New Developments in Brazil’s Solar Power Sector

By Rafael Figueiredo and Larry B. Pascal, Haynes and Boone, LLP (Texas)

Brazil’s renewable energy landscape has changed significantly over the last decade. Although Brazil is mostly known for biofuels production and conventional hydroelectric power — hydroelectric power by itself accounts for over 70 percent of the country’s electricity generation — investment in the wind and solar sectors has been increasing rapidly since 2009.

With a solid track record of renewables development, Brazil is currently one of the fastest growing solar markets in the world, attracting the interest of a number of foreign investors, multilateral development banks, energy companies, and equipment manufacturers. In addition, Brazil’s market size positions the country, not only as a leader in the Latin America region, but also as a potential supply hub for neighboring countries.

Following a severe drought in 2001 that reduced water flows to the country’s hydroelectric dams, caused regular energy shortages, and led to an unprecedented country-wide electricity rationing, the Brazilian government started aggressively supporting biomass and wind as alternatives to the country’s heavy historic dependence on hydroelectric power, with the creation of a federal incentive program and a robust auction system for utility-scale procurement. Moreover, hydropower’s growth is increasingly held up over environmental and social concerns and, in recent years, developers and investors are being forced to overcome many project development hurdles as well as public and administrative challenges to permit issuance.

Since the first wind-only auction held in December 2009, Brazil has added approximately 7 GW of installed wind capacity. Through similar supportive political and regulatory regimes, the government has demonstrated its intention to replicate the same rapid growth in solar power generation, committing to contract one to two GW of utility-scale solar per year at government-run auctions. Equally important for Brazil’s strategy was the recent enactment by the Brazilian Federal Energy Regulatory Agency (ANEEL) of new rules aimed at reducing barriers for the incorporation of distributed solar power generation into the country’s grid supply system, and allowing small-scale solar energy systems to receive credits for the electricity that is produced on-site and sent back to the grid.

Notably, installing new solar and wind power capacity is of strategic importance to Brazil not only to hedge against periods of low rainfall but also for economic purposes in order to hedge against volatility in electricity prices and fluctuating natural gas prices (i.e., prolonged droughts such as the most recent one in 2014/2015 forced Brazil to significantly increase the amount of natural gas it imports to bring on thermoelectric power plants in order to support ever-increasing electricity consumption).

Solar Power Auctions

In Brazil’s “reverse” power auction mechanism, the government sets a ceiling price for the megawatt-hour (MWh) and companies bid down the price at which they are willing to sell energy to the market. Energy producers that offer the lowest prices sign 20-year power purchase agreements with distribution companies, which are statutorily mandated to purchase power via the auctions.

Three solar power auctions have been held to date, of which two (in October 2014 and August 2015) were solar-only auctions and at the most recent auction (in November 2015) wind power was included in the competitive bidding. The auctions secured approximately R$ 12 billion ($3 billion) in investments for the next three years and attracted a number of domestic and international players into the market, with the following results:

  • October 2014 auction (solar-only): over 1 GW awarded — 31 projects to start supplying energy on Oct. 1, 2017 — at an average price of R$ 220/MWh ($55/MWh).
  • August 2015 auction (solar-only): over 830 MW awarded — 30 projects to start supplying energy on Aug. 1, 2017 — at an average price of R$ 301/MWh ($75/MWh).
  • November 2015 auction (solar and wind): over 920 GW awarded — 33 solar power projects to start supplying energy on Nov. 1, 2018 — at an average price of R$ 297/MWh ($74/MWh).

One challenge utility-scale projects are facing is the lack of new transmission capacity to transport the energy produced in the northeast region of the country to the major metropolitan areas located in the southeast. Recent transmission line auctions fell short of expectations and massive ongoing transmission projects have stalled and are up for sale.

Distributed Generation Regulation and Tax Incentives

On Nov. 24, 2015, ANEEL issued Resolution No. 687, which amends and modifies a previously enacted resolution (i.e., Resolution No. 482 of April 17, 2012) and sets out the framework to enable solar power generation on a broad scale but without reliance on long-distance transmission lines. The major components of the new regulation are as follows:

  • Expands the net metering program (Sistema de Compensação de Energia) created by Resolution No. 482 by allowing small-scale power generators of up to 5 MW to offset their electricity bills with credits from the energy they provide to the grid (Art. 2, section II).
  • Allows participating consumers to distribute net-metering credits among multiple electric service accounts, for instance, on a multi-tenant commercial property or a residential apartment building (Art. 2, section VI).
  • Introduces the concept of shared/community solar, allowing several energy customers to share the benefits of a solar power generating facility as one single consumer (Art. 2, section VII).
  • Allows for the net-metering credits obtained and not used by a generating facility to offset the excess energy consumption of other sites provided that (i) both sites are serviced by the same distribution concessionaire; and (ii) ownership of both sites is the same (Art. 2, section VIII).
  • Establishes that the credits obtained by the solar power producer expire after 60 months (Art. 6, paragraph 1).

Soon after publication of the net metering rules, on Dec. 15, 2015, the Brazilian Ministry of Mines and Energy (MME) launched a federal incentive program seeking to provide another significant boost to the solar market and attract additional market players. Proposed key tax incentives include: (i) exemptions of the state value-added tax (ICMS) and Social Integration/Social Security Contribution taxes (PIS/COFINS) on net electricity that is fed back to the grid by the net-metering system — of note, several states have already passed exemptions on the value-added tax on electricity; and (ii) reduction from 14 percent to 2 percent of import taxes levied on capital goods used to produce PV solar equipment and related components until Dec. 31, 2016.

In addition, the program sets a competitive price for the electricity that is added to the grid by the generating facility at R$ 454/MWh ($113/MWh) and allows for integration of the net-metering system into the bilateral market. Both measures are aimed at incentivizing production, export and potential commercialization of excess energy. The expanded net-metering rules and the federal distributed generation incentive program are expected to attract R$ 100 billion ($25 billion) in investments and add 23 GW of distributed power capacity by 2030 (based on estimates by the MME).

Although the Brazilian Development Bank (BNDES) has been the major source of lower-cost financing for renewable energy projects — especially to utility-scale developers — in Brazil, the government is currently evaluating other options to increase access to capital while decreasing the cost of obtaining financing for both large scale and distributed generation projects, taking into account the depreciation of the Brazilian Real and currency hedging systems.

Strong Fundamentals but Challenges Remain — Conclusion

The increased domestic and international interest in the Brazilian solar energy sector over the last two years was not a surprise to many industry experts. Brazil has one of the highest insolation rates in the world; a population of 200 million people consuming almost 600,000 GWhs of electricity per year — and paying extremely high retail electricity rates; a necessity to hedge against periods of low rainfall and highly variable fuel costs; a well-rounded auction process providing additional levels of security to both offtakers (distribution companies) and power producers; as well as solar distributed generation regulations already in place.

However, for the market to sustain steady growth, in addition to overcoming the transmission infrastructure and cost of capital barriers mentioned above, Brazil must continue setting policies and encouraging supply chain frameworks with less stringent local content requirements and less reliance on BNDES lending, including statutorily allowing third-party financing and ownership of smaller-scale solar systems.

Lead image: RIO DE JANEIRO. Credit: Jefferson Bernardes /

Previous articleVisualizing the Power of Today’s Solar Panels: An Infographic
Next articleSiemens 7 MW Offshore Wind Turbine Reaches Final Stage in Development Process
Rafael Figueiredo is an international attorney at Haynes and Boone, LLP. He is a dual American and Brazilian citizen with more than 15 years combined experience in project finance and development, syndicated lending, regulatory counseling, corporate transactions, private equity and government enforcement actions. Rafael represents clients in the energy/renewable energy, financial services, mining and a variety of other industries (including both U.S.-based companies and international clients based throughout Latin America as well as in Asia and Europe). He is also a frequent author and speaker on financing and regulatory issues related to energy and infrastructure projects.

No posts to display