Future unclear for Brazil renewable energy tenders

The decision by interim Mines and Energy Minister Fernando Bezerra Filho to postpone, with no set date, the 29 July PV tender has raised concerns about continuation of Brazil's renewable energy policy.

“It's completely understandable that while staff in the ministry and in the energy planning authority, EPE, are being restructured, some decisions taken by the previous administration undergo some adaptations,” says Rodrigo Sauaia, CEO of the Brazilian Solar Power Association (Absolar).

“[But if they cancel the tender] it would cause great harm to country's credibility and affects players that have invested a lot in the registration of 9GW of projects,” he adds.

Key to changes in the ministry is Luiz Barroso assuming office as president of EPE, scheduled for later this week. He is a partner is the well-known energy consultancy PSR.

Responsible for the long term strategic planning, EPE also helps ministry officials determine cap prices and tender rules, whose draft version should have been published by now for the 29 July auction.

Sauaia estimates that 9GW of projects will translate to R$40bn ($12bn) investment. Among others, developers include local and global players such as CPFL Renovaveis, Enel Green Power, Solairedirect and Solatio.

Ricardo André Guedes, the Brazil head of Portuguese consultancy Megajoule, sees the postponement as a very negative signal.

“This shows lack of coordination and preparation,” he says. “The developers have done their part so the government needs to also do its part”.

Early this year, the government announced two reserve tenders – 29 July for solar and small hydro and the other 29 October for solar, wind and other renewables. The government has taken no decision about the second tender.

Filho took office in mid-April after the suspension by Congress of President Dilma Rousseff, who now faces impeachment hearings that could drag through September.

Since then, an internal debate has arisen in the government about the need to revise power sector regulations – including tenders – given dwindling demand for electricity and resulting liquidity problems of distributors.

These factors contributed strongly to lack of contracts for wind at the A-5 tender earlier this year. Now the discussion is whether the reserve tenders should continue.

Different from the A-3 and A-5 tenders through which distributors contract power for future demand, the government contracts power at reserve tenders independent of demand. This controversial practice can burden consumers who must pay for stand-by capacity through a surcharge on electric bills.

Lack of definition has raised speculation about how the interim government plans to continue expanding renewables.

“Does this mean they are trying push one of the tenders for next year? It seems that a lot of clarity needs to be gained, it's not a very good precedent for companies [if the rules are changed],” says Manan Parikh, Latin American analyst at GTMResearch.

Politics, economy

The political and economic situation in Brazil is so complex that this is the first time since the solar tenders started in 2014 that Parikh has not been able to estimate what would be a reasonable cap price.

Reserve tenders have been an important part of Brazil's renewable energy policy because they allow the government to diversify its hydro-thermal power mix by contracting more expensive renewables, while at the regular tenders, distributors can contract cheaper conventional power.

The wind sector, for example, which now has 9.8GW of installed capacity, or about 7% of Brazil's generation base, started growing in earnest after the first reserve auction in 2009, which allowed wind to be later introduced in regular tenders as prices fell.

The 3GW of solar due online by mid-2017 was also contracted at reserve tenders.

“The wind sector broke barriers and changed perceptions about renewables in Brazil, but it was in another moment,” says Sauaia. “Regular reserve tenders have an important role to guarantee supply security for when the country starts growing again and to give a positive signal to development of the supply chain, which is important for job creation”.

Although Sauaia agrees that reserve tenders could be reviewed, such a step needs to be included in a more complex revision of regulations to solve other problems including acceleration of national grid expansion, long term planning and diversification of the energy mix.

“The worst thing that could happen is a roller-coaster in terms of contracts,” he says, pointing out that the government can no longer rely on hydro, which generate 70% of its power supply. Hydro reserves can rapidly deplete because of multiple water usages, while climate change reduces predictability of rains.

To make things worse, competition for renewable energy investment is intensifying with Argentina, Chile and Mexico, among others, pushing ahead with clean energy programs.

“Chile is holding a tender this year to contract renewables for 2021, so they thought it out what demand they expect for renewables,” says Parikh. “Developers have to decide whether it's an opportunity gain to invest in a specific market”.

He notes that US PV panel maker First Solar decided to stay out of Brazil because it considers other regional markets safer for investment.

As opposed to regional competitors, Brazil has a much more complex and dynamic market. Planning through 2025 suggests that more than 22GW of wind and 7GW of PV will come online. This influences what technology to contract at tenders year by year.

Looking ahead

The prospect of a declining number of yearly auctions and uncertainty in the market already signals a cliff in new renewable capacity past 2018, which is when the remaining 8GW of wind contracted should be operational.

“We have to remember that Argentina will hold a tender in August … but with this kind of signal, it's difficult [to attract investment]. Brazil should also consider the moment in Europe – with Brexit – which is an opportunity to attract money that could leave Britain,” says Megajoule’s Guedes.

Despite Brazil's potential in solar – with average irradiation topping 2,000kWh/square meter per year – and wind (more than 300GW), the decision to cancel auctions could cool down investor interest.

The number of PV projects Megajoule helped prepare for the October tender has been higher than seen previously in Brazil and more than any other developing country, according to Guedes.

“There is an international perception that Brazil offers an investment opportunity because they have seen solar developing in other parts of the world and the growth of wind in Brazil,” contends Absolar's Sauaia.

But the opportunity will only become a reality if long-term clarity of rules are granted.