Investment incentives in Renewable Energy in Argentina. RenovAr Rounds

by 5 Oct 2016Companies, Doing business in Argentina

Having an enormous potential in this field, Argentina has established as a state policy the generation of electrical energy from renewable sources, aiming at providing a public service and the research for the technological development and manufacturing of equipment for that purpose (Law Nº 26,190, Article 1). And the targets set are very ambitious indeed. Pursuant to Law Number 27,191, renewable energy should supply 8% of the energy demand by December 31, 2017 (Law Number 26,190, Article 2) and 20% of the energy demand by December 31, 2025 (Law Number 27,191, Article 5).
However, public funding is not sufficient to make the investments needed to develop renewal energies in Argentina. Therefore and in line with said state policy, Argentina has enacted an ambitious legal framework to put such capabilities in motion. Such framework is given mainly by Law Number 26,190 – as amended by Law Number 27,191 – and its Regulatory Decree Number 531/2016, establishing the National Regime for the Promotion of the Use of Renewable Sources of Energy for Electrical Power Production (the Promotional Regime).
To attract private capitals, the Promotional Regime offers wide and diverse incentives:
1) Purchase quotas: large users and customers (i.e. those with an electricity consumption equal to or above 300 kW) are obliged to obtain a certain amount of their electricity needs from renewable energy sources (Law Number 27,191, Article 9);
2) Public tenders: under which the Ministry of Energy and Mining will award power purchase agreements with the Wholesale Electricity Market Management Company (Compañía Administradora del Mercado Mayorista Eléctrico Sociedad Anónima or CAMMESA), to allocate such energy to end users or to those large users and large customers choosing to be supplied by CAMMESA, (Law Number 27,191 and Regulatory Decree Number 531/16).
By Resolution Number 136-E/2016, the Ministry of Energy and Mining has instructed CAMMESA to conduct Round 1 of the national and international open Call to submit public tender offers to enter into supply contracts with CAMMESA (the RenovAr Program). The same resolution also approved the bidding terms and conditions and the power purchase agreement of renewable electric energy.
Pursuant to the Emergency Decree Number 882/2016, power purchase agreements may have a maximum term of 30 years (Article 2). Such contracts shall be subject to Argentine private law (Emergency Decree Number 882/2016, Article 3) and, therefore, national or international arbitration are allowed.
By Resolution Number 205 – E/2016, issued by the Ministry of Energy and Mining, offers submitted under the RenovAr Program, Round 1, have been qualified and the tender winners will be appointed on 7 October 2016.
Round 2 of the RenovAr Program is expected to be launched early next year.
3) Financial and tax incentives: According to Articles 8 and 9 of Law Number 26,190, those investors and licensees of new projects of electrical energy production from renewable sources approved by the Ministry of Energy and Mining shall enjoy various benefits:
In the case of execution of infrastructure works, including capital goods, civil, electromechanical and assembly works and related services inseparably integrating a new generating plant or and existing plant: there are accelerated depreciation for income tax purposes on the assets or infrastructure works involved in the project and anticipated return of VAT (Law 26,190, Article 9, Sub-Article 1);
Extension of income tax loss credit carryovers for ten years (Law 26,190, Article 9, Sub-Article 2);
Tax exemptions on minimum presumed income in connection with the assets involved in the project (Law 26,190, Article 9, Sub-Article 3);
Income tax exemption on dividends or profits distribution as long as they are reinvested in infrastructure projects in Argentina (Law 26,190, Article 9, Sub-Article 5);
Promotional Regime´s beneficiaries showing proof of the use of a 60% of national components in electromechanical equipment – excluded civil work – or a lower percentage in no case less than 30% provided that no national production is available, may apply for a tax certificate equivalent to 20% of the national components of the electromechanical equipment, which can be offset against national taxes (Law 26,190, Article 9, Sub-Article 6);
Beneficiaries will also be exempted from import duties over new capital goods, special equipment or parts or components of said goods and certain supplies until December 31, 2017 (Law 27,191, Article 14);
Exemption from specific taxes, fees or royalties, whether national, provincial, municipal or from the Autonomous City of Buenos Aires in relation to the access and the use of renewable energy until December 31, 2025, in those jurisdictions adhering to the regime (Regulatory Decree Number 531/2016, Article 17);
   Beneficiaries may transfer into the prices of the power purchase agreements any future tax increase (Law Number 27,191, Article 13).
To profit from such benefits, the execution of the project has to be initiated before 31 December 2017 and this condition is deemed to exist upon the expenditure of funds for an amount of no less than 15% of the total expected investment (Law Number 26,190, Article 9).
There is no restriction on the participation of foreign investors in the renewable energy market. However, Regulatory Decree Number 531/16 sets forth eligibility requirements to qualify as a beneficiary of the tax incentives, among others, being an individual domiciled in or a legal entity incorporated in Argentina (Annex I, Article 8.1).
4) Guarantees and other mechanisms: Further and to give security and boost investment projects, a trust fund to develop renewable energies (Fondo para el Desarrollo de Energias Renovables or FODER), supported by the federal government has been set up (Law Number 27,191, Article 7). The FODER may provide funding and other benefits for project financing, make capital contributions in companies executing the projects, subsidy interest rates and guarantee payments under power purchase agreements (Law Number 27,191, Article 5).
The Emergency Decree Number 882/2016 also establishes that the power purchase agreements may foresee put and call options to sell or purchase the relevant project that may be triggered by the project company or CAMMESA upon the occurrence of certain events.
5) Conclusions: All in all, international private investors looking for opportunities in renewable energies will have plenty of them shortly, being the Round 2 of the RenovAr the next to closely consider when launched early next year.

Mario Eduardo Castro Sammartino

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