2015 OUTLOOK: Brazil gets serious about solar

Eletrosul’s 1MW rooftop array at its headquarters in Florianópolis, eastern Brazil

Eletrosul’s 1MW rooftop array at its headquarters in Florianópolis, eastern Brazil

Brazil needs renewables. Demand for power is growing at 4% a year, a continued drought is pushing the hydro-reliant grid to breaking point and the nation wants to be a world leader in the fight against climate change.

Wind remains Brazil’s cheapest form of energy, and the industry expects another 2GW of contracts to be awarded this year, not to mention the commissioning of a whopping 3GW.

But when the history of Brazilian renewables is written, 2015 will not be seen as a particularly remarkable year for wind power; it will go down as the year when the nation finally got serious about solar. 

President Dilma Rousseff’s government needs energy fast and PV plants can be installed quicker than any other utility-scale power source.

“A solar plant can be built in less than one year after obtaining all the licensing, and this is what the country needs,” says José Carlos Miranda de Farias, studies director at the country’s energy planning authority, EPE.

It was this urgency that led to the first solar-only auction being held in October, contracting 890MW to become operational by October 2017. Supply deals for these 31 projects are likely to be signed this year, potentially giving the first insights into the future make-up of the Brazilian PV sector.

The tender was a giant leap forward for the industry. Total PV installations in the country currently amount to around 15MW, largely comprising experimental pilot projects and football stadium roofs — a negligible slice of the global pie.

More solar auctions are due to take place this year, although dates have not yet been announced, and exponential growth is expected.

As Farias points out, the country’s energy expansion plan for 2014-23 predicts 3.5GW of solar by 2023, a figure that could prove to be a gross underestimate. More than 30 developers — large and small — already have a solar pipeline of over 14GW in the country. With high insolation across Brazil, there is no shortage of project sites or sunny rooftops.

Foreign players have already entered the race, with Spain’s Solatio, Canadian Solar and Italy’s Enel Green Power winning projects in the first auction. California-based SunEdison has gone several steps further, forming a 1GW solar joint venture with the country’s second-largest renewables developer, Renova Energia, and announcing plans to build a 140MW module plant in the country, plus a factory for PV tracking systems.

Chinese manufacturer Yingli Solar, one of the official sponsors at the recent football World Cup in Brazil, has signed several commercial agreements with local rooftop installation companies, while more than 20 module makers and component suppliers have visited the national development bank, BNDES, and regional government offices seeking information and tax incentives to set up shop.

But while the potential opportunities for foreign PV companies are enormous in the medium to long term, making money in the short term may prove a trickier proposition.

The prices agreed by developers at the solar auction are among the lowest in the world. At R$215 ($82) per MWh — below the levelised cost of solar energy in Europe and the US — profit margins will be tight, especially when you consider the high local taxes and complex local-content rules that have been introduced.

Until the end of 2017, at least 60% of a project’s electrical components and module frames must be made in Brazil in order for developers to access cheap loans from BNDES and the country’s climate fund at interest rates of about 5% — less than half the country’s 11% base rate. Although challenging, this should not be a problem, as there are already sufficient local suppliers. With high import taxes and high foreign-exchange risks, financing projects with cheap BNDES loans may be the most attractive option.

From 1 January 2020, BNDES will insist that 60% of a project’s modules and cells be made in Brazil. As there are no module or cell makers currently operating in the country, 2015 may well be the year when foreign PV manufacturers make a long-term commitment to Brazil.

But many in the industry are worried that the potential returns from utility-scale PV may be too low to attract investment from manufacturers or developers, even with BNDES funding.

“The local-content rules are very important, albeit challenging, for the solar PV sector,” says Rodrigo Sauaia, chief executive of the Brazilian Solar Power Association, Absolar. “But it’s clear that with current tax structures, the production of solar modules in the country is much more expensive compared to other places.”

Sauaia says he is in talks with the federal government about possible tax breaks for the solar industry, something that many believe is vital to attract the required investment.

Rafael Valverde, executive secretary for energy in wind-rich Bahia, says that his state and others have been considering their own incentives to encourage more solar development, including tax breaks for panel makers and discounts for consumers buying solar power.

“[But] without further [government] tax breaks, the BNDES policies and our [state incentive] measures will be innocuous,” he tells Recharge.

The state governments of São Paulo, Pernambuco, Ceará and Minas Gerais are all considering holding renewables auctions to complement the national tenders.

Meanwhile, rooftop installation companies are seeing something of a boom in demand, despite the high taxes on imported panels and a lack of adequate financing. This is especially true in the Northeast region, where wind turbines are prevalent.

“People see the wind turbines and immediately associate them with solar, so they call us up,” says Gabriel Vale, commercial director of Fortaleza-based rooftop installer Satrix, which has installed more than 30 arrays in the region.

And with power prices rising — the central bank expects consumer bills to rise by at least 20% in 2015, largely on the back of high spot prices due to a lack of hydropower — the growth in rooftop PV is expected to accelerate, potentially drawing more solar companies into the country.

Wind

In the more mature wind sector, which will see a cumulative installed capacity of 9GW by the end of 2015, the outlook is a little clearer. Another 2GW is expected to be tendered this year, while 3GW won in previous tenders has to come on line by the end of December, or developers face fines.

The eight manufacturers building turbines in the country have mostly come to terms with the stringent local-content requirements for 2015.

“The bottlenecks have mostly been solved,” says Élbia Melo, executive president of the Brazilian wind-power association, ABEEólica, referring to forged-steel components and bearings, which are now being produced locally.

But meeting local-content requirements does not guarantee a profitable turbine-making business.

Siemens, which has a 7.7% market share, is likely to make a final decision this year on whether it will continue building turbines in Brazil (accepting higher costs and lower profit margins to meet forthcoming local-content requirements).

Argentine company Impsa is struggling with a group-wide crisis and needs to sell its generation assets in 2015 in order to get its finances back on track. Enercon’s local unit, Wobben Windpower, needs to solve its ongoing tax-rebate problems, which have increased the price of its already expensive but highly regarded machines, eroding its ability to close new orders in recent auctions.

The only Brazilian turbine maker, WEG, the most recent entrant into the market, will be hoping to continue its storming form in 2014, when it took 332MW of orders, bringing its total pipeline to 499.3MW.

Other turbine makers are going from strength to strength. Gamesa had by far its most successful year in 2014 with more than 700MW of confirmed orders — including a 220MW deal with CPFL Energias Renováveis after the Brazilian developer cancelled turbine orders from Vestas. The Spanish OEM is expecting strong orders again in 2015, and plans to expand capacity at its 400MW plant in Camaçari, Bahia. New Brazilian manufacturing capacity — in the shape of nacelle assembly plants and tower factories — is also expected to come on line from Vestas, Acciona and GE this year, as they race to meet new local-content requirements. Alstom’s factory, also in Camaçari, began operating on a 24-hour basis in September, effectively increasing its capacity from 600MW to 900MW as it works towards fulfilling its pipeline of more than 2GW.

However, there may be an upheaval in the turbine market in 2015, when GE’s acquisition of Alstom’s wind assets is expected to be concluded. Since the country’s two top suppliers each have a 20% share of the Brazilian turbine market, the merger will have to be approved by the anti-trust watchdog CADE. There are no precedents for such a new economic sector in Brazil, but the body could reject the move or put impose conditions on the acquisition.

Consolidation is also expected among developers. CFPL Renováveis has grown to become the country’s second-largest renewables developer largely through mergers and acquisitions, and plans to do another two or three such deals in 2015. “We will focus on assets that are already generating revenue,” chief executive André Dorf tells Recharge.

It should be a good year for private developers as federal power companies such as Furnas, Chesf and Eletrosul are expected to reduce their participation in wind tenders, in which they often won large chunks. These state-owned companies need to regroup over the next few years as they faced reduced income from 2015 and 2017 — a result of their 30-year government concessions for transmission and generation assets coming to an end and being renegotiated at 20% lower rates.

Foreign companies may also want to buy into Brazil’s fast-growing wind market, following in the footsteps of Canada’s Brookfield Renewable Energy Partners, which bought 150MW in November.

The government’s 20-year power-purchase agreements, cheap 16-year financing from BNDES and ten-year O&M contracts with OEMs continues to make the sector a very attractive source of profits in the medium- to long-term.

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