A New Regulatory Framework for Electrical Energy from Renewable Sources

The System for Increasing at a National Level the Use of Renewable Energy Resources Earmarked for Electrical Energy Production (^{Law 26.190} from 2006 and modified by ^{Law 27.191}) established in 2015 a timeline for ERS’ share of energy consumption and three key tools in boosting its generation and changing the makeup of the national market. The tools include a public trust fund earmarked for giving warranties and financing for projects; tax, customs, and regulatory breaks; and a renewable and private energy sources futures market.

On the one hand, the goal postponed until 2017 of 8% of electrical energy consumed at a national level being covered by ERS as established by ^{Law 26.190} and a timeline was defined for the mandatory consumption to reach 20% in 2025. Contrary to previous policies and other proposals at an international level, the timeline presented specific, mandatory and measurable goals, which along with a commitment from the national government, grant a clear vision of the path for the growing demand for ERS (^{Irena, 2017a}). Compliance will mean incorporating into the energy matrix an additional capacity of 1000MW from renewable sources each year for the next 10 years.

In spite of the challenge for Argentina that this timeline presents, other countries in the region and around the world have committed themselves to even more demanding proposals regarding the participation of ERS in the energy matrix. For example: 35% by 2024 in Mexico (^{SENER, 2017}); 86% by 2024 in Brazil (including large scale Hydroelectric installations) (Ministério de Minas e Energía, 2015); and 80% by 2050 in Germany (^{Arranz, 2016}). These goals are nevertheless the result of strong pre-existing drives to boost ERS and which currently propose to consolidate and further the sector’s growth.

On the other hand, with regards to tools used to invigorate the offering, the new law broadens the tax, customs, and regulatory breaks which ^{Law 26.190} offered to projects generating electric energy using renewable resources. In order to accelerate their installation, the law establishes that these incentives must decrease with time until they are done away with completely in 2025. Among the most relevant benefits with regards to the goals of this study are the fact that the State bestows upon the projects a fiscal certificate good for paying federal taxes equivalent to 20% of the value that the electromechanical installations have at a national level⁷ . Additionally, it exempts these projects from the payment of import fees on capital assets not produced in the country (until 2022, inclusive, according to ^{Decreto 814/2017}). While some point out that this last benefit hinders the growth of the domestic industry, others believe that the list of goods which are exempt is restrictive and could cause bottlenecking when the first projects are at the construction stage (^{Siboldi, 2016}).

Then we have the law that proposes the creation of the Fund for the Development of Renewable Energies (FODER)⁸ in order to broaden financing for the projects. The trust fund is earmarked for financing the construction of ERS projects and providing guarantees and payment obligations assumed by CAMMESA. The projects which spent the highest percentage of their investments on domes-tic products have preference when it comes to access to this fund. Nevertheless, FODER has so far not acted as a fund for financing but for guarantees, leaving it in the hands of the private sector to seek and negotiate financing.

To boost investors’ faith, the Federal Ministry of Energy and Mining (MINEM) signed ac-cords with the World Bank so that if interested projects so choose, it will back FODER’s role as a guarantor for CAMMESA. The new public policies find themselves constrained by the previous policies (^{Rogge et al., 2017}). This combination of guarantees is an effective strategy to reduce the level of uncertainty associated with CAMMESA’s ability to pay and the functioning of the electric sector.

Finally, the law defines the framework for creating a futures market for electric energy from renewable energy for private companies upon establishing that the biggest users of the MEM (those whose needs exceed a capacity of 300Kw) must meet the ERS consumption goals, effectively and on their own, as set forth by the law. The users which fall into this category, almost 7,500 and 90% of whom consume less than 1MW according to the Asociación de Grandes Usuarios de Energía Eléctrica de la República Argentina (Argentine Republic’s Association of Large Scale Electric Energy Users), will be able to sign individual contracts for electric energy, self-generate it or do so in collaboration, or participate in the joint purchasing process carried out by CAMMESA. However, this last option includes charges for the management and commercialization costs which are subject to the needs of each user and the current ERS capacity.

According to some in the private sector, only companies with a demand for more than 10MW (around 53 companies) will opt for not participating in CAMMESA’s joint purchases in the short term. But as time passes and tariffs increase, the majority of companies will opt for contracts in the futures market. This market provides an opportunity for renewable energy producers, for even though it does not provide the guarantee and certainty of public bids, it allows spreading the risk among different clients, many with an international reach, and opens a tiered path which allows for growth as demand increases. For large scale users, it represents an opportunity to reduce costs, especially with wind and solar energy, and guarantee its supply.

The Objectives of Policy and its Creation

In 2016, MINEM established as main objectives in energy management improving the efficiency of supply and demand, increasing the security of the system, and developing a more competitive market. In order to reach these goals, the institution proposed three lines of attack: 1) increase the domes-tic production of oil and natural gas, which had recently been in decline (^{Ceppi, 2018}), 2) improve the efficiency of consumption, and 3) improve electrical energy production and distribution (^{MINEM, 2016}). Support for ERS production, with stable operating costs which are relatively independent of international markets, was included as part of these guidelines as the incorporation of ERS into the national grid helps to fulfill various proposed objectives such as increasing available capacity, displacing the import of electrical energy and fossil fuels, and diminishing external vulnerabilities of the system.

In line with these objectives, the Subsecretaría de Energías Renovables (Subsecretariat of Renewable Resources), created in 2016, is in charge of defining the speed, the direction, and means for incorporating ERS into the energy matrix as it considers its technological diversity and geographical distribution (^{Subsecretaría de Energías Renovables, 2016}). The objectives of MINEM and the Subsecretariat are an answer to the goals presented by ^{Law 27.191} -a competitive energy system, growth in markets related to ERS, diversity in technology and geographical distribution- but the law also mentions the need to develop industries associated with these technologies. Fostering domestic supplies however does not form part of the Subsecretariat’s main objectives. Even so, various public figures from this and other areas of MINEM publicly highlighted the role of ERS projects as a method to channel new foreign direct investments into the country and promote local production and employment.

One of the principal strategies employed by MINEM to increase capacity and share of ERS in the electric matrix is the implementation of the program RenovAr, which provides a framework for the purchase of energy from renewable sources via an open call. In May 2016, the federal government launched round 1 of this program and round two in October 2017. In round one it opened bid-ding on contracts to supply electric energy for 1000 MW capacity from ERS, establishing an allocation quota for each kind of technology. The second round opened bids on contracts for 1200 MW capacity with an allocation quota for each technology and in the case of wind and solar energy, by region. In the first round 123 projects offering a total of 6,346 MW were presented, of which 105 (5,209 MW) passed formal, technical, economic, and legal evaluations and 59 were selected (2,434.7 MW). In the next round, 228 projects were presented with a total capacity of 9,403 MW, 194 passed the evaluation and 88 were awarded (1942.3 MW).

The projects were selected based on adjusted bid price,⁹ which had to be less than the maximum selection price as set forth for each technology by MINEM. Only in the case when two projects were technologically equal was priority given to the project with a higher declared domestic parts rating (CND).¹⁰ In practice this made the role of CND a marginal one in the selection of the projects, contrary to what happened with public bids in other countries where the socio-economic goals of energy policies with regarding ERS are reflected in the design of said policies. In South Africa for example, the bidding process evaluates projects by giving a weight of 70% to price and 30% to the fulfilment of social economic goals such as the creation of jobs, use of domestic parts, and ownership structure (^{Pahle et al., 2016}).

The transition to an environmentally and socially sustainable economic model, based on technological ability, as well as on local innovation demands an active industrial policy focused on the coordination problems which limit the diversification and spreading of technology (^{Bárcena, 2017}). In the beginning, Argentina’s industrial policy for the ERS sector depended on the Ministry of Production’s (MP) supplier development program (PRODEPRO). This selective program offers financing at a subsidized rate, non-refundable contributions, and technical support for industries considered strategic, like those associated with generating ERS. It thus seeks to facilitate the acquisition of physical capital; the development, standardization, and certification of products; production reforms; and training human resources.

Activities which make intense use of natural resources -such as generating ERS- demand to a lesser or greater degree adaptive innovations and processes which continually seek solutions to increase productivity, which is generally limited by physical constraints, and meet increasing demands (^{Pérez et al., 2014}). As such, the Acuerdo por la Producción y el Empleo: Principales lin-eamientos para el sector de Energías Renovables (Agreement for Production and Employment: Principal Guidelines for the Renewable Energy Sector), signed by representatives from the public¹¹ and private sector - unions, businesses, and trade associations - ¹² , seeks to promote innovation and competitiveness of the sector’s domestic businesses.¹³ The document presents a vision for the medium term (2018 - 2023) and a combination of functional policy actions, horizontal and vertical, geared towards the development and transference of technology (^{Lall and Teubal, 1998}).

On the one hand, in line with the objectives of MINEM, the agreement proposes increasing ERS generation, prioritizing competition in the projects’ pricing. At the same time, it seeks to increase the use of local parts in the projects and to transfer technology to domestic businesses with the goal of promoting their entry into global value chains. This represents a challenge for industrial policy which has seen its field of influence limited by the economy being opened to international competition.

On the other hand, the actions proposed by the agreement (see Table 2) are geared toward promoting the creation of a stable renewable sources electrical energy market and the growth of two sectors considered critical, due to their abilities and proximity to ERS technologies: the metallurgical industry and suppliers of electrical parts and equipment. Specifically, the agreement seeks to strengthen wind turbine and solar panel production chains and for the domestic components to reach 50% and 30% respectively in said chains by 2023.

Industrial policy needs to promote the production of goods and services, as well as the adoption of processes which generate new experiential and tacit knowledge and skills. Many of these skills are expressed in engineering, design, and management routines which are developed and replicated by means of experience and which workers, technicians and businessmen execute in a more or less automatic fashion. As a result, the learning and building of new skills is an incremental process in relation to the technological space in which these companies move, and depends on a technological path which they have already tread (^{Porcile and Martins, 2017}). These conditions are necessary for the companies to create their own high-tech designs and brands (^{Lee, 2013}). Otherwise the innovation process is carried out by importing capital assets, acquiring patents or licenses and/or specializing in low-tech parts assembly in global production chains (^{Yoguel et al., 2017}).

Technological diversification

The energy transition from an electric matrix highly dependent on natural gas to one which is more diversified and sustainable requires a policy to lead this process, ensuring a continual balance between available renewable resources and the sustainability of the system. The technological makeup of the electric matrix, which defines the relationship between base energy and intermittent energy,¹⁴ the location of the projects in relation to the availability of renewable resources and transportation nodes, and the impact of both on the efficiency of the projects and the price of electric energy, determine the speed and direction of the energy transition.

In response to these determinants, the RenovAr program established an allocation quota for each type of ERS, which is reflected in a growing technological diversification of the capacity awarded in relation to previous bids. Even so the capacity awarded by RenovAr mostly corresponds to wind energy (54%) and PV energy (39.8%), while the share of PAH (0.7%) and bioenergy plants, both biomass and biogas, (5.4%) are straggling (see table 3).

Small hydroelectric plants are an energy source spread throughout the country. In 2011 there were already 380 MW installed and today there are 488 MW, fostered in previous decades along with large hydroelectric plants. Although there is much room to increase the capacity of small hydroelectric plants in the whole country, these projects are generally to be found in isolated regions which increases the cost of each MWh delivered to the MEM. Bioenergy, on the other hand, is a technology which is mature at an international level but incipient in the country; it has great potential thanks to the availability of agro-industry and farming resources, and with a value chain complex in its organization and costs. Furthermore, both technologies are categorized by an average capacity relatively low in comparison to that of wind and solar energy.

The number of projects selected also increased between round 1 and round 2 of RenovAr, growing from 59 to 88, and the share of biomass and biogas projects in particular increased (from 2 to 16, and 6 to 34 respectively). The reduction in the minimum capacity required for these technologies (1MW in round 1 and 0.5 MW in round 2) and the application of price incentives to lower scale projects in round two drove an increase in the number of projects with low capacities, which allows for a more efficient use of the installed transportation network and a good use of residual biomass.

Prices

In round 1 of RenovAr bids, the bid prices turned out to be lower than the maximum set price for selection, which was not known until the moment the envelopes were opened, and less than the expectations of the private sector and large-scale users (who have ERS consumption obligations according to ^{Law 27.191}) who had as a reference the bid prices from GENREN (see Table 4). In addition, 70% of the projects were selected with prices which did not exceed the national electric system’s average monomic cost¹⁵ in that year ($71.3 US/MWh in 2016).¹⁶

These results are defined in part by a tendency to lower the prices of wind and solar energy at an international level, driven by a reduced cost of these technologies.¹⁷ In Argentina, on the other hand, the changes in the economic and political environment, the competition created by the bidding system, signing conditions, and guarantees bestowed by RenovAr lower the cost of financing and broadened their availability at an international level. The lower economic and financial uncertainty was reflected in a drop in the percent of projects selected which requested a guarantee from the World Bank, from 54% in round 1 to 31.8% in round 2. These conditions allow the adjusted bid price to reach levels comparable to those markets with a greater history in the field (see Figure 1).

Source: created by the author based on data from ^{IRENA (2017b)}.

Figure 1 Selected Bid Prices According to Technology and Country. In $US/MWh (2016). 

Furthermore, by prioritizing the product prices, the selection criteria of efficiency was further emphasized, that is the meeting between technology and quality of the renewable resource available, relegating to second place factors such as the use of domestic parts, geographical location (especially in the second round), or the proximity to consumption centers.

The price level of wind and solar energy in the country, despite being good for the competitiveness of the energy system, represents a challenge for the market’s growth. According to sources from the private sector, if this trend of lowering prices becomes more pronounced, only large-scale projects which have more accurate costs and which are more developed -with a lower risk of contingencies and a greater understanding of the available renewable resource’s traits- will be successfully selected for new bids.

Declared Domestic Parts (CND)

Investing in ERS projects provides much room to promote job creation through local industries’ participation in the different stages of development, installation, and operation and maintenance of these projects. The technological development stage is characterized by the creation of stable and highly specialized jobs; likewise, the installation stage has an intense need for temporary but specialized manual labor; and the operation and maintenance stage requires stable and moderately specialized local employment (^{OIT, 2011}; ^{Lambert and Pereira Silva, 2012}). Nevertheless, the actual impact on employment by ERS generation projects depends on inserting local industry into the early stages of the chain, as the last stages have a more intense service but have less weight when it comes to the global added value (^{Sica, 2016}).

Integration of domestic goods in projects selected by the RenovAr, calculated by the pro-jects as the CND for the purpose of getting tax breaks, showed a wide variety in rounds 1 and 2 and disparate trends in both (see Figure 2). In fact, the incorporation of CND in each technology type is not related to the bid price nor is there an apparent relationship to rounds or the scale of the projects.

Source: Created by the author based on data from ^{MINEM (2017)}.

Figure 2 Percent of CND in Bids by Technology (2016-2017). 

Only wind projects increased the average percent of CND (from 11% to 35%) and its distribution. Projects with a CND share close to 100% are few and for the most part correspond to pro-jects which propose to increase their already installed capacity.

The drop in average CND use, even if it is in the short term, puts into question the idea that it is possible to increase the incorporation of domestic parts in ERS projects without employing criteria in the bid selection process which takes its incorporation into account, and/or financing or support policies which “reward” those who choose to become involved in developing integral value chains or in technology transference processes. Various sources in companies dedicated to designing and installing projects in the country state that, in general, there are no local providers which offer specific products for these technologies.

For example, the government of Brazil implemented policies which promote local content in wind energy projects as is the case with the Incentive Program for Alternative Electric Energy Sources¹⁸ (PROINFA) which provides financing from the National Social and Economic Development Bank¹⁹ if at least 60% of the windfarm contains local parts (^{Freier, 2016}). These experiences show that it is possible to set goals for domestic components in a gradual and staged manner in energy markets with sufficient capacity (^{Lewis and Wiser, 2007}). In bids carried out in this country, wind energy has a significant share, as do the associated industries (^{Puerto Rico and Sauer, 2015}).

Public figures and sources from the private sector agree on fostering the emergence and development of a national industry connected to the ERS market. Nevertheless, they reject the possibility of imposing a minimum requirement for domestic parts for projects in the market’s structuring phase, arguing that it would increase adjusted bid prices and that market growth will be what promotes a dynamic of innovation in the domestic industry. However, other sources in the private sector question the possibility of the domestic industry’s penetrating the ERS sector under current conditions. The presence of large international players in the field of wind and photovoltaic solar energy increases competition on the one hand but, on the other hand, imposes high quality standards for goods produced locally which could be integrated into the value chain. In other words, the current setting demands a level of competitiveness which the local industry has yet to develop in the field of ERS and which it will only be able to reach if it manages to reduce the cognitive and technological distance between international players and local companies.