Brazil creates modern energy matrix

The growing participation of wind in Brazil’s energy matrix in the past five years has been the result of its competitiveness and the learning process that started with the Proinfa programme in 2004.

Proinfa’s objective was to make possible the contracting of “non-conventional” renewable energy — biomass, small hydro and wind — even when these sources had production costs much higher than conventional hydropower, in order to send an investment signal.

At today’s prices, wind was contracted for about R$370 ($165) per MWh in that period, while biomass and small hydro were contracted at prices above R$200/MWh, in contrast to conventional hydro prices of around R$100/MWh. This was similar to the feed-in tariff regimes used by Europe and most of the developed countries that implemented strong renewables policies from the mid-1990s.

Wind and solar have stood out strongly in the past ten years in the evolution of their technology and production costs. These factors have allowed an exponential increase in investment and brought strong competition in equipment prices.

The large investments in manufacturing made by China and the subsequent reduction of equipment costs stand out, creating a certain discomfort for the other countries investing in the technology.

The strong pressure on solar equipment costs, forced principally by Chinese competition, has found a parallel in the reduction of wind-power costs in Brazil in the past five years, due to the competitive auction process for 20-year contracts and a fall in manufacturing costs brought about by technology and productivity gains.

The dynamics and economics of our industry have changed enormously in the past decade. Add government policy decisions, the imperative to tackle climate change and the holy grail of affordable, sustainable electricity in emerging as well as developed markets, and the playing field is tilting in favour of green energy.

Given the major participation of wind in energy auctions and recent prices of about R$130/MWh in this year’s A3 tender, several questions have arisen about Brazil’s contracting model — essentially auctions for the regulated market — and in particular whether the process should be revisited, to allow the contracting of other renewable sources to diversify the national energy mix.

It is worth reflecting that Brazil does not have a specific policy for renewables, despite their importance. Proinfa resulted in the allocation of 3.3GW of renewables, but since then, the contracting model has been through competitive auctions.

The success of this model has been anchored on energy prices. The price factor was fundamental in the first competitive wind auction in December 2009, which saw 1.8GW contracted at R$180/MWh. Since then, more than 14GW has been contracted, with the most recent price around R$130/MWh in this year’s A3 tender.

The difficulty in covering power demand in the past two years, caused by a fall in water levels in hydropower reservoirs, creates a need to reorientate energy policy towards a long-term matrix that takes into consideration the complementarity of different sources.

In this sense, the auctions in 2013 and more strongly this year are pointing to a contracting strategy that aims at a further diversification of the electricity matrix, prioritising non-conventional renewable sources — for example, the reserve auction planned for this October, which aims to source power from solar, biomass and solid waste.

The new auctions don’t clearly represent a fresh direction in energy policy that takes into consideration the abundant offer of renewable sources and the differences in their technologies and costs.

But there is a favourable expectation in the market that a “new order in energy contracting” will be implemented, in which not just the price per MWh is taken into consideration in the auctions, but above all the importance of the source, its place in the mix and its complementarity with other sources.

Such a policy will allow the construction of a competitive energy matrix that is secure and sustainable from both the economic and environmental points of view.

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

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