Brazil's energy data-cruncher seeks right model for RE growth

IN DEPTH | As its renewables supply chain frets over cancelled tenders, Brazil's top energy planner insists they are still a vital part of the mix but new policy approaches may be needed

Wind and solar are still top of the agenda in Brazil’s long-term power planning if they remain competitive, while alternative mechanisms are being studied that could lead to renewable power certificates and minimum levels of clean-electricity contracting, says the country’s top energy planning official.

“The participation of renewables in the power mix will depend upon their competitiveness with other technologies, and the perspectives for economic growth and, consequently of power demand,” Luiz Barroso, the president of Brazil’s federal energy planning authority EPE, tells Recharge.

Since assuming office in July, Barroso has had to revise long-term planning, improve the country’s 13-year-old power tender regulations, and help the Mines and Energy Ministry find a solution to over-contracted power distributors due to sharp decline in demand.

EPE’s data would have been among the considerations as Brazil’s government decided to hold no power auctions at all last year, sending shockwaves across the wind and solar supply chains that desperately need contracted plants to support them.

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Setting a long-term guidance for renewables in the 10-year Energy Development Plan (PDE) is among EPE’s annual duties. And this year the revision will likely be deep, since the next period – starting in 2017 – will include years of economic recovery after the country’s GDP slumped more than 4% in 2016 amid an on-going political crisis which has undermined confidence among consumers and investors.

In the previous PDE, EPE had indicated that wind would reach 24GW in 2025, while solar PV was expected to hit some 7GW.

“Renewables have an important role in the country’s [generation capacity] expansion, as such technologies are candidates to help expansion and the maintenance of [a] low-carbon energy mix,” Barroso says.

However, Barroso also underscored the basic guidelines, which aim to guarantee power supply security at lowest cost, but always led by demand.

One of the ways is looking abroad. In early February, EPE signed a cooperation agreement with Mexico’s power regulator and grid operator CENACE in order to study its recent energy reform, including the tendering process, studies for insertion of renewables in the grid, and transmission grid planning.

“[Mexico’s reform] brings together the best elements of market design, already taking into account mistakes and positive points in similar reforms [around] the world. The aim of this agreement is to oxygenate EPE’s knowledge,” he says.

On the home front, EPE is supporting the ministry’s efforts to decide whether to hold a reserve tender this year – which contracts stand-by power – for renewables despite the current surplus capacity.

So far, the decision to wait for power demand to grow before holding new reserve tenders has won the day, leading to the abrupt cancellation of the 2016 tender.

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But wind and solar trade groups are still lobbying for the reinstatement of the tender. The Brazilian Solar Power Association (Absolar) has already presented a study to EPE and the ministry arguing for the need of continuation of reserve tendering policies. These policies have been one of the main instruments for the contracting of wind and solar since 2009, independent of demand. So far 3GW of solar and 5.9GW of wind have been contracted in reserve tenders.

Although Barroso dubbed the study as “important” and based on “specific hypothesis that justify” the tenders, he said that discussions need to involve the revision of rules for physical guarantees that have been questioned because of a recent drought, which has caused severe variations power prices and supply security. The revision, he says, could reduce the need for contracting stand-by power in reserve tenders, but would indicate more realistically the supply situation in the country.

“This injection of realism is good for the market, eliminating distortions,” Barroso says, concluding that although there could be reduced need for stand-by contracting, renewables would still have an important role in regular tenders.

Mines and Energy Ministry officials have said they would conclude studies on the need for reserve tenders by April.

EPE, however, is studying other changes that would bring about closer links between the regulated and the non-regulated markets. “We have to seek more efficiency,” he says.

The studies are complex and there is no deadline for their implementation, but EPE is considering tendering capacity separately from PPAs, changes that could also lead to the creation of a renewable power certificate system similar to Mexico’s.

At the moment, Brazil tenders power in 20-year PPAs backed by physical generation guarantees. They are traded together, and when the construction of a contracted power plant is delayed or a wind farm cannot produce power because of lower-than-expected winds, they have to buy power in the spot markets to deliver what was contracted in the PPA.

This is a risky exposure to spot market volatility, but also reduces the amount of power available for the non-regulated market.

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By contracting capacity separately, says Barroso, the construction costs are covered since the developer will have to make the capacity available to the system to be switched on when needed. But this will also allow generators to seek separate contracts for the power.

“This would allow more liquidity and the creation of future power market which would bring more efficiency,” he says.

Barroso does recognise that such a mechanism is challenging for renewables such as wind and solar, which have more seasonal and daily variations in power production, but says this could lead to new business models.

Such a difficulty could be “mitigated by portfolios with other generators and technologies”, he adds.

Barroso indicated that this could also be helped by the introduction of minimum renewable power contracting requirements and clean-energy certificates that would be specific to renewable technologies, and complementary to the separation of tenders for capacity and power.