PRODUCTION VS.

CONSUMPTION

Thousands of barrels

Billion cubic meters

900 800 700 600 500 400 300 1998 2000 2002 2004 2006 2008 2010

55 50 45 40 35 30 25 2000 2002 2004 2006 2008 2010

Production Consumption

+35%
CAPACITY FACTOR

PRIMARY ENERGY CONSUMPTION MIX (in %)

ENERGY SOURCE USED FOR ELECTRICITY CONSUMPTION 2011 (in %)

TOTAL INSTALLED POWER CAPACITY (in MW)

33.33

32.44

11,063.6

50.58 0.52 11.93

60.71

17,576.9

4.84 1.99 2.08 1.56 0.01

85.8 1005

Oil

Gas

Thermal

Renewable energies

Nuclear

Hydro

Coal

Imports

Wind

OPPORTUNITIES FOR WIND POWER PROJECTS WHY THERE? WHY NOW?

BASIC FACTS
Argentina is located at the southern cone of South America, the 8th largest country in the world by surface at 2,780,400 sq km. Its population exceeds 42 million and is concentrated in large cities, leaving large swaths of unoccupied land in Patagonia, in the Pampas farmlands and in the Andes mountains areas. As shown in the above map it is estimated that winds allowing for at least a 35% capacity factor are present in more than 50% of the countrys territory with many areas in Patagonia boasting a 45% or even more capacity factor. Hence, potential for wind-powered electricity is nearly unlimited, as it has been projected to amount to 220 GW of capacity. THE ENERGY SECTOR Oil and gas are the key sources in Argentinas energy mix, as seen in the above graphic. However, while oil and gas production has been declining consumption has been expanding, as shown in the above charts. Thus, Argentina now needs to import natural gas, as well as diesel oil. Imports affect the countrys trade balance and subject it to price commodity volatility. Therefore, adding wind to Argentinas energy mix seems now pivotal from both an economic and security of supply point of view. THE ELECTRICITY SECTOR Total installed power capacity currently runs at 29,732 MW. As shown in the graphic above, thermal generation supplied more than 60% of the electricity consumed in the country during 2011. Declining production of natural gas has meant that the thermal generation eet is increasingly running on oil derived fuels causing generation costs to rise. Therefore, in Argentina wind power is now competitive, considerably less costly than oil- red generation. Electricity consumption has grown steadily since 1992 totalling a 142% cumulative expansion. During the same period, installed power capacity grew 124%. In February 16, 2012 a new record of capacity usage was reached at 21,949 MW. It is estimated that 14 to 21 GW of generation capacity will have to be built in the following ten to fteen years in order to supply an ever-expanding demand. WIND Until 2010, approximately 30 MW of local wind facilities were operating in Argentina. During the past two years development has picked up the pace and the two rst commercially scaled projects (Arauco I and Rawson) have recently commenced operations, jointly totalling more than 100 MW of capacity. Projects for 750 MW of capacity have already been awarded by a competitive bid (GENREN I). Furthermore, projects for an additional 1100 MW have been tendered in the latest bid (GENREN II) and are expected to be awarded soon. Additionally, it is estimated that projects exceeding 1500 MW of capacity have already required planning permits or transmission access capacity.

LAW AND POLICY

ARGENTINAS ELECTRICITY SECTOR LAW AND REGULATIONS Argentina has a federal government and 23 provinces. Electricity and Renewable energies regulation is mostly federal but certain provincial regulations may also apply (typically site and environmental issues). The main features of federal regulation are the following: (i) Vertical division of the electricity industry into generation, transmission and distribution. (ii) Competition in generation activities with a wholesale electricity market (the WEM). (iii) Large users entitled to generate their own supply or purchase electricity at the WEM. (iv) A WEM administrator (the Compaa Administradora del Mercado Mayorista Elctrico - CAMMESA) which also acts as off-taker in wind power purchase agreements (PPA). RENEWABLE ENERGIES CURRENT POLICIES The National Renewable Energies Incentive Regime (the GENREN program), in place since 2007 aims that for the year 2016, 8% of the electricity consumed in the country should be generated by the following renewable sources: wind, solar, geothermal, tidal and small hydro (up to 30 MW of capacity) and biomass. The GENREN program includes the following features: Tax bene ts An alternative between: (i) Anticipated VAT refund for durable goods used in the project. (ii) Accelerated amortization of the goods used in the project for Income Tax purposes. Long term PPA with government off-takers The Government has promoted the execution of long term PPA between governmental entities acting as off-takers and private developers as suppliers. PPA execution was rst undertaken via competitive bids called by ENARSA (Empresa Nacional de Energa), a State-owned energy company. Under the GENREN I bid, PPA corresponding to 750 MW of capacity in wind projects were awarded in the 120-130 US$ MW/hour price range. GENREN II bid projects are expected to be awarded soon. In April 2011 the Government adopted new regulations to enable PPA execution with no prior bid and developers allowed to submit projects directly to CAMMESA for the execution of a PPA to be agreed. Regulations approved the basic terms and conditions of the PPA which include the following: - A fteen-year xed term with a xed price to be calculated in US$ per MW/h and to be agreed by the parties. - A guarantee by the off-taker to purchase all of the projects supply up to an agreed quantity. - The possibility of assigning the PPA cash ow to third parties. Other measures being currently discussed The possibility of imposing a minimum renewable energy portfolio standard to large users purchasing electricity at the WEM is under initial assessment by the Government. So why hasnt the wind power market in Argentina boomed yet? What is holding development back? The main issue has been limited access to long term nance due to sovereign risk considerations. In spite of this, Argentinas wind power is now gradually starting to take off due to many of the advantages described in this presentation as well as for reasons such as comparative prices and early entry upsides. Choosing the right project and investment structure is a key to mitigate and hedge risks when considering investing in Argentinas wind power projects. The following are some of the main issues to take into account: 1) Choosing the role to be played and what type of investment to make. Risk does not affect all parties to a wind project in a similar way so the rst thing is to consider which role to play in a project. Supplier, developer, builder, servicing company or nancer to the project? Equity or debt investment? Short or long term exposure? 2) Choosing the project. Green eld projects or existing projects? Risk assessment may vary according to what stage the project is in. While some projects are already operating and others are about to start construction or are on an advanced planning stage, many are on an initial planning stage. a. Green eld projects or projects at initial stages. Pros: the investor gets to shape the project. Cons: time and resources must be devoted to sort out regulatory paper work and other initial stage tasks. b. Advanced or operating projects. Pros: project already generating or about to generate cash ows; all regulatory paper work completed. Cons: proper project due diligence must be undertaken. 3) Choosing the right partners. (i) Local private partners provide knowledge of conditions on the ground and familiarity with local markets and practices. (ii) Provincial and municipal authorities are generally interested in new projects being developed at their jurisdictions and may provide additional bene ts and support. (iii) Multilateral, national development and local governmental banks as well as export promotion agencies can jumpstart nancing by providing a part of it and thus encouraging private banks and investors to join a multi-party structure. 5) Exploring the large user market, inside the fence projects. Large electricity users such as mining and manufacturing companies face increasing energy bills. Thus, opportunities for projects inside industrial facilities are rising.

THE CHALLENGE

6) Exploring alternative project nance structures. The eld may be suitable to go for alternative ways of structuring project nance including a total or partial pre-paid PPA structure with an upfront payment.
Sources: Ministry of Federal Planning, Infrastructure of Argentina; Regional Wind Power Center of Argentina CREE (map); Secretary of Energy of Argentina; CAMMESA and BP Statistical Review of World Energy, June 2011.

ARGENTINA
Leandro N. Alem 928 7th oor Buenos Aires, Argentina Tel. (54.11) 4310.0100 www.marval.com.ar

Nicols Eliaschev NE@marval.com.ar