Developers, manufacturers, investors and other renewable energy industry stakeholders need to know where the next big market is going to be so that they can adjust their business decisions accordingly.
Since 2003, global consultancy Ernst & Young has released its Country Attractiveness Indices, which ranks global renewable energy markets by analyzing investment strategies and resource availability. The indices are updated on a quarterly basis and the most recent report can be found here.
Here is the firm’s assessment of Brazil.
Solar Scores Big
After hosting the first-ever FIFA World Cup game to be powered by solar energy, thanks to the 6,000 solar panels installed on the Mineirão Stadium, Brazil’s solar ambitions are about to get even bigger. Around 400 projects representing 10.8 GW of capacity have already been shortlisted for the October reserve auction, the first national power auction to split out solar capacity from other technologies. Through such allocations, the Government expects to contract around 3.5 GW of solar power between 2014 and 2018, compared to just 11 MW of installed capacity currently. Successful projects securing these 20-year PPAs will need to be operational by October 2017.
Seeking Fair Prices
Solar actually made its debut in Brazil’s national power auctions last October, with around 6 GW of projects cleared to bid. However, with average solar PV prices of R$250/MWh (US$112), projects have been unable to compete with wind bids averaging just R$130/MWh (US$58) in recent auctions, resulting in no solar contracts being awarded. The decision to ring-fence solar projects within October’s reserve auction therefore represents a very deliberate move by the Government toward a technology that it previously deemed to be too expensive.
The Solar Rationale
Prolonged drought has left the country’s hydro reservoirs at less than 40 percent capacity at a time when energy demand is forecast to grow by 50 percent over the next decade. With federal elections looming in October, the threat of electricity rationing and rising energy bills (as the need for more expensive back-up power increases) is understandably causing political angst and prompting alternative energy sources to be explored. Further, solar projects can typically be brought online faster and with less reliance on transmission networks compared with wind installations. The initial low share of solar in the energy mix should also minimize the impact on consumer energy bills despite the much higher generation cost at present.
Creating Local Value
Recent announcements that the Brazilian Development Bank (BNDES) will offer cheaper funding to solar projects using locally produced equipment also reinforces the country’s ambition to create a strong domestic solar value chain. Favorable financing from 2020 onward will only be available to developers buying solar equipment with at least 60 percent domestic content, though obligations for specific components will be phased in over the period. Cells will be the final element to be subject to the maximum local content requirements.
Developers may be able to finance up to 65 percent of their projects via BNDES’s 20-year credit lines with rates ranging from 6.4 percent to 9 percent per year. A further 15 percent may be available from Brazil’s BLR560 million (US$245 million) Climate Fund, offering 16-year credit lines at just 1.4 percent to 3.9 percent per year. Both represent a significantly lower cost of capital than the country’ s annual base interest rate, currently around 11 percent.
Such domestic content obligations will also put pressure on the Government to ensure sufficient demand, with BNEF estimating more than 500 MW of solar capacity per year will be required to support local panel production. Consumers will also need to be prepared to pay more for locally made panels. Meanwhile, the sentiment from many developers seems to be recognition that solar projects may not initially bring high profitability, but will be worth it to get a foothold in the sector early on given its significant growth potential.
However, with the Government simultaneously undertaking a study of the wind sector’s supply chain to identify bottlenecks and investment needs as turbine manufactures struggle to meet BNDES’s increasingly stringent domestic content obligations, the solar sector may want to start taking notes. With wind power continuing to experience significant growth — now a 2-GW per year industry — and vendors facing a January 2016 deadline to meet up to 70 percent local content for core components on a phased basis, there are some concerns that there are insufficient local suppliers to provide specialist subcomponents to support this target.
Act Versus Wait
The apparent lack of supply chain efficiencies are prompting some turbine manufacturers such as Alstom, Vestas and Impsa to set up their existing foreign suppliers locally to increase control over the quality and availability of components. However, some turbine makers also appear to be holding off placing orders with suppliers so close to the October presidential election, where a victory for the opposition could result in changes to the strict local content policy.
Though government support for the wind sector is likely to remain high, such bottlenecks will need to be addressed to accommodate the 22.4 GW of capacity
expected to be online by 2023, compared to just 3.5 GW of installed capacity currently. Such growth prospects are inevitably keeping manufacturers and developers interested in the market, with India’s Suzlon, recently poised to quit the Brazilian market altogether, now renewing its efforts in the country as it plans to open a new 400-MW turbine factory.
September’s A-5 auction has already attracted 708 wind projects totaling 17.4 GW, while the October reserve auction has shortlisted 15 GW of projects, representing 58 percent of the total capacity registered. June’s A-3 auction also saw a healthy 248 projects quality totaling 6.2 GW, though actual contract awards were significantly lower at 986 MW and primarily allocated to smaller players. Many larger companies registered but did not pursue contracts, citing grid connection and tight A-3 completion deadlines as barriers, although many of these projects will automatically be registered for the pending A-5 and reserve auctions.
Brazil is also planning to auction 4,000 kilometers of transmission lines in order to avoid delays connecting wind farms to the grid and redress the 1 GW of wind generation capacity currently lying idle. Transmission shortages have arisen largely due to the previous policy of only auctioning new grid capacity post completion of the generating assets.
Lead image: Brazil map via Shutterstock