IN DEPTH: Brazil's local discontent

Serious questions are being asked in Brazil as to whether turbine makers will be able to meet the strict new local-content rules that come into force at the start of 2016.

The national development bank, BNDES — which offers cut-rate loans to developers using accredited turbines — has brought in a long list of local-content requirements for pretty much every component of the turbine, right down to the screws that hold them together.

While much of the focus of the so-called Finame requirements has been on the four main criteria — that towers, blades, hubs and nacelles are sourced locally — there is an even bigger problem to solve — there are not enough local parts manufacturers to meet the demands of the 2GW-a-year industry.

And this is just one of the local difficulties that turbine manufacturers face in Brazil — a saturated market with relatively low power prices, expensive production, thin margins, troublesome logistics, high taxes and complex bureaucracy.

Few turbine makers have criticised the Finame rules publicly, but behind the scenes, they are nervous.

“Some manufacturers would prefer to import machines or some of their components... so they are putting pressure on the BNDES to loosen the national content rules,” says Roberto Veiga, co-ordinator of the wind-power council at machinery and equipment industry association Abimaq.

But the BNDES is not willing to budge. Antônio Tovar, head of financing at the bank, tells Recharge: “There might be some companies that want national content targets to be postponed, while others are carrying out the necessary investments. Any change would hurt those companies that are already investing.”

José Luis Menghini, vice-president of Impsa, identifies local bottlenecks for blades, towers and bearings, adding that his company needs to find a foundry to produce certain components. Brian Gaylord, Make Consulting’s lead analyst for Latin America, says that the biggest Finame headache is sourcing specialised subcomponents such as casts, mainshafts, hub castings and bedplates, due to the lack of suppliers.

Gaylord believes that the problem will only get worse next year, when the proportion of local content required rises and 1.5GW is due to come on line. He believes that the industry should work together to find solutions. “I don’t see turbine makers speaking to each other to co-ordinate orders to suppliers,” he says.

The demand for turbines — and their components — is growing. Alstom, for example, has already placed the same amount of orders with suppliers this year as it did for the whole of 2013.

In 2016, turbine makers will have to deliver more than 2GW, or about 1,000 turbines. This will be no small feat — each turbine typically requires parts from 40-50 direct suppliers, which in turn source smaller components from their suppliers. In total, each turbine might require parts from 1,000 manufacturers. This massive supply chain has to work in unison — any missing part would mean a turbine cannot be built.

The scramble for local parts will lead to “substandard components at inflated costs”, says Global Wind Energy Council boss Steve Sawyer. This will lead to tighter margins and, ultimately, increased maintenance costs for developers, he adds.

Turbine makers generally expect prices and bottlenecks to decline as component suppliers ramp up production. But according to Veiga, the suppliers are not getting the signals they need to begin expansion. “Despite all the [turbine-supply] contracts announced, the turbine makers are not placing all of [the corresponding parts orders] with suppliers yet, which makes them wary of investing to increase output.”

Some suppliers that have invested in new machinery and production lines now have idle capacities.

Veiga calculates that turbine makers have yet to place component orders for 5,000 turbines that have been ordered by developers. One OEM, which he chooses not to name, has announced more than 500MW of new turbine orders but placed component orders for only 23MW of that, he says.

This hesitancy to place orders, says Mario Lima, executive director for sustainability consulting at Ernst & Young Brazil, may be due to the forthcoming presidential election in October, in which a victory for one of President Dilma Rousseff’s opponents could lead to a change in the strict local-content policy

Some component makers say they need significant volumes to make a profit from a new production facility — the type of scale found at a global, not national level.

Veiga believes that turbines are currently 15-30% more expensive to produce in Brazil than in their manufacturers’ home countries. But this extra cost could fall if component makers get the green light to build more capacity. “If turbine makers committed to placing orders with current suppliers, the Brazilian companies would be happy to invest to meet demand.”

Spanish turbine maker is Acciona is concerned by the slow speed of investment by suppliers.

“Everything in Brazil has its own time frame and sometimes time goes by faster than the ‘Brazil cost’,” says the company’s Brazil manager, Christiano Forman, referring to the commonly used expression that describes the complex bureaucracy, high taxes and problematic infrastructure that raise operating costs and slow production.

Some turbine makers, however, are not planning to wait for local suppliers to get up to speed.

“Our strategy is to place our [existing foreign] suppliers locally and develop them over time,” says Pierre François Chenevier, Alstom’s vice-president for wind power in Latin America. “The number of suppliers needs to be increased and, though in the beginning they [the foreign suppliers] may operate at a loss, in the long term, production needs to be increasingly scaled up.”

Vestas is also bringing in trusted suppliers from abroad. “We have to maintain quality,” says Ruben Lazo, Vestas’ Brazil president, “because this is how we will conquer the market.”

Lazo is critical of the details of the local-content rules. “Brazil’s wind power industry is very young and it is not worth putting up barriers if they don’t help the local industry to develop,” he says.

Argentine turbine maker Impsa has already set up three of its key foreign suppliers close to its main factory in Suape, Pernambuco state: Danish blade maker LM Wind Power and steelmaker Gestamp and flange maker Iraeta, both from Spain.

Tovar dismisses concerns that manufacturers will be unable to find suppliers to meet all the local-content requirements. “Three years [between the announcement of the rules and their launch in 2016] is long enough to meet all the goals that they all agreed,” he tells Recharge.

However, the BNDES and the Brazilian wind industry association, ABEEólica, admit that there is a supply-chain bottleneck that must be eased — especially with 7.1GW of wind projects scheduled to come on line between 2015 and 2018.

ABEEólica plans to unveil a map of component suppliers at the end of August, while the Brazilian government, through its Industrial Development Agency, ABDI, is carrying out its own studies into the supply chain, which should be completed this year.

These studies will allow the bottlenecks to be identified and solved, especially as the BNDES is willing to finance the acquisition of new machinery and production lines, says Tovar.

Sawyer, who is highly critical of the local-content rules, admits “it will probably be okay in the end”, but he believes the Brazilian government has been so focused on local content that it has missed greater growth opportunities for the domestic wind sector. “What governments want to see is added value and local employment as big as possible,” he says. “But this goal is much better served by focusing on the market and with market prices. Let the market make the practical decisions.

“Who is the BNDES using as adviser on which components should be localised? Most manufacturers would disagree [with the choices].”

Lima is of a similar mindset. “Brazil’s renewable-energy policy is clearly not working because it lacks a long-term plan and... an industrial policy,” he says. “What’s lacking is a clear signal from the government that it will implement measures to reduce costs and improve competitiveness. Financing research, giving tax incentives, reducing import tariffs, or even subsidising the supply chain is needed.”

With its steel, engineering and raw materials, Brazil should be working towards becoming an exporter of wind equipment, he adds.

Players such as Vestas and Alstom are already looking ahead to a time when the industry will be consolidated and ready to export.

“Finame is good to get the sector started,” says Forman, “but we need to work to make the whole industry become more efficient, and this requires improving logistics and improving the productivity of suppliers.”