Renewable generation in Argentina: past failures and a plan for future success.

• Author: Lythgoe, Martin

1. INTRODUCTION II. REASONS FOR ARGENTINA TO DEVELOP RENEWABLE ENERGY III. THE STRENGTHENING OF THE GENERATION SECTOR IN ARGENTINA A. The End of a State-Owned-Company Model B. The Pre-1992 Electricity Model, Law 15,336 1. General Description 2. The Proposed Changes C. The New Model: Law 24, 065 1. The Creation of the Wholesale Electricity Market 2. The Main Public Actors 3. Generation Sector 4. Transmission and Distribution Sectors 5. Interaction Between Supply and Demand 6. The Performance of the Argentinean Electricity Sector from 1992 Until 2002 IV. ATTEMPTS TO BOOST RENEWABLE GENERATION A. First Attempt B. 2001 Crisis and Its Aftermaths C. Second Attempt 1. Investments in the Renewable Generation Sector 2. Enactment of Law 26,190 D. The Results Obtained so Far V. THE EXPERIENCES OF THE UNITED KINGDOM AND GERMANY A. Experience of the United Kingdom B. Experience of Germany C. Comparison of the experiences of the United Kingdom and Germany VI. RENEWABLE GENERATION IN ARGENTINA: WHAT WENT WRONG? A. Introduction B. Law 25,019: Its Flaws 1. Regulatory Barriers 2. Investment Barriers 3. Technical Barriers 4. Infrastructure Barrier C. Law 26,190: Its Flaws 1. Regulatory Barriers 2. Investment Barrier 3. Technical Barrier 4. Infrastructure Barrier 5. Tax Barrier VII. REQUIRED AMENDMENTS TO PROMOTE INVESTMENT IN RENEWABLE GENERATION A. Policy on Price Setting B. Transmission System Rules C. Policy on Investment in Research, Development and Education D. Consistency, Stability, and Adequacy of Regulations E. Tax Incentive Policy F. Miscellaneous 1. Approach to the Clean Development Mechanism 2. Policy on the Management of the Fondo Fiduciario de Energias Renovables 3. Arbitration Awards VIII. CONCLUSION I. INTRODUCTION

   Because many countries around the world have realized the importance of generating energy from environmentally friendly sources, there is a worldwide tendency towards the development of renewable electricity. (1) The Argentinean Republic is no exception and it has strong reasons for not being so. Argentina has almost no electricity reserve capacity left, its reserves of oil and natural gas are slumping, and its environment is in jeopardy. (2) Internationally, oil prices prove to have a high ceiling, and the Kyoto Protocol imposes certain commitments on Argentina with regard to renewable energy generation. (3) Fortunately, with a diverse geography and climate, Argentina has the best conditions with which to build up a renewable energy generation industry. (4) Indeed, its renewable potential is outstanding. For instance, in one year, the Patagonian winds over Argentina have the potential to produce up to 500,000 megawatts. (5) Furthermore, Argentina still has the capability to generate 130,000 gigawatts of electricity per year from hydrological sources (6) and also has almost four million Tons of Oil-Equivalent ("TOE") from unexploited biomass. (7) As will be explained, Argentina has taken the adequate steps to achieve a successful generation sector. Even so, this South American country has developed a strong fossil fuel and large hydrogeneration sector but has failed in promoting renewable generation. (8) As will be explained in this Article, with reasonable changes to its legislation, Argentina will be able to overcome that failure.

   Argentina's generation sector grew dramatically with the enactment of Law 24,065 (the "Electricity Law") at the end of 1991. (9) Among other major changes introduced by the law were the transfer of state-owned companies to private parties and the application of market forces to the electricity sector. (10) By making these changes, Argentina implemented a cutting-edge model, (11) becoming one of the first countries worldwide to permit private participation in the generation, transmission, and distribution sectors of the industry. (12) The electricity regulatory model ensured non-concentration through the implementation of transparent rules and regulations. (13) It also provided transparency and legal certainty to the privatization process itself and to the subsequent investments made in the electricity sector. (14) This unique situation attracted local and foreign investments totaling US$12.5 billion. (15)

   By 1998, almost 95% of the primary energy produced in Argentina came from fossil fuels. (16) During that year, in an attempt to increase the production of energy from renewable sources, the Argentinean National Congress enacted Law 25,019, (17) by means of which both wind and solar energy were to receive special treatment intended to boost those types of energy generation. As will be explained later, the regime created by Law 25,019 was intended to be similar to the one successfully implemented by Germany during the 1990s. (18) However, neither wind nor solar energy generation in Argentina has grown significantly. (19)

   Unfortunately, the conditions that had promoted the Argentinean electricity industry's strong growth during the 1990s had changed by the end of 2001. (20) Due to a constant public deficit, Argentina's public debt had increased dramatically by the end of the 1990s. (21) This situation, together with a deteriorating balance of payments, made it necessary for Argentina to restructure its public debt. (22) Though there were many different ways of doing so, at the end of 2001, the Argentinean government took a hard road under the brief administration of President Adolfo Rodriguez Saa. Firstly, in December 2001, the government forbade depositors from making withdrawals exceeding US$250 per week from their bank accounts and prohibited foreigner investors from repatriating their investments. (23) Secondly, it decided to suspend all payments on its foreign debt. (24) Moreover, the National Congress went one step further and, after ten years of pegging the Argentinean peso to the U.S. dollar, (25) authorized the Executive Branch to abandon that foreign exchange policy in January 2002. (26) Less than a month after this enactment, the peso was maxi-devaluated, (27) and a quasi-flotation regime (28) was implemented with a peso that, today, is worth approximately US$0.32. (29) The fourth step the government took was to require that all contracts originally agreed to be paid off in U.S. dollars were converted to pesos; however, the conversion rates applied to the contracts varied depending on the characteristics of each agreement. (30) Finally, during 2004, the Executive Branch enacted Decree 1735/2004 (31) by means of which Argentina exchanged outstanding debt for new bonds worth 25% of the original ones. (32) Those measures, among others, triggered a global financial panic that would affect not only Argentina but all emerging market economies. (33)

   This crisis affected the entire Argentinean economy and, within it, the energy industry. (34) As a consequence of that crisis, the electricity industry saw the "pesification" of their tariffs but not of their international contracts subject to foreign legislation. (35) Furthermore, in order to avoid entering into a new inflation escalade, like the one experienced during the 1980s, the government froze the electricity tariffs. (36) Indeed, had the Argentinean government let the electricity tariffs float, they would have immediately increased in almost the same proportion as the increase of the U.S. dollar against the peso, due to the fact that the investments in the sector were highly leveraged with foreign debt. (37) According to the Argentinean government, that situation would have created a domino effect because the industry in general would have made a passthrough of the increased electricity tariffs paid to power suppliers with the prices of their final products or services, leading the economy to a new inflation period. (38) The freeze on tariffs remained unchanged until 2004. (39) In 2004, the Energy Secretariat authorized a raise on the tariffs of "large users" (basically, industrial and commercial users). (40)

   Under the previous one-sided changes, the normal supply of energy was threatened and future private investment in this sector was restrained. Conversely, other users (mostly homeowners) would benefit from unchanged tariffs effective on February 1, 2008. (41)

   Since 2002, the Argentinean economy and industry have started to grow steadily again. (42) Along with this growth, demand for electricity has increased at an average pace of 7.34% per year. (43) However, almost no investment in the electricity sector was made. (44) Furthermore, generators started to satisfy the new demand with electricity generated from reserved capacity. (45) In 2006, the sector had almost no reserves left--power plants had reached their generation limits. (46) Given this situation, and due to the fact that the whole region is currently facing electricity shortages, (47) the Argentinean government started to look for alternatives to increase the installed capacity. (48) The first alternative was implemented in September 2006, when the Energy Secretariat launched a new program called Energia Plus. This program required all large users (above 300 kW) (49) to contract to buy the difference between their current demand and their demand in 2005 from new generation capacity. (50) However, the new program did not achieve its goal, because installed capacity did not increase as expected. Consequently, the government started thinking about new options that reached extremes such as changing the lamps of all public buildings to low-consumption lamps. (51) Within this context and for other reasons explained in Part II, the National Congress enacted Law 26,190 at the beginning of 2006. (52) Law 26,190 was intended to have a broader scope, because it referred not only to wind and solar energy but also to certain types of hydro, biogas and other gases, biomass, geothermal, tidal power, and renewable sources in general. (53)

   More than two years have passed since the enactment of Law 26,190, and ten years have passed since the enactment of...