Banco Santander Rio has closed the Ps19 million ($6 million) financing of the Ecoayres methane recovery project. The financing, for a landfill gas project located in Buenos Aires, Argentina's capital, indicates signs of life for both the Latin American carbon finance market and the Argentinean project finance market. Both, for very different reasons, have struggled to attract lender attention.

Ecoayres is the first project financing in Argentina to involve lending against revenues from the sale of certified emissions reductions (CERs). It has achieved this through the heavy involvement of Santander as both a lender and a buyer of CERs. The deal also involves some sponsor support, and any successor deals would benefit from some improvements to its technical and financial structure.

The project involves the installation of methane capture equipment at a landfill site in the northern suburbs of Buenos Aires run by the Coordinación Ecológica Area Metropolitana Sociedad del Estado, or CEAMSE. CEAMSE is an agency that serves both the city of Buenos Aires and the 34 municipalities that surround it in the greater Buenos Aires area, part of the province of the same name.

The landfill site – Norte III-B – is located on land owned by the Argentinean Army in the district of General San Martin. It is near the Norte III-A site, where roughly 10.5 million tonnes of municipal waste were deposited at the site between 1994 and 2002, when the 65-hectare site was closed. Norte III-B has been in operation since 2006, and is scheduled to be open until 2010. During this period, the city will dump 15 million tonnes of waste at the 82.5-hectare site.

The waste breaks down by anaerobic decomposition, and produces a large amount of methane, which as a greenhouse gas and contributor to global warming is 21 times more potent than carbon dioxide. The project was conceived from the beginning as a way of capturing the carbon credits from preventing this release of methane into the atmosphere.

The sponsor of the project is the Roggio Group, a local conglomerate with experience in construction, transport, road concessions, and, through its subsidiary Cliba, waste management and environmental engineering. Roggio, however, is not very well-known, although the technology in use at the project is proven. The technological risk would be roughly equivalent to a landfill gas project in the US.

In fact the project is a little simpler than a biogas-to-energy project because the first phase of the project does not involve using the methane to generate substantial amounts of electricity. The majority of the gas captured will be flared, producing the much less dangerous carbon dioxide, although the project does have a small on-site generator that produces 330kW.

The developer had looked at installing generation technology, and an attempt to generate power on a larger scale could form part of a second phase, but for now, the technical challenges of getting the project running within a short timeframe mean that it will flare the gas for now.

According to the clean development mechanism of the Kyoto Protocol to the United Nations Framework Convention on Climate Change, the project is eligible for carbon credits. It can sell the credits to end users in developed countries that have signed up to the protocol.

The most unusual aspect of the deal is that revenues from these credit sales are the project's only source of revenue because it is not, at this time, selling either gas or power. The clean development mechanism lays down that projects should not be commercially feasible without this revenue, and several developers of renewable energy projects have had to make sure their financial statements reflect this. Ecoayres does not suffer from this drawback.

But this dependence on credit revenues makes it harder for banks to finance this revenue stream, since the banks must be certain not only that the project will operate as planned, and that the credits will be certified under the mechanism, and will produce a sufficient quantity of credits, but finally that the buyer will pay for them as agreed.

Santander has solved this by being both lender and offtaker. A Spain-based subsidiary, Gestión de Actividades Tecnológicas, has signed an agreement to buy as many of the credits as the project produces at a fixed price until 2013. It will in turn sell these credits on to European corporations who need them to meet their targets for emissions reductions.

The project was registered on 27 April 2007, and has a crediting period that ran from January 2008 until the end of 2017, and during this period the project is forecast to prevent the emission of roughly 6.1 million tonnes of carbon equivalent. Revenues from the sale of the CERs are deposited in the offshore account attached to an onshore-registered trust, for the benefit of lenders.

The deal does involve leaning on the sponsor for a little support, especially since the local CER market essentially did not exist before this deal. The risk should be manageable, since Roggio has strong existing relationships with CEAMSE, and shares with the concession awarded the proceeds from carbon sales. Certification risk, according to adviser Climate focus, is manageable.

Santander's carbon traders get, in return, reasonably-priced carbon credits of a respectable quantity, if nothing on the scale of those available to HFC-23 reduction projects, which dominate the market. Santander as lender earns a healthy margin over Argentina's double-digit base rates. It syndicated half the debt to the municipal-owned Banco de la Ciudad de Buenos Aires.

Roggio, in return, gets a foothold in a market that is likely to get more important in coming years, whether in terms of CERs from renewable energy projects, those that reduce methane emissions from the country's prized livestock herds, or further landfill projects in urban areas. As Juan M. Diehl Moreno, a partner at Marval, O'Farrell & Mairal, which advised the lenders, notes, project costs in Latin America are low enough to make CER-reducing projects increasingly attractive.

The deal also primes lenders for a return of the project finance market after six years of quiet. Utility and power borrowers suffered as the country defaulted, its monetary system convulsed and its regulatory background collapsed. The Argentinean government has proposed a new framework for the country's power sector, that if acceptable to developers might lead to much-needed investments in generating capacity and bigger bites for project lenders.

Ecoayres SA
Status: Closed 22 October
Size: Ps19 million ($6 million)
Location: Buenos Aires, Argentina
Description: Methane capture project at municipal landfill site
Sponsor: Grupo Roggio
Lead arranger: Banco Santander
Lender: Banco de la Ciudad de Buenos Aires
Lender legal counsel: Marval, O'Farrell & Mairal,
Adviser to the credit buyer: Climate Focus