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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

Brazil contracts 1.4GW of wind as price falls to $31/MWh

Brazil contracted 1.4GW of new wind power projects to start operations in January 2023 at an average R$98.62/MWh ($30.76/MWh) – a record low price of for the technology in the country – with foreign players Enel, Iberdrola and EDPR the biggest winners.

The intense bidding in Wednesday’s tender came as developers battled it out to win deals for a fraction of the 26GW of projects readied for auctions over the past two years.

“It was not surprising that such an amount wind was contracted and that the auction was very competitive – everybody wanted to sign new contracts,” Jean-Paul Prates, president of renewable energy think tank Cerne told Recharge.

In terms of capacity contracted, wind was the number-two technology in the tender, known as A-6, which included other renewables except solar and thermoelectric projects. A total of 3.8GW of new capacity was contracted, of which 2.1GW came from two natural gas-fired plants, 177MW from biomass and another 76.5MW from small-hydro plants.

After staying out of the A-4 tender on December 18 – in which projects for 2021 were contracted – wind power investors took the opportunity to win their first contracts since 2015,when 548MW of wind was procured.

Even so, the volume was below the 2GW yearly average contracted between 2009 and 2015 – the minimum amount that the Brazilian Wind Power Association says is needed to keep the six OEMs in the country busy.

Today’s A-6 tender allows investors six years to build the wind farms, which indicates that they believe that most of the transmission bottlenecks that kept them out of the A-4 tender will be resolved.

Still, most players played it safe: Piauí and Paraíba, which have fewer transmission grid bottlenecks, were responsible for 510MW and 281MW respectively. But investors also ventured into states where transmission line problems still need to be solved, and 381MW was contracted in Rio Grande do Norte and 108MW in Bahia.

“The government now needs to pull its weight to get this problem solved. After all, there are more than 9GW of projects in Rio Grande do Norte for example,” said Prates.

The longer time period also allows investors to negotiate lower prices with turbine makers and engineering services suppliers.

Such competition and forward looking projections knocked down the price for wind to a historic low of around $30/MWh, from over $50/MWh at auctions up to 2015.

Today’s price was 64% below the cap price of R$276/MWh set by the government.

These new prices are aligned with those seen in recent auctions in Mexico and Chile, and below the levels in neighbouring Argentina, which were around $40/MWh.

“Two years without contracts shook all the market, making the supply chain more ready to accept lower prices in order to end the fast of contracts,” said Prates.

Although competition for new contracts was the main driver for lower prices, Brazil’s learning curve in the wind sector – from government licensing to engineering services and logistics – also helped reduce costs of construction, which before this tender was estimated at $2m per MW.

The auction also signalled that power distribution companies – which bought the output – are projecting bigger demand by 2023. A total of 573TWh was contracted over the 20-year and 30-year period of the contracts.

This is almost tenfold the amount of power bought at Monday’s tender.

But following a trend that had started in 2015, Brazil’s market continues to consolidate as large international utilities took most of the contracts, leaving no space for smaller developers who were much more present in earlier tenders.

Italy’s Enel contracted a total of 618MW, Spain’s Iberdrola – through its local unit Força Eólica – 281MW, EDP Renováveis – controlled by China’s Three Gorges – 219MW, and France’s Voltalia added another 91MW to the 64MW of wind it had already contracted in Monday’s tender.

Omega Energia – the Brazilian renewable energy arm of investment fund Warburg Pinkus – and local player Eólica Tecnologia contracted 95MW and 82MW respectively.

The government didn’t comment on the tender. In 2018, it plans another three tenders which will contract power for 2022 and 2024.

Fonte: Alexandre Spatuzza | Revista Recharge Brazil

 

Solar dominates Brazil A-4 tender as record low is contracted

Solar was the big winner in Brazil’s first power tender since 2015, as low demand and transmission bottlenecks hampered trading and resulted in just 674MW (AC) being contracted.

PV accounted for 574MW (AC) – around 791MW DC – or 85% of the total capacity contracted at an average price of R$145.68 per MWh ($45.42/MWh). This was 55% below the cap price of R$329/MWh.

Wind, however, only contracted 64MW (AC) in two projects owned by France’s Voltalia in the Northeastern state of Rio Grande do Norte. Wind came in at an average price of R$108/MWh ($33.67/MWh), or 61% below the cap price of R$276/MWh, said Brazil’s Power Trading Chamber (CCEE).

The solar and wind winners will sign 20-year PPAs and the contracted projects will have to start operation by January 2021 under the process, known as an A-4 tender.

Biomass and small hydro projects accounted for the other 35.5MW contracted. In US dollar terms, wind and solar prices were below prices in the last tenders held in 2015 of R$203/MWh for wind and R$298/MWh for solar. This, at exchange rates then, was equivalent to $53/MWh and $78/MWh respectively and at today’s rates are equivalent to $63/MWh and $92/MWh.

The volume contracted was below the amount expected, and was only a fraction of the 18.5GW and 26GW of solar and wind registered for the tender respectively. By comparison, Brazil had contracted 548MW of wind and 1.1GW of solar PV in 2015.

This is the smallest amount of wind and solar contracted at tenders since the two technologies were included in competitive tenders in 2009 and 2014 respectively.

Prior to the tender government studies showed that transmission bottlenecks linking Brazil’s solar and wind states in the Northeast to the industrialised south would limit the amount of power contracted. Rio Grande do Norte, for example, which accounted for over 25% of wind projects registered had only transmission capacity for 200MW, the government had said in a study.

Analysts said this could spoil bidding in this tender despite the strong appetite from investors. Tender rules say projects not connected to the grid in time for the start of PPA could face heavy penalties.

As a result, analysts said that many investors in wind would likely wait for this year’s second tender scheduled for December 20.

This second tender – known as A-6 – will contract power for January 2023, when transmission bottlenecks would likely be solved following recent tenders for new lines and the expected conclusion of delayed projects.

Solar investors, however, will not be able to bid in the A-6, so many took the opportunity to contract their projects at today’s tender.

The amount contracted was also dependent on future demand projections from power distribution companies, which could have also resulted in the small volume contracted since Brazil’s economy is still recovering. Distribution companies have been facing financial troubles due a sharp decline in demand in recent years which left them overcontracted. The projection of future power demand, however, is not published by the government.

Out of the more than 60 power distribution companies, only seven bought power. A total of 39TWh will be delivered over the 20 and 30 year period, CCEE said. By comparison, Brazil’s 12-month power demand stands at 461TWh currently, according to government data.

Government officials weren’t readily available for comments on the tender results.

While France’s Voltalia expanded its presence in wind power in the country with two new projects, Italy’s Enel consolidated its lead in Brazilian solar power contracting 240MW of new capacity in eight projects, adding to its 716MW of solar PV already in operation and under construction.

The new projects will be built in the state of Piauí where Enel is already operating and building solar plants.

The tender also ushered the entrance of US utility AES Corp into Brazil’s solar market. AES, through its local unit AES Tietê, contracted a total of 75MW of new solar capacity in the state of São Paulo.

Other players in solar power includes two local developers and Spain’s Solatio, which sold power from two projects with a combined capacity of 57MW.

Fonte: Recharge Brazil | Alexandre Spatuzza