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Brazilian wind is back in the game – but the game has changed

The 1.4GW of wind contracted in Brazil rewards the country’s supply chain for playing the long game, but falling prices mean it’s by no means business as usual, writes Alexandre Spatuzza

One of the first OEMs to celebrate the result of Brazil’s latest tender was Siemens Gamesa, which says it won a “substantial market share” of the 1.4GW of new capacity contracted for 2021 and 2023.

The manufacturer also said the victory will allow it to upgrade to bigger, newer models from the current 2MW, G114 and other platforms assembled in Brazil.

Even so, the record low price of around $30/MW reached in December’s second tender – in which most of the wind was contracted – will be challenging for the OEMs active in Brazil, which up to 2015 got used to prices above $50/MWh, even as other countries in the region saw rates falling well below that.

“Brazil is back in the game, and it is now following the trend of sharp decline in prices of wind and solar power seen in other tenders in Mexico, Chile and Europe,” Rodrigo Ferreira, supply chain and institutions director for Siemens Gamesa in Brazil told Recharge.

Differently from its Latin American counterparts that hold tenders denominated in US dollars, Brazil not only has a local-currency PPAs, but also has the strictest local content rules. Those regulations have led six OEMs to open up nacelle assembly plants and invest over R$1bn ($310m) to develop a local supply chain since 2013.

Producing locally is the only way that project sponsors can tap development bank BNDES’s cheap and partially subsidised financing to buy machines, avoiding exposure to foreign exchange risks, which, in Brazil are unbearable, given the lasting political and economic instability of the past three years.

In fact, some say that such protectionism was one of reasons for Brazil’s stability in wind prices around the $50-$60/MWh level. With no competition from abroad, who would move to reduce prices if financing is guaranteed by the BNDES at almost unchanged rates and conditions, and the government is constantly buying new capacity?

But then came the crisis: with economic free-fall since 2014, political turmoil – which led to an unorthodox change in government – meant the tenders stopped and the carefully-built 2GW-a-year wind power supply chain was thrown into disarray.

Although for solar power – which contracted 574MW at the first tender also at record low prices – tapping foreign financing seems to have been an option due to the lack of a developed local supply chain, and even as wind power players dabbled with overseas funding, it seems that BNDES and the local supply chain managed to retain the buyers’ preference.

So, if interest rates have fallen little, if foreign financing seems to have been discarded, and if BNDES will still be funding most of the 51 projects that Enel, EDPR, Iberdrola, Voltalia and others contracted, what happened for prices to fall so drastically?

The main factor was hunger for new contracts. Developers had built up a projects pipeline of 26GW, an investment which cannot easily be written off because it mobilises a lot of manpower and money in a country with complex, bureaucratic and strict environmental rules.

So investors had to grab the first opportunity that showed itself, and this came under the name of economic recovery. Albeit still shy and unpredictable, we’re talking about 2023 – six years from now – when a large BRICS country with a 200 million plus population is very likely to have broken free from the straightjacket of recession.

True, this has been one of Brazil’s worst slowdowns, but no developing country can remain without growing for too long. A relatively young population and pent up demand for improvements in a global economy are always a magnet for economic growth, even without the support of a fiscally crippled government.

Also, by 2023, a new elected government will hopefully have more legitimacy and clarity in policies, applying lessons learned for democratic living and turning the page on the political depression that currently has its grips on Brazil.

So if in the first tender the seven distributors that bought power projected only 39TWh of demand over 20 years starting in 2021, in the second tender, not only more utilities signed contracts, but they also bought 10 times more power over 20 years starting in 2023.

“It’s a signal that the economy is recovering, although we cannot say it will be constant,” said Élbia Silva Gannoum, executive president the Brazilian Wind Power Association (ABEEólica) moments after the tender.

Hunger was also the driver for the supply chain.

Aside from Siemens Gamesa, Vestas, Nordex-Acciona, Wobben Windpower (Enercon), GE and local player WEG held on for two years without new contracts, none throwing in the towel and all trying to find ways to ensure some kind of activity after July 2018, when most of them will have fulfilled the 17GW of orders placed in the tenders between 2009 and 2015. So when this tender came, they were gasping for new contracts.

Even so, something else must have changed in Brazilian market.

Jean-Paul Prates, energy consultant and head of the renewable energy think tank Cerne, put it like this: “The fast of contracts shook what was an accommodated market, and engineering services suppliers as well as OEMs all knew they had to do something, so this resulted in lower prices.”

Differently from neighbouring Argentina, where competition for 10GW of contracts for 2025 in a ‘virgin’ market led to a sharp decline in prices as players jostle for position – sometimes risking returns in the short term – Brazil is a much mature market.

So investors know how to the play the game here. In fact, they have helped create the rules of the game as Brazil surged from zero wind power capacity in 2009 to 12.5GW at the close of 2017.

The winners of this year’s tenders are large international utilities who not only have interest in other sectors in Brazil, but also have easier access to capital. They also have firepower when needed to negotiate with suppliers by the sheer bulk of their buying capacity. This also forces a change in the market.

Whether such price levels will continue in the three upcoming tenders already scheduled for 2018, is still uncertain. But Siemens Gamesa’s strategy could indicate what is coming for OEMs and investors alike.

Ferreira clearly linked the success in the tender with the measures taken within the company while procurement was frozen, which he summarised as ‘gains in competitiveness’.

This ranges from offering auxiliary consulting services in the design of projects to doubling its supply chain – from around a 150 to 300 says Ferreira – to offering new technology to its clients.

But keeping its supply chain alive through an audacious exporting scheme, says Ferreira, made suppliers invest to be able to sell products in foreign markets.

“When our suppliers made a commitment to improve competitiveness for the foreign market, it made them competitive in the local market also,” says Ferreira, adding that the company will continue to export components.

Perhaps the cliché of “opportunity in times of crisis”, a favourite of management gurus in the 1990s, has been confirmed by Brazil’s wind sector. But perhaps the tender also confirms the resilience of the renewable energy sector and its capacity to play the right game when its sights are set on the long-term.

In any case, if the new Brazilian government planners had any doubts about whether the tender system put in place in 2004, with wind debuting in 2009, still works, they no longer have. And with that, solar and wind investors have shown not only they know how the play the game, but that they can win, out-competing all other technologies in price.

So Brazil is back in the game, as expected. After all 12.6GW installed, 5GW being built and the 1.4GW now contracted is but fraction of Brazil’s 200GW plus wind power achievable potential, making resilience pay off.

Fonte: Alexandre Spatuzza | Recharge Brazil

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