Argentina’s energy sector on the cusp of transformation following President Milei’s inauguration
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|Name of regulation
Decree of Necessity and Urgency 55/2023 (DNU 55)
Decree of Necessity and Urgency 70/2023 (DNU 70)
Basis and Starting Points for the Freedom of Argentines (the Omnibus Bill)
|Executive branch, Congress
Before the president Javier Milei took office on 10 December 2023, there were three main factors impacting long-term investment in the renewables and energy sector (see Argentina: Renewables and Energy Transition – Policy and Latest Developments):
- Argentina’s critical macroeconomic situation;
- stringent foreign exchange controls and restrictions; and
- a lack of financial sustainability in the energy sector.
While these issues are still the most critical challenges for long-term investment in Argentina, within a few weeks the new administration had set out an ambitious shock-therapy programme that, if successful, could be a game changer for the country's energy sector.
Legislative changes amid national energy sector crisis
One of the first economic measures in Milei’s shock-therapy programme included devaluing the Argentine peso by more than 50%, which substantially reduced the gap between the official exchange rate and the market exchange rate (this gap was more than 100% before Milei took office).
After this, on 18 December 2023, the executive branch published the Decree of Necessity and Urgency 55/2023 (DNU 55) in the Official Gazette, declaring that the national energy sector would be in a state of emergency – with regard to the generation, transportation and distribution of electric power under federal jurisdiction and the transportation and distribution of natural gas – until 31 December 2024.
Among other matters, DNU 55 launched a tariff review process for electric power and natural gas services that are subject to federal jurisdiction. This is the first step towards introducing financial sustainability for the energy sector and is a 180-degree policy shift from the previous administration, where energy subsidies were the norm.
On 21 December 2023 the executive branch published the Decree of Necessity and Urgency 70/2023 (DNU 70) in the Official Gazette, which approved the “Basis for the Reconstruction of the Argentinian Economy”. DNU 70 has over 300 articles and proposes substantial regulatory change in a wide array of matters, from general deregulation topics to specific oriented areas, including key reforms for the energy sector.
Milei’s shock-therapy programme also includes a huge bill called Basis and Starting Points for the Freedom of Argentines, which was sent to Congress on 27 December 2023 (the Omnibus Bill). This bill initially contained over 600 articles – 100 of which were deferred to a later stage during the Congress deliberations – and, among other matters, proposes a profound deregulation of many economic sectors, complementing the reforms that were introduced through DNU 70.
With respect to renewables and energy transition projects, the Omnibus Bill includes:
- a promotion regime for large investments (ie, more than US$300 million); and
- an energy transition section, pursuant to which the executive branch will be empowered to establish and regulate a greenhouse gas emission market.
The sectors included in the promotion regime are:
- oil and gas;
- energy; and
The promotional regime for these sectors contemplates tax, foreign exchange and custom benefits and was essentially designed to insulate large investments from Argentina’s current macroeconomic situation. If the Omnibus Bill is approved as is and its implementation is not detractive, the benefits could surpass the advantages established under both Federal Promotional Regime for the Use of Renewable Energy for Power Generation (Laws 26,190 and 27,191) and the Mining Investment Regime (Law 24,196).
The road ahead
Whatever the outcome may be, for the time being Milei has certainly delivered on one of his campaign promises: in under one month, the new administration submitted to Congress a large package of reforms to stabilise Argentina’s economy, promote investments in key economic sectors and, at the same time, set several measures in motion to reduce the government’s structural deficit.
If these actions are successful, the Argentine energy sector could be revitalised and offer interesting investment opportunities.
For this to happen, Milei’s substantial reforms need to get through the Congress. This would be a significant achievement for the newly elected president as he faces an opposition-dominated Congress and his political party has only a minor fraction of the seats in the Senate and lower Chamber of Deputies.
The Argentine Congress is generally in recess during the Argentina’s summer months. As a rule, ordinary sessions go from 1 March to 30 November. However, extraordinary sessions have been convened until 15 February 2024 to consider the proposed legislation. This means that in the next few weeks, the Omnibus Bill could be passed into law. The DNUs will remain in force so long as they are not expressly rejected by both chambers.
In any case, if the reforms are approved by Congress, chances are that they will be challenged before the courts by affected parties (eg, unions, non-governmental organisations or consumers). In fact, various judicial actions have been filed against DNU 70, and labour reforms established from it have been suspended through temporary injunctions. For Milei’s push towards liberal policies to succeed, the bulk of the proposed reforms will need to be upheld by the judiciary.
Certain judicial precedents should be considered in the implementation of these reforms, particularly with respect to tariff increases and cutting government spending on subsidies. In 2016, when former president Macri tried to contain government deficit to sustain progress through market-oriented reforms, the Supreme Court slowed the increase of energy tariffs and forced Macri’s administration to redesign its initial plan.
Looking to the near future
At this stage, it is unclear whether Milei’s large package of reforms will become law. It is also difficult to predict the position of the lower courts and – eventually – the Supreme Court when it comes to the reforms and tariff increases’ constitutionality.
It is too early to answer the question of whether the new government could rapidly reshape Argentina’s government-centric economy and promote investments in the renewable and energy transition sectors. However, the outcome of Milei’s shock-therapy programme should be closely monitored by those looking to explore opportunities in Argentina’s energy industry.