Freeing up Brazil's free market

The growth of investment in Brazilian wind energy has delivered an important expansion of installed capacity.

Today, wind accounts for 2.8GW, equivalent to 2% of national electricity generation capacity. It was expected to reach 8.8GW — 5.5% of the total — by the end of 2017. And that’s before you add the result of the latest tender on 23 August.

These numbers are mainly the result of contracts negotiated through energy auctions in the regulated market in the past four years. Only 600MW involve contracts in the unregulated market.

Wind’s success is due to its competitiveness. Since the first auction in 2009, prices have gone from R$180 ($79) per MWh to an average of R$100/MWh in 2011 and 2012.

So why hasn’t wind grown at the same pace in the unregulated market? It accounts for about 30% of the power market and has a potential in the order of 13GW just for special consumers (those with a power demand of 500kW-3MW, which can get tax breaks for buying renewables) — and that’s without counting big “ self-producing” industrial groups and large-scale consumers.

One reason is the large obstacles to investment in generation in the free market generally, regardless of the power source, because of the reduced bankability of this market. Power-supply contracts in the free market are short-term (five years on average) while the financing agreements needed for new ventures are long-term (15 years on average).

The national development bank, BNDES, the principal source of funding for the electricity sector, offers few alternatives for this unregulated market, preferring to finance projects in which part of the energy produced is sold in the regulated market.

In the case of wind, in particular, there is a second factor — perhaps even more relevant — which is the risk of exposure to spot power prices.

The seller is obliged to supply the contracted energy in accordance with the purchaser’s demand curve. To do this, operators must look to the spot market. As wind’s generation curve can diverge widely from the consumption curve, the risk of exposure is too great, given the high level of volatility in the spot market, and this discourages the selling of wind energy in the free market.

Another big challenge for the expansion of wind power in the free market is transmission.

In the regulated market, when there are delays in building new lines — a frequent occurrence — investors’ revenues are guaranteed. Generators in the free market, however, have to cover such delays by buying energy in the spot market at prices that are reaching unaffordable levels.

There is no doubt that wind could be sold at R$140/MWh in periods of three to five years. However, the free market has had only a marginal expansion, for the reasons outlined above.

It is really only generators belonging to big holding companies that have managed to enter this market, as they are able to balance their contracts with their production from other sources such as hydropower, thus mitigating their exposure to the short-term market. On top of that, these large companies can obtain bank loans using corporate finance.

For all these reasons, breaking down the barriers to the expansion of wind power in the unregulated market continues to pose a big challenge.

Elbia Melo is executive president of the Brazilian wind-energy association, ABEEólica

This piece was published as part of the Thought Leaders series. Recharge’s Thought Leaders’ Club brings together leading thinkers and participants from the renewable-energy sector to examine the key challenges facing our industry

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