Energy, News

Highlights of the Renewable Energy Promotional Regime

1. Renewable Portfolio Standards

a. Large Consumers

Under the New Promotional Scheme, large consumers (i.e. consumers with a demand equal to or larger than 300 kW) are required to source a minimum level of their electricity consumption from renewable sources, as per the targets and respective dates established above. Failure to meet the applicable targets under the Renewable Portfolio Standard triggers a fine calculated on the basis of the variable cost of power generated using imported diesel oil.

We outline below the different options that large consumers have available to meet their Renewable Portfolio Standards.

i. Purchase power sourced from renewable energy either directly from generators, marketers or distributors
Parties may freely negotiate the terms and conditions of their power purchase agreements (“PPAs”) which will be subject to a US$ 113 per MW/h average price-cap.

ii.Self-generate or co-generate
If large consumers decide to self-generate or co-generate they are not required to comply with CAMMESA’s rules with respect to dedicated backup capacity.

iii. CAMMESA’s joint purchasing system
Large consumers that fail to inform CAMMESA that they want to opt out of the joint purchasing system managed by CAMMESA are automatically included therein. CAMMESA will transfer pro rata the price per MWh that large consumers included within the Purchasing

System will have to pay; however, this price will be subject to the USD 113 per MW/h average price-cap. In addition to the price, CAMMESA will charge large consumers a fee for administrative expenses.

The maximum term of supply agreements and preference clauses provided for by sections 1,177 and 1,182 of the Civil and Commercial Code will not be applicable to PPAs sourced from renewable energies. However, to reduce potential claims against the validity of this provision, it could be useful for the Federal Congress to ratify these exceptions.

b. Small Consumers

The New Promotional Scheme does not establish a binding obligation for residential and small consumers (i.e. consumers which demand is below 300 kW).

Notwithstanding, it sets forth that the enforcement authority must instruct CAMMESA to diversify its energy mix in order to meet the targets under the New Promotional Scheme. In this sense, the PPAs entered into by CAMESSA with power generation companies are not subject to the aforementioned price-cap and will allow the pass through to prices of any new or increased tax.

2. Tax Incentives and Exemptions

The New Promotional Scheme builds on the tax incentives established by Law No. 26,190. We refer to the main regulations:

  1. Anticipated VAT Refund: Credit lines with a special interest rate from the National Bank of Argentina as from the execution of the Project as of the entry to commercial operations to finance the Value Added Tax (VAT) paid on investments until refunded under the Anticipated VAT Refund benefit.
  2. Accelerated Depreciation for income tax purposes: depreciable assets should not be sold for 3 years since “habilitation” (they can be replaced for other assets within that period – conditioned).
  3. Exemption from import duties: The benefit will only be applicable if there is not Argentine made production of the similar goods or assets available.
  4. Tax Certificate: To calculate the percentage of the Argentine-made component the costs of transport or assembly of equipment may not be included.
  5. Increase of the price due to new or more burdensome taxes, contributions or any other charges: In contracts executed with a party different than CAMMESA, the increase can be “freely negotiated” between the parties. In contracts executed with CAMMESA, CAMMESA will determine the new price according to the “real” impact of the tax increase over the structure of costs of the beneficiary. Only certain tax increases are covered by the possibility to seek an increase of the price with CAMMESA.

 

Costs increase covered/excluded by a price increase

Costs increase covered/excluded by a price increase

 

The proceeding before the Ministry of Energy and Mining that interested parties would have to follow in order to request the available tax incentives and exemptions.

To begin with, developers would have to request a Certificate of Inclusion (Certificado de Inclusión en el Régimen de Fomento de Energías Renovables). The Ministry of Energy and Mining, jointly with the corresponding authorities, will analyze the projects and set up an order of merit.

The Ministry of Public Finance will determine the global maximum amount of tax incentives and exemptions that would then be assigned to projects according to the order of merit provided in each Certificate of Inclusion.

3. Public Benefit Fund (FODER)

The New Promotional Scheme introduces a federal trust fund (“FODER”, after its Spanish acronym) to act as a public benefit fund for purposes of granting loans, issuing securities, investing in renewable energy companies and providing guarantees to renewable energy producers (“FODER’s Instruments”). Holders of a Certificate of Inclusion may request the FODER’s Instruments.

The FODER will have two differentiated accounts:

1. Guarantee Account
The Guarantee Account is going to collect a renewable energy charge to be paid by small consumers and it will be used to secure CAMMESA’s payments under the PPAs subject to the New Promotional Scheme.

2. Finance Account
The Finance Account will receive specific appropriations —to be transferred by the Federal Treasury— with sums to the equivalent of no less than 50% of the annual cash savings resulting from a reduction in fossil fuel imports as a consequence of the increase in renewable energy generation. The amount to be transferred in 2016 will be AR$ 12,000,000,000. Amounts destined to Finance Accounts will be used to fund FODER’s Instruments.

A) Tax Certificate. The benefit consists of the issuance of a Tax Certificate for the 20% of the Total Argentine Component as long as it is proved that 60% of components in the electromechanical installations are Argentine-made, -excluding civil works, costs of transport and assembly of equipment – or less than 60% but always higher than 30% if it can be demonstrated that the product is not manufactured in Argentina.

“Electromechanical installations” are defined in the terms of the Resolution as “parts, fittings, assemblies and subassemblies of goods of the systems of developed technology that combine electrical, electronic and mechanical components to constitute the mechanism and generate electric power, excluding civil work”.

To calculate the percentage of the Argentine component in the electromechanical installations, the proportion that represents the “Total Argentine Component” (or “T.C.N.” after its Spanish acronym) over the total cost of the goods corresponding to electromechanical installations (Argentine component plus CIF value of goods imported until their arrival to an Argentine port) should be calculated.

In other words:

  1. In the numerator the “Total Argentine Component” (or “T.C.N.”) and
  2. In the denominator the sum of T.C.N. and the cost of the imported goods plus the international insurance and freight calculated at the port of destination – Argentina- (total value CIF).

In graphic terms:

Total Argentine Component formula

To grant the Tax Certificate, the result of the C.N.D. must be 60% or 30% if in electromechanical installations are incorporated goods included in the Annex of the Resolution, that is, goods that are not manufactured in Argentina.

To calculate the T.C.N., the value of the Argentine component of all the parts, fittings, assemblies and subassemblies of goods that meet the characteristics that are enumerated below (plus 15% as “miscellaneous” or small parts which are difficult to quantify such as screws, nuts, washers, etc. which must be deemed as “Argentine-made”) must be added:

  1. Goods whose maximum imported content does not exceed 40%;
  2. Goods whose production is made from raw materials of Argentine origin;
  3. Goods whose production is made from raw materials which are imported but have undergone a process of transformation that implies a change in the classification under the relevant chapter of the Mercosur Common Nomenclature. If the destiny is to generate electric power from solar photovoltaic energy, it must be accredited also that the Argentine component integrated is at least 25%.

Finally, the Argentine component of investment projects is also relevant for the purposes of allocating the resources of the FODER.

B) Exemption from taxes on imports.

The capital goods, special equipment, parts, elements, components, replacements, accessories and new inputs necessary for the implementation of a project included in the Annex, that is, the goods that will be imported (final import as of December 31, 2017) because they are not manufactured in Argentina, will enjoy exemption from import duties or other charges or statistical rate with the exclusion of the other “service fees”.

RenovAR 1.5
Government officials announced a new tender for the projects submitted in this first auction and have been left out. That is, both those who have not qualified in the technical offer, such as economic and those who had not been awarded for reasons of competitiveness, may be submitted to this new tender.

The specification will be available from October 28. In total 400 MW of wind power and 200 MW of solar are tendered in this new Round 1.5. As for wind projects, 100 MW will go to the Comahue Corridor, 100 to Patagonia, 100 to Buenos Aires and another 100 MW to the rest of the country. In solar, 100 will go for projects on the NOA and another 100 to other nodes.

Thus, the authorities will point to a regionalization of the project. “We want it to be a more federal auction than first one” said Kind. Through Resolution 213, he invited companies to make a new offer “for the lowest price between the offer price and the maximum price of Award”. That is, solar price cut will be USD 59.75 per MWh and USD 59.39 for wind MWh.

The projects presented must have connectivity; no changes in the technical proposals already qualified in Round 1 are allowed; a new Annex will be issued with capabilities Interconnection Points (PDI) and applicable limitations; it is allowed to change the offeror and the strategic partner. The presentation of these new offerings will take place on November 11. On November 23, the opening of the economic proposals will take place and two days after that, the award of projects. Round 2 of RenovAR is expected to start on May 2017.

Francisco A. Macias

Partner

C.V.

 María Inés Brandt

Partner

C.V.

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