project developers to think twice about investing in Argentina, are not, unfortunately, the only risks that are present. The actual administration and management of the FIT program in Argentina is also a hurdle which needs to be cleared. The process, which has been called extremely politicized, has not moved forward at the pace which was originally intended. Only a small amount of solar has been grid connected and approximately 80% of all first round of GENREN contracts which were announced in 2009 and granted in 2010 have not been completed. 

Given these risks and uncertainties, it would appear that Argentina’s solar market does not possess the potential that is suggested by its fundamentals and policy support. Underneath what appears to be a strong renewables program with solid political backing lies a potentially risky investment environment which must be evaluated with caution.  As such, any investment in Argentina will require safeguards such as loans backed by development banks against the possibility of investment risk.

Importantly, Argentina can also be used as an excellent example of the sort of unbridled optimism which can occasionally surround a country following a policy announcement or promise of renewable energy investment. As the Argentinean example shows, there is much more behind a renewable energy investment decision than simply FIT programs or a strong policy framework. Given this, timely research and an intimate knowledge of the specific market can be the difference between success wasted resources.

Lead image: Caution tape via Shutterstock