Wind Power

Brazil is one of the fastest growing wind energy markets in the world. Wind developments are concentrated in the Northeast Brazil, including Ceará state.

In recent years, Brazilian wind energy has been growing on a fast trajectory, with the prospect of being the second main source of energy in the year 2019 after hydroelectricity. It should be reaching an installed capacity of more than 20 GW by 2022. The evolution and the current scenario of wind energy in Brazil can bringing a discussion on the issues surrounding wind energy and the environmental, social and economic pillars of the sustainability. We highlight the Northeast region because it has more than 85% of the wind capacity in the country and, at the same time, it contains the cities with the lowest human development indexes.

CONTRACTING MECHANISMS

In 2001, the publication of the Atlas of Brazilian Wind Potential estimated the country’s wind potential to be 143 GW, based on average wind speeds equal to or greater than 7 m/s and towers of 50 m high, enough for wind-turbine technologies from that period. Without doubt, the atlas was an important milestone for wind-sector development in Brazil. In the following years, the Brazilian wind market experienced significant growth due to the implementation of the Incentive Program for Alternative Sources of Electric Energy (PROINFA) and also good results from energy auctions. Over time, wind-turbine technology developed significantly by providing models of higher power and dimensions for operation at higher altitudes.

The PROINFA was created in 2002 by the federal government to increase the participation of alternative renewable sources—small hydroelectric plants, wind-power plants and biomass thermoelectric projects—in the production of electric energy, prioritizing those companies that did not have corporate ties with generation, transmission or distribution concessionaires. PROINFA, as the first effective public policy focused on the wind sector, provided an environment with few risks for investment with a technology still little known in the country at that time. However, in spite of the 144 projects initially approved by PROINFA, only one was able to start operation before the year 2006. Thus, from 2005, Brazil began the adoption of the system of auctions for the lowest price for contracting the electricity demand foreseen by the concessionaires and a reserve amount. As of 2009, through specific auctions for renewable sources, wind energy has been marketed in a regulated environment. The contractual auctions scheme for wind generators was designed to reduce the risk of investment by the private sector. Wind energy has economic characteristics such as high initial investment, low operating cost and a seasonal and intermittent production flow, which were formulated into a contract model to consider the average production over the years and to allow readjustments and compensations according to generation history. This change in the contracting system stimulated the development and growth of wind energy in Brazil.

Due to the economic crisis experienced by Brazil in 2015, electricity consumption was 1.8% lower than in 2014 and, thereby, enough energy was provided to consumers by the wind sector in the short term, making it difficult to conduct auctions for new power-generating ventures. As a result of the drop in the electricity consumption and economic recession, there was a reduction in the contracting of wind energy in 2015, even with three auctions that year. In 2016, there was no contracting of wind energy. The auctions in Brazil are conducted by the National Electric Energy Agency, which coordinates and controls the entire process, with auctions of new and existing projects, new energy and existing energy. Existing energy auctions refer to the contracting of energy for the short term, usually for the following year, which implies that the energy comes from projects already in operation, while new energy auctions are related to the contracting of energy for the medium and long term, which implies that the energy comes from power plants in project or in construction. For these reasons, installed wind capacity in 2016 was higher than 2015, even though there were no auctions of new hires that year.

KEY PLAYERS
With turbine manufacturers and international developers facing increasing competitive pressure in their traditional markets of Europe and North America; Brazil with its stable economy, high projected growth rates and hereto attractive profitability has invited increasing attention from the global industry. There are now many major international players from the wind turbine industry present in Brazil―Alsthom, Enercon, Gamesa, GE, IMPSA, Siemens, Suzlon, and Vestas. These companies have, or are in the process of, establishing manufacturing facilities to meet local content targets in order to qualify for financing by government banks.

BUILD OUT
However projects are slow to get going. The wind farms are expected to be placed in service and supplying power to the off-takers within 3 years of the award of the PPA. We expect this scenario will likely result in a shake-out, as developers re-asses their project portfolios and many opportunities will exist to acquire projects with PPA.

THE NEXT STEPS
The industry believes that prices will continue to be highly competitive. In parallel some projects are looking for PPAs in the open market to achieve better prices. Meanwhile, new rules for wind power in Brazil’s upcoming energy tender will permit the use of uncertified turbines in an attempt to promote local technology and reduce electricity prices.

INVESTOR STRATEGIES
There are a number of potential entry routes into the market, which depend upon investor objectives:

  • Acquisition of pre-licensed projects to participate in the auction process – although these are expected to continue to be highly competitive;
  • Acquisition of projects from past auctions with PPA – attractive opportunities are anticipated as the market restructures;
  • Construction and operation of wind farms – provides a long-term return and requires establishment of operations in Brazil as an IPP;
  • Construction and sell-down stake on completion to an IPP – more suited to an EPC company. 

Options include providing turnkey construction with a full investment package. Critical success factors for WTG suppliers are bankability and local content for wind generators or being able to provide own financing. A typical 120MW project with an investment of R$ 450 million (BRL) based upon a tariff of R$ 135 /MWh has a project IRR of 12%. 

Birchwood Stanhope

In addition to investment opportunities we also design tailor-made investment solutions in the form of individual mandates or specific investment strategies and their implementation.

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