An injection of growth into Brazil’s wind market15 June 2012
Wind power is set to become Brazil’s fastest-growing energy source over the next decade, driven by significant investment from national development bank BNDES. In addition to offering competitive loans and interest rates, BNDES’s stipulation that developers buy domestic equipment has transformed the industry in Brazil. Bob Moser reports.
More than R$30bn (US$15.9bn) has been invested in wind energy projects in Brazil since 2009, with nearly 6,000MW in planned installation contracted through public auctions during that time. Wind supplies about 1% of Brazil's electricity at present, but should provide 7% or more by 2020, according to ABEEólica, the Brazilian Wind Energy Association.
Brazil will soon be among the world's top wind-power-producing nations. In terms of the pace of megawatts installed per annum, it could jump from the 11th fastest-growing wind market to fourth or fifth-fastest by 2013, when 2.3GW of wind power should go live on Brazil's grid, according to EPE, the planning agency for Brazil's Ministry of Mines and Energy.
Brazil currently has eight turbine manufacturers that collectively provide 3.9GW of annual production capacity; in 2013, this number will rise to nine, supplying 4.4GW of capacity. More manufacturers are showing serious interest in Brazil, and plant construction plans are already confirmed, or underway, for GE, Fürhlander, Suzlon, Alstom, Vestas, Gamesa, Weg, Impsa and Wobben.
BNDES: financing the future
Turbines can make up as much as 75% of a wind farm's initial cost, and Chinese turbines cost roughly US$1.15m per megawatt in Brazil; 14% less than the competition. A total of 44 wind farms sold contracts at Brazil's long-term energy auctions in August 2011, and at R$99.58 per megawatt hour (MWh), it was Brazil's cheapest rate ever for wind power.
Some of those projects still haven't lined up turbine suppliers, leaving foreign manufacturers room to capture this nascent market. But to truly compete in Brazil, they'll need to produce there, because the nation's most influential lender is steering developers towards domestic suppliers.
Brazil's National Development Bank, BNDES, offers interest rates that are often half the best rate a Brazilian private bank can offer; in turn, it has been the primary lender to close to 100% of the nation's wind farm projects and related suppliers since 2009.
"When a wind farm developer is trying to put in the lowest bid at a public energy auction, he's going to have to work through BNDES eventually to make this happen, no doubt," says Camila Galvão, attorney and specialist in energy market investment at São Paulo law firm Machado, Meyer, Sendacz & Opice.
Public financing of new wind projects is directly tied to the success developers are having in Brazil's auctions, says Antonio Tovar, head of renewable energy at BNDES. The bank can offer a loan that covers up to 80% of an energy project's cost, and wind power developers generally request 65% or more.
"But the loans are worth making because wind farms have dominated interest at [recent] auctions," Tovar says. "There's great demand and need for the energy source here, to complement hydropower."
BNDES approved R$3.4bn (US$1.8bn) in loans for the sector in 2011, accounting for a third of all energy projects it financed last year, and nearly three times the R$1.2bn it approved for wind in 2010. This year, Tovar believes BNDES will top R$4bn (US$2.1bn) in loans for new wind farm projects.
One other public development bank in Brazil, Banco do Nordeste, had been financing wind farms, but stopped in September 2011. Foreign banks could be an option for Brazilian developers, but the currency fluctuation is typically too risky for both parties. Loans may be made in dollars, but developers will earn and have to repay in Brazilian reals.
With the rollercoaster history of Brazil's currency and the nation's high taxes on foreign wire transfers, that funding option remains out of reach.
"It's certainly a monopoly, but a natural one," says Elbia Melo, president of ABEEólica. "BNDES dominates because private banks can't, or won't, compete [on low interest rates]."
BNDES: encouraging domestic investment
Certain parties have questioned if interest in Brazil's wind sector has hit a wall, after an energy auction in March 2012, which included more than 13GW in proposed wind power, was postponed to June at the last minute due to lack of distributor interest. Another long-term energy auction set for August, where 429 wind farm projects totalling 10,935MW are registered to participate, could also be delayed or even cancelled.
The dip in energy contract demand is natural this year, even expected, says Melo, based on the slowdown of Brazil's economy in 2011 compared with 7.5% GDP growth in 2010 - its highest growth rate in a quarter century.
Distributors who bought in on a record number of wind contracts in 2011 may have good reason to pass on auctions this year, she adds, but Brazil's economic growth forecasts for the rest of this decade point to 6GW of new power being needed each year.
With BNDES holding the only purse strings worth pursuing, wind power developers must march to its beat. The most influential loan requirement set by BNDES has been that at least 60% of equipment and services used to build a wind farm be domestically sourced.
"Depending on the turbine manufacturer, if you build a factory [in Brazil] you solve your main problem," says Rodrigo Viana, alternative energy analyst with Andrade & Canellas, Brazil's largest independent consultancy for the energy industry.
The fact that Brazil has some of the world's highest import tariffs on manufactured goods would normally be the main driver for foreign turbine makers to set up shop here. But with BNDES's rules steering wind developers towards domestic supplies, imported turbines would struggle to compete in Brazil in the future, regardless of price.
BNDES's Tovar understands the concerns that imported turbines could allow wind farms to sell Brazilians cheaper energy, but says the national bank's goal involves long-term prosperity for domestic industry.
"We now have more than 12 turbine producers established in Brazil or building [factories] here, and these industrial parks will foster competition and push prices lower domestically," Tovar said. "We can't support the import of foreign materials when there is a [local] industry, and BNDES's money is justifiably not just to generate profit, but to help develop the country."
Hurdles to Brazil's growth
Brazil really began investing in wind energy in 2009, when the federal programme Proinfa was created to kick-start renewable power sources. The country's first wind power auction was held that year, with 71 projects contracted totalling 1,806MW, to be delivered starting in July 2012.
But the wind sector's rapid growth is already hitting increasingly burdensome speed bumps that are common for Brazilian industry, such as poor infrastructure, transport logistics and a lack of qualified labour.
Brazil's infamously slow bureaucracy also poses a challenge to wind farm development, says Melo, specifically the licensing process developers have to go through in which each state has different rules. In addition, agencies in north-eastern states are not well organised digitally.
"Brazil has a serious transportation problem that it hasn't addressed in decades," she says. "The country perhaps isn't prepared for [wind power] to grow at the rate we need." ?