It was a great challenge to leave the massively subsidised system.

Alejandro SRUOGA Secretary of Energy Policy Co-ordination MINISTRY OF ENERGY AND MINING

The light at the end

May 7, 2018

Alejandro Sruoga, Argentina’s secretary of energy policy co-ordination, talks to TOGY about the positive changes that have occurred since the declaration of the energy emergency and what the ministry will be concentrating on going forward. Initially declared at the end of 2015, the emergency decree was allowed to expire in December 2017 as a result of various power sector improvements.

• On ministry focuses: “The efforts and actions of the first two years of our administration were located in solving fundamental problems to exit that electrical emergency and in being able to offer a more reliable and secure service. In this sense, measures were taken in every stage of the sector.”

• On subsidies: “Unfortunately, from the past experience of the generalised subsidy, the results were very poor, quality decreased, companies lost value and investments were not made. There isn’t a single reason why we should maintain a generalised subsidy system. Besides, it is a heavy burden on public finances.”

• On regional integration opportunities: “We have to work hard for what is coming, and we especially have to share storage resources to make renewables viable. This is the great opportunity that we have in the Southern Cone, and to become leaders in the topic.”

Most TOGY interviews are published exclusively on our business intelligence platform, TOGYiN, but you can find the full interview with Alejandro Sruoga below.

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What is the status of Argentina’s power sector two years after an energy emergency was decreed in December 2015?
The efforts and actions of the first two years of our administration were located in solving fundamental problems to exit that electrical emergency and in being able to offer a more reliable and secure service. In this sense, measures were taken in every stage of the sector.
In thermal power generation, we signed Resolution 21 to be able to tackle power cut risks through quick [capacity] installation and flexible power generation. The latter will later be useful in supporting the intermittency of renewable energies. We called for bids and adjudicated projects for cogeneration and closing cycles to improve fuel use.
We normalised distribution and transportation concessions. We also worked on the normalisation of electricity prices, starting with the social tariff as a protection for those who couldn’t afford electricity, and we regularised the price system, taking it to a market system, as the law demands.
We are very well positioned now, to the point that we will not have to renew the electrical emergency. We have power generation that is more reliable and secure, beyond climatic shifts that might put the system in a complicated position, but we are much better prepared than we were two years ago.
In terms of distribution, the quality indicators have improved considerably. If you check the ENRE [Federal Electricity Regulatory Agency] data for the 2011-2015 period, the blackout indicators for Edesur and Edenor averaged 22.7 hours, and today we are at 15.1 hours. The new quality regulation demands that it should be 5.1 hours by 2022. Power generators have a strong economic incentive, given that there are severe economic penalties for failing to abide.

What role has renewable energy played in this power sector progress?
The three renewable energy bidding rounds, the good acceptance of the bidding round process and the construction of the process were important steps towards leaving the emergency. We ended up adjudicating nearly 5 GW at very competitive prices for all three rounds, more than double what we initially called for. We have installed the topic of renewables in Argentina. It has come to stay and will change the foundation of the energy matrix and the working paradigms of the sector.

Now that the energy emergency is over, what will be the ministry’s main power sector objectives and policy focuses through 2019?
Looking forward, there are three main objectives. The first is to normalise the markets, in terms of recreating the conditions for the free play of supply and demand between agents. The first semester of 2018 will be focused on creating a model, establishing the law and regulations, and installing it so that it again works exactly as the electrical energy framework law establishes. The generators will be able to negotiate directly with demand in the spot market or in an opportunity market.
The other main objective will be electrical transportation. Here our great challenge is to call upon private investment to efficiently develop large high- and extra-high-voltage projects of 132 kV and 500 kV. We want to repeat the success of renewables and thermal power generation in the infrastructure sector. The PPP [public-private partnership] model will be used for the development of infrastructure, and for electrical transportation in particular.
We hope that in 2018, we will adjudicate six or seven high-voltage projects. We will start with the Diamante-Charlone high-voltage line. We also have the southern corridor from Puerto Madryn to Choel Choel; the finalisation of the 500-kV Vivorata line in greater Buenos Aires; the new west-east corridor from Charlone to Plomer, which will become a new injection point to greater Buenos Aires; and the lines between Atucha, Plomer and the northern Edenor station.
We also have the issue of the connection of the Argentine northwest with Cuyo through the Rodeo-La Rioja Sur line, and the link through San Francisco of the central and coastal systems, where a third interconnection is missing.
Finally, the third objective is relations with neighbouring countries. The insertion of renewables will change paradigms. It will demand power generation resources to manage the system and integration with neighbouring countries will allow for a good commercialisation of those services. We have borders with five countries and, obviously, there are always possibilities for exchanges.
We have to reduce technical, political, business, sectorial interest and social barriers. We have to work hard for what is coming, and we especially have to share storage resources to make renewables viable. This is the great opportunity that we have in the Southern Cone, and to become leaders in the topic.

 

Does Argentina’s existing power infrastructure have the capacity to sustain the expected growth in generation, transport and distribution?
For us, the concept of transport is what what joins the interests of the relevant parties. We are seeing very good proposals for renewables at really competitive prices, with a clear will from private capital to be competitive and invest in the long term. Transport is a shared resource and it is the responsibility of the state to enable corridors so that renewables flow, while also allowing for their strengthening because they are intermittent resources.
It is unthinkable that the developer of a renewables project, beyond building a transmission project to connect to the system, would intervene directly in a system that is collective. That is where we shift the paradigm, establishing the state with a leading role and deciding on expansions to not only favour a generator or a particular project, but to develop renewable power generation that is economically competitive, environmentally friendly and technologically updated.
This is why we have decided to take up a leading role in transportation, and to let the state have the responsibility to define projects and execute them through the PPP mechanism. The seven to eight projects that we have decided to take up will by 2021 allow us to avoid congestion, while incorporating all the renewables and thermal energy projects that have been adjudicated.
In 2018, we will work on deciding on other projects besides these to go along with a new RenovAr round, so that we can reach a target of 10 GW of installed generation capacity from renewables projects by 2025.

What is the remaining potential for projects related to co-generation and closing cycles?
There is still potential for both. We received proposals for 25 projects [in the last thermal bid round of 2017] for co-generation and closing cycles, 12 of which were adjudicated. All the projects were evaluated based on the benefits they had in terms of fuel savings and the ability to apply generated heat to produce energy. We took the projects with capital costs below the benefits.
In the other projects, the costs of taking advantage of that heat was greater than the benefit of saving gas oil and natural gas. Today we have a high dependence on gas oil. This is a variable that we hope to reduce in four to five years with the supply of unconventional natural gas. There were scenarios that were not convenient because of the costs required to close the cycles. There is potential to close cycles, as long as the capital costs match the benefits. We have taken on all the proposals that were economically convenient.
So far, we have acted according to demand in the context of the electrical emergency. Looking forward, we now wish that, with a working market, the interaction between supply and demand will initiate these types of projects.

Why have the RenovAr rounds been so successful and what challenges remain for the effective incorporation of renewable energies into the system?
The success was based on the fact that we structured something in line with the country’s needs. We achieved an environment of concurrent interests of the state, community and private investors.
I highlight the challenge of incorporation of renewables in a hydro-thermal system, where the guarantee of supply to demand is above all interests. A huge challenge coming up in the next two years is the ability to operate with intermittent energies.
I believe that we can’t just be content with our success in terms of prices and the quantity of proposals we have received. The great challenge that we have – besides doing a RenovAr 3.0 round – is to establish new dispatch procedures, the new power generation market, new relations with neighbouring countries, and new flows and transport systems, in order to create a base to insert these renewables in the existing system that can operate harmoniously and that together can be more reliable and cheaper than what they are now.
This is a concern that all Latin American countries have. Many countries have exportable surpluses in the afternoon, but need to import at night, as a result of having developed these renewables. The great challenge that we will have in the next two years is to manage the successful incorporation of these resources.

What will be Argentina’s role in regional energy integration?
Argentina has taken up the residency of the CIER [Regional Energy Integration Commission], an institution that has more than 250 associates, eight national committees for South American countries, and one regional committee for Central America and the Caribbean. It is an environment where companies – private and public, dispatch and control organisms – convene with governments, the makers and enforcers of policies.
We will have a series of meetings during 2018 to discuss the experiences of different countries, from the incorporation of renewables in dispatch, up to renewable distributed generation. We will exchange experiences to be able to generate industry opinions to be considered in the construction and application of the framework.
We aim to strengthen relations with Chile, Brazil and Uruguay, and even with Paraguay and Bolivia, with whom we have intentions to discuss integration. There are countless opportunities. For instance, in 2017, we imported wind energy from Uruguay that was produced by Ventus, based on the difference between their marginal cost – which is zero – and ours.
These experiences are positive, which is why we need to keep working regionally to see how we can buy and sell renewables surpluses and especially to start exchanging power generation services and growth expectations, and sharing potency and storage reserves, so that renewables can be properly used in every country.
Obviously, we need to build the physical connection – transmission lines and transformer stations – and also have agreements between countries that enable business between companies. It is a win-win; you can always reach agreements where both countries win, given that the marginal costs are always different. Integration opportunities can only deepen.

What is your assessment of the tariff revision process started in 2016?
It was a great challenge to leave the massively subsidised system that was also contrary to what is established by Law No. 24.065, which doesn’t determine a generalised subsidy, and addresses economic costs and the need to recognise concessions and market mechanisms.
The strategy was to start with the protection of users who couldn’t afford electricity, which is why we established the social tariff. It was a learning process of overcoming challenges, judicial protections, the issue of public audiences to explain to people why we realised adjustments and subsidy eliminations. I think the most difficult part has already been overcome.
We are convinced that a system based on economic costs is much more efficient and less susceptible to corruption. The important thing is that the person receiving the service pays for it and demands quality from the provider based on the paid service. Unfortunately, from the past experience of the generalised subsidy, the results were very poor, quality decreased, companies lost value and investments were not made. There isn’t a single reason why we should maintain a generalised subsidy system. Besides, it is a heavy burden on public finances.
We have gone through the most difficult part, we are very close to reaching economic costs in wholesale electricity prices, and at the level of distribution and transport, there are practically no subsidies; they have been normalised.

What is the basis for the national energy efficiency strategy?
There are two crucial elements. One is institutionalised through the creation of the Undersecretary of Energy Efficiency, with its support programmes, both to the private and public sectors and associated actions in the public sector.
Secondly, there is the issue of price. Where there are economic prices, there is a business in saving and rationally using energy. It is one of the fundamental drivers. On the other hand, the promotion of clean energies, closing of cycles and better use of energy sources provide incentives for undertaking efficient behaviours. If we promote a market with the right signals and incentives, we are promoting efficiency.
If we do not reward the closing of cycles or the use of clean fuels, there is no sense in promoting efficiency through other instruments. We have tried to put an emphasis on the institutional aspect, on the incentives and on relationships between agents.

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