Overline: Coronavirus

Headline: A Tale of the Golden Goose and the Ugly Duckling: Impacts of the Pandemic on the Argentinean Energy Sector

Argentina is among the countries hardest hit by the social and economic consequences of the current pandemic. The Economic Commission for Latin America and the Caribbean (ECLAC) is predicting the worst economic crisis in the history of Latin America, with a fall in GDP of over 5% and millions more people pushed into poverty. Argentina, which is currently renegotiating its massive external debt, could suffer a drop in GDP of 6.5% or more. In order to mitigate the impacts of the crisis, the government is responding with some immediate relief measures – tax deferrals, subsidies for low-income families, and special financial measures for different sectors including energy – as well as planning a quite ambitious recovery program. The decisions that are being taken today are likely to have a profound effect on the energy sector for decades to come. These decisions are influenced by visions and narratives associated with different sectors, with oil and gas being the “golden goose” and renewables the “ugly duckling”.

Large subsidies for a dominant oil and gas sector

Argentina’s energy system is highly dependent on fossil fuels, especially oil and gas. Hydrocarbons represent 85% of the country’s energy production. In the electricity sector, installed thermal power (mainly gas-fired plants) grew from 15.6 GW in 2009 to 24.5 in 2018.

The country has promoted the oil industry since the beginning of the twentieth century, primarily through the partially state-owned company YPF. Nowadays, this company and the whole oil sector are still considered a pillar of the country’s economic development. With conventional oil and gas reserves diminishing, political attention has turned to the development of the country’s enormous shale oil and gas fields, especially the Vaca Muerta formation. This is one of the world’s largest reserves, and the government considers it a national golden goose. Echoing his predecessors, President Fernández declared in an address to Congress in March that “Hydrocarbons will be a lever for the productive development of our country.”

In practice, however, the reality of these reserves is less promising. Even regardless of the adverse social and environmental impacts of mining them, they are not cost-competitive. The sector has relatively high production costs and has so far failed to develop without state support. The oil and gas oligopoly (a small group of national and international companies) received subsidies of around USD 24 billion in the decade from 2008 to 2018, a gigantic sum for the size of the Argentinean economy.

In the current crisis, the international oil companies operating in Argentina have announced significant cuts in costs and investments. The heavily indebted YPF, whose shares on the New York Stock Exchange plummeted in April, has largely followed suit. The pandemic reveals once again that investments in this sector are highly vulnerable to fluctuations in international oil markets and economic crises in general. And, ultimately, the government has to step in with a rescue package.

Every time the international oil price falls, pressure from the oil industry increases to set a local price – the so-called “barril criollo” – higher than the international price, the difference being covered by the national government. Currently, part of the oil industry and governors from oil-producing provinces (like Neuquen and Santa Cruz) are lobbying for a barril criollo of USD 54. An official decree has yet to be published, but the government has yielded to industry pressures and fixed a price of USD 45 dollars until the end of the year. The current pandemic has led to a collapse in oil prices that is not likely to be reversed soon, so this measure means significant new subsidies for the hydrocarbons sector. In order to avoid a new increase in the price of gasoline, the government is also fixing the price at the gas pump until at least December 2020.

A common argument in favor of the development of Argentina’s shale oil and gas fields is that they generate local employment and avoid oil and gas imports. However, the country now needs to consider to what extent these sectors should benefit from state subsidies and what the alternatives are. The same approach should be taken to the links between the state and YPF. In the coming years, economic recovery may benefit from a robust public company. But should this company continue to invest in highly polluting energy sources whose days are numbered, or should it instead commit to more promising and cleaner energy sources?

Fledgling renewable energy sector threatened by the crisis

In 1998, Argentina was the first country in Latin America to introduce state support for renewable electricity. However, the sector is still perceived as an “ugly duckling”, nice to have but far less important than the eternally “promising” fossil fuels sector. The initially higher costs of these technologies and acute economic crises hindered their deployment for many years. More recently, support programs such as RenovAr have allowed renewable technologies, especially wind power and solar PV, to take off. Argentina went from less than 2% renewable electricity production in 2017 to 8% in 2019, and is aiming to reach 20% by 2025. For that to happen, the sector requires continued and expanded government support: progress has been made, but the speed of deployment needs to increase. Unfortunately, the new government seems to have lost interest in this sector, which is now hit by the pandemic.

Many large-scale renewable projects that won tenders do not currently have access to the financing necessary to carry them out and may soon be abandoned. Currently 25 wind and solar projects awarded in the RenovAr auctions program are renegotiating for a total of 1307 MW. The projects will have dispatch priority and are economically viable – the average prices auctioned are competitive by national and international standards – but they lack access to funding at reasonable rates. Argentina’s debt crisis, the pandemic, and the lack of interest shown by a government dealing with several simultaneous crises have left the sector in wait-and-see mode.

Distributed generation is an emerging niche with very high potential. In the years 2018 and 2019, the country began to implement the new law 27424, which regulates distributed generation projects. These projects must stay below 2 MW and can sell any excess power back to distributors through a net billing system. Argentina was late to diffuse these decentralized technologies and now has the opportunity to substantially boost their deployment as a response to the crisis. Indeed, they offer several social and economic advantages for the post-corona recovery. First, these technologies strengthen the self-sufficiency and resilience of users and allow for substantial savings in the energy bills of households and SMEs. Second, they are not dependent on significant capital investments by a few actors, decentralizing and dispersing such a decision over a diverse group of investors. Third, they contribute to diversifying and decarbonizing the electricity mix, one of the country’s long-term objectives. Finally, together with other technologies such as storage, smart metering, demand management, and e-mobility, they are a critical element of a future cleaner and reliable electricity system.

Strategic integration and spending in a more resilient, fairer, and cleaner energy system post-crisis

In the coming weeks and months, the government has to make fundamental decisions that will shape the energy system for the next decades. One exit strategy from the crisis may be to support the fossil fuel sector, reinforcing the country’s lock-in to old polluting technologies. An alternative exit strategy would be to embark on a new development paradigm that actively supports new and cleaner technologies in strategic sectors like energy, transport, and agriculture.

In March 2020, the government announced a post-crisis stimulus package of USD 11 billion. With private financial markets currently closed to the country and without the support of international financial institutions, a more ambitious stimulus package seems unlikely. In this context, every peso of public expenditure matters. Since all sectors cannot be supported at the same time, the government has to make choices.

Vaca Muerta is portrayed as a golden goose but it actually depends on subsidies. That will only change if oil prices increase strongly and remain high after corona, which is very unlikely. Concentrated in the hands of a few big companies, the fossil fuel sector is unlikely to help the country and its people. Public monies should therefore be spent in more promising sectors. As discussed above, decentralized electricity is an example of a solution that can stimulate economic recovery and, at the same time, directly help families and small companies severely affected by the crisis. Furthermore, there is an urgent need to support utility-scale renewable energy projects that are approved but lack funding. Abandoning this emerging sector would be a historic mistake.

At the same time, the country needs to rethink the energy integration agenda with its neighbors. The pandemic is causing significant geopolitical changes, with different regional productive poles (North America, Europe, China) trying to relocate industries and bring production and consumption closer together. South American countries must reassess their production strategies in various sectors, including the organization of regional value chains around promising renewable energy and storage technologies. Cooperation in the area of renewables and infrastructure could bring benefits to all countries in the region, not least by improving energy security, facilitating access to funding and creating regional value chains.