IN-DEPTH: The Brazil dilemma
The world’s leading turbine makers have tough decisions to make.
Either they invest millions of dollars in new production facilities in Brazil, or they must leave one of the world’s fastest-growing wind markets knowing that they may never be able to return.
It is a huge risk either way.
Staying in Brazil will require an investment of about R$100m ($46m), according to industry sources. Yet the market is so competitive that current profit margins are almost non-existent, and there is no guarantee — even for the major players — that they will ever see a return on this investment. With an annual production capacity in Brazil of 4GW expected by 2016, and a market of roughly 2GW a year, it is inevitable that some manufacturers will fail.
Exiting the market now would mean losing out on a slice of the R$10bn-plus up for grabs each year, not to mention the pain at seeing rival manufacturers winning multi-million-dollar deals in their absence. And once they have left it, it will be very difficult to re-establish themselves.
The problems all stem from the local-content rules instituted earlier this year by the national development bank, BNDES — which is responsible for funding more than 90% of the wind farms in Brazil.
BNDES is crucial to the market because it offers unbeatable low-cost loans to developers — but only if they buy turbines that meet its strict “Finame” local-content criteria. From 2016, loans will only be offered for turbines that have their blades, towers, nacelles and hubs manufactured or assembled in Brazil. Currently, only three out of these four criteria have to be met — and so far nobody has assembled nacelles in the country.
“The break-even for a nacelle plant in Brazil is around 100 turbines per year, some 200MW,” says Roberto Veiga of parts supplier Bardella, who runs industry association Abimaq’s wind-energy council. But the five biggest turbine manufacturers in Brazil will need a capacity of at least 600MW to fulfil orders already taken.
This will require enormous investment in new factories — in an ultra-competitive market where no-one is currently making much money.
MAKE analyst Brian Gaylord believes that companies are selling at “near-cost” in order to remain viable in the market. “Once several competing OEMs exit the market, the remaining turbine manufacturers will have to adjust pricing in order to fully account for the reality of higher components costs,” he says.
At the 1.5GW wind-only federal tender held in August, the average price awarded to projects was R$110 per MWh. Elbia Melo, executive president of the Brazilian wind energy association, ABEEólica, believes that a fair price — one that would allow acceptable profits for manufacturers — would be R$130 per MWh.
Four years ago, when the country held its first national wind tender, there were only two turbine makers competing in Brazil — Argentina’s Impsa and Enercon subisidary Wobben. By 2011, when Brazil awarded 2.7GW of new wind contracts, there were 12.
In July 2012, when BNDES carried out an audit of manufacturers’ facilities, it discovered that many approved companies were not complying with local-content rules. Acciona, Clipper, Fuhrländer, Siemens, Suzlon and Vestas were taken off the BNDES list. Only Acciona has made it back since, and the criteria are about to get even stricter, requiring even more investment.
So who will be left standing at the end? Let’s take a look at how each manufacturer has been faring, and what their plans are in Brazil.
The US company, which has had a presence in Brazil for 94 years, has won 2.741GW of the 12GW so far awarded in the country. A further 289MW is still to be fulfilled in a framework agreement with local developer Bioenergy.
A third of GE’s orders came from Brazil’s leading wind investor, Renova Energia — yet the developer dropped the manufacturer earlier this year over perceived installation inefficiencies at its enormous Alto Sertão wind complex in the Northeast state of Bahia. Renova instead handed a 1.2GW framework agreement to Alstom.
GE is currently building a nacelle plant for the 1.7-100 and 1.85-82.5 machines in Campinas, 100km from São Paulo — thousands of kilometres from the wind-rich Northeast, where it is installing hundreds of turbines.
The company does, however, have an O&M centre in Bahia, and is planning another in neighbouring Rio Grande do Norte, with 100 employees between them.
Aside from Bioenergy and Renova, GE has also won orders from local developers such as Casa dos Ventos, Dobrevê Energia and Brazil Wind, as well as US-based ContourGlobal.
The Argentine turbine maker has won 1.525GW of orders in Brazil and is thought to have the largest production capacity in the country — about 1.4GW, once a new plant is completed. Its massive hub and nacelle factory at the Port of Suape in the Northeast could be able to deliver up to 1GW per year, company officials claim.
Its Pernambuco base — and the fact that its blade provider, LM Wind, has built a factory at the same industrial complex — makes Impsa more competitive in the region than GE and others, due to lower logistics costs.
Impsa is proud that its 2MW IWP-100 model is the only turbine in Brazil using South American technology, as the machine was developed in-house using funding from federal R&D agency Finep. But the manufacturer’s success largely depends on the performance of its development arm, Energimp — a joint venture with federal pension fund FI-FGTS — which has bought 800MW of Impsa turbines so far.
The company has been active in Brazil for decades as a hydro turbine manufacturer, and its long-standing relationships have undoubtedly helped it win orders from state-owned energy providers such as Chesf, Eletrosul and Furnas. Impsa’s relationship with the national power company, Eletrobras, has been tougher — the latter only recently paid a long-awaited R$500m debt to Energimp.
Impsa also has supplied turbines in Brazil to Australia’s Pacific Hydro and Portugal’s Tecneira.
Spain’s Gamesa became the second manufacturer to meet BNDES’s strict guidelines in May this year, having only entered the Brazilian market in 2009 with a 42MW contract from compatriot investor Inversiones Tenería.
It then won 322MW of orders in 2010 and almost 600MW a year later, when it completed a small hub-assembly plant in Camaçari, Bahia.
In the August 2013 tender, it won a further 470MW — almost a third of the auction — reaching a total contracted capacity of 1.425MW. Gamesa swiftly decided to spend R$100m expanding its Camaçari plant, which will be able to produce 400MW of hubs and nacelles a year from 2014.
Yet the size of the expanded factory may be problematic. A company spokesman tells Recharge that the factory will be working flat out to fulfil its current contracts until 2016, and may not be able to take on new orders for a while.
In the A-3 tender in November, Gamesa inked only 68MW from expansion projects.
Gamesa has well-established relationships in Brazil with Spanish companies such as Iberdrola and Santander, as well as European players such as Italy’s Enel and Portugal’s EDP Renováveis. The company has also won orders from state-owned Eletrosul and Chesf.
The subsidiary of Germany’s Enercon was the first manufacturer to enter the Brazilian wind market, in 1996, and it supplied most of the projects awarded under the government’s alternative energy programme, Proinfa. It also did well in the 2009 wind tender, inking about a quarter of the 480MW up for grabs.
But the years since have not been so good. It won 395MW in 2010, but only 122MW in 2011, 28MW in 2012 and 170MW in 2013.
Of the 1.288MW of orders it has received, 530MW came from Spanish developer Enerfin, which has focused on the South region.
Developers say that Wobben is at a disadvantage because its new machine, the 2.35MW E-92, has a rotor diameter of only 92 metres. Most recently awarded projects will use rotors of at least 100 metres, thus generating more energy. And to build the E-92, Wobben will have to make a major investment in its blade factory in Ceará state. It is the only turbine maker currently manufacturing blades in Brazil.
The French industrial group has been supplying energy equipment in Brazil for many decades, building relationships with major players such as construction companies Odebrecht and Desenvix, which were the first developers in the country to order Alstom wind turbines, in 2009.
But the turning point for Alstom’s Brazilian wind strategy came early this year, when it signed a 1.2GW framework agreement with Renova Energia.
The €1bn ($1.35bn) deal gave the company enough security to invest in a 600MW nacelle-assembly plant in Bahia, which is now operating at full throttle. To seal the deal, Alstom agreed to design and build a bespoke turbine to harness the unique winds at Renova’s Alto Sertão complex.
To date, Alstom has only received firm orders for 802MW on the regulated market, plus a further 541MW for Renova on the unregulated market. Adding the 470MW left over from the framework deal gives Alstom a total of 1.813GW in the country.
The Spanish manufacturer entered the Brazilian market in 2010 when it won a 120MW contract from local utility CPFL Renováveis, one of the country’s biggest wind developers. The following year, it nailed down a 210MW order with French developer Voltalia. And in the A-3 tender last month, Acciona agreed to supply 90MW for Rio Energy.
So far, those are the only three orders that the company has received in Brazil.
However, the manufacturer believes that its new 3MW machine will be highly sought-after, as it will be the biggest and tallest in Brazil, with a 125-metre-diameter rotor and 120-metre hub height.
The prospect of the Brazilian group entering the wind market has long worried other manufacturers due to its huge industrial capacity as a global supplier of electric motors, generators, transformers, drives and coatings.
However, it has only inked two small orders of 23.1MW, with local developer Servtec, and 55MW with state-owned CEEE-GT at the latest A-3 auction. The company says that from 2014, it will be able to produce 200MW of turbines a year using technology recently bought from US-based Northern Power System.
Weg has announced that it will develop its own 3.3MW turbine with financial support Tractebel Energia, a subsidiary of GDF Suez. The new machine, which will cost R$160m to develop, is due to enter serial production by 2016.
Life in Brazil has been tough for the world’s biggest turbine manufacturer. Although it has almost 1.2GW of firm orders in the country, the Danish company has not inked a contract since 2011 — aside from a 27MW private deal with carmaker Honda — and it does not currently meet BNDES’s local-content rules.
Because of this, Vestas could not compete in August’s wind tender. Yet it offered to sell turbines in November’s A-3 tender, a sign that the company may be revving up to build production capacity.
Many local developers predicted that Vestas would leave the country, but senior vice-president Morten Albæk told Recharge last month: “We are definitely staying in Brazil and we are going to comply with the Finame conditions.”
The German industrial group says its board is analysing which technology will best suit the local market, but many in the Brazilian wind industry believe Siemens will also exit the country.
The company has sealed 505MW of orders, with Enel, CPFL Renováveis and Tractebel.
Its turbine assembly plant is actually an in-house unit of Brazilian industrial group Bardella, a major industry supplier. To stay in the Brazilian market, Siemens would have to build a new facility.
Since winning 385MW of orders in the Proinfa programme and 350MW in the 2009 tender, the Indian company has won nothing in Brazil.
All its 2009 projects should have gone on line by July 2012, but according to official data published by the country’s energy watchdog, Suzlon has yet to complete 95% of this capacity, with many projects seriously delayed. Major developers no longer consider Suzlon when looking for turbines, and one industry source says the Indian firm will definitely leave the country when it completes its remaining projects.
Clipper, Sinovel and Furhländer
US-based Clipper, China’s Sinovel and Germany’s Furhländer attempted to gain traction in the Brazilian market, but did not last long.
Clipper announced it would build a local factory, but it never even opened an office in the country. Furhländer won a 290MW order from state-owned Furnas, but could deliver the machines after BNDES made the local-content rules more stringent.
Sinovel’s only success was 34.5MW for a single Chinese-backed project.