Carnival time for Brazil?

Brazil's wind power sector lined up more long-term energy contracts through public auctions in 2013 than ever before, while the average price per megawatt hour (ppMWh) contracted in recent auctions has crept up from the fire sale prices that drew market ire in 2012 to more comfortable levels.

Delays with transmission infrastructure remain a costly problem for Brazil's government, but lawmakers have appeared willing this year to tweak renewable energy policy as they learn what wind power needs to succeed. It's a positive sign for one of the world's most promising wind energy markets, which, along a coastline of nearly 7,500km, still has plenty of potential to flourish.

Last year, Brazilian wind park developers won long-term contracts worth 4.7GW of future power that will require R$21.2 billion (US$9.5 billion) in investment over the next five years to bring to fruition. At least five public energy auctions scheduled for 2014 should include new wind power projects, beginning with June's first 'A-3 auction', so-called because winners have three years to bring the projects online.

Brazil's wind sector had 3.6GW of installed capacity across 148 active wind park segments as of early May, accounting for more than 3% of the country's energy matrix. That installed capacity is expected to reach 7,310MW by the end of this year, surpass 11,100MW by 2016 and top 13,480MW by 2018, according to ABEEólica, the Brazilian association for wind energy.

Matrix mix 'n' match

Thirteen years after a controversial energy-rationing period in 2001, Brazil has once again been forced to take a hard look at its growing dependence on rainfall for hydroelectric dams, which account for more than 70% of the nation's power generation today. The country's surprisingly dry 2013-14 summer drove water reserves to record lows, bringing the topic of energy rationing back into the headlines.

The federal government's ten-year energy plan calls for R$122 billion (US$54.6 billion) to be invested in new power plants, with 38% set aside for renewable sources, including biomass and wind generation. Wind power's share of the Brazilian energy matrix is expected to reach 9.5% by 2022, and could even exceed that based on how much wind has gained in price-competitiveness in recent years, according to the government's Company for Energy Research (EPE).

"Brazil's overall economic performance will ultimately dictate where wind power goes, as new power demand comes from that economic growth," says Brian Gaylord, senior analyst specialising in Latin American wind power at MAKE Consulting.

"The country is building a number of large hydroelectric dams now, and, if they come online on schedule, it's the only technology that can consistently beat wind on price."

However, recent droughts are making Brazilians more conscious of the need to diversify the power mix, especially with wind in the north-east being very complementary to hydro.

Based on 27 public energy auctions held between 2005 and 2013 in Brazil, the average megawatt price of a new hydro plant is roughly R$81 (US$36), followed by wind at R$104 (US$47), small-scale hydro at R$137 (US$62), and thermal and diesel-based plants at R$550 (US$248). Wind power's price per megawatt hour in recent years has been contracted as low as R$L90 (US$41), although in the A-3 auction held in November 2013, that average settled at R$124 (US$56). It's a comfortable range that analysts say new wind contracts should maintain or increase to keep pace with rising costs.

"There are still a number of great sites within Brazil to build or expand wind farms, so there's a lot of life for that sector yet," Gaylord adds. "Price per megawatt hour will need to rise a bit, though, because the costs of turbines are going up due to the domestic supply mandate for lending from Brazil's National Development Bank (BNDES)."

Complications

Regardless of wind power's megawatt hour price in upcoming auctions, the deadlines developers face to deliver active wind parks are becoming points of contention, due to delays with local suppliers and transmission lines.

Brazil's domestic supply chain is under pressure because of the high demand and the slow installation of new manufacturers in the north-east region, where most new wind park development is concentrating. At least 16 international manufacturers of turbines, blades and towers announced plans to build new facilities in the north-east last year - the same number of industry supply plants operating in the rest of Brazil combined.

"Much of the cost of wind power [in Brazil] is connected to the equipment, facilities and their transportation to the project for installation," according to Ana Karina Esteves de Souza, a São Paulo-based attorney with law firm Machado, Meyer, Sendacz e Opice.

"With the growing number of players in this market and improvements in transportation, it's possible the price of wind energy in the regulated market will stabilise in the coming years."

Unfinished transmission lines needed to connect new wind parks to the country's national power network are also, in many cases, far behind schedule. More than 500MW of operable wind energy in Brazil that was contracted at auctions between 2009 and 2011 currently isn't being delivered, because parks lack a connection to the grid, with transmission line construction delayed for years by environmental licensing, among other bureaucratic factors.

One example includes 26 wind park segments in the northern states of Ceará, Bahia and Rio Grande do Norte, which have been ready to generate energy for more than a year but remain offline due to delays caused by transmission companies.

Those parks could supply energy to around 3.3 million people a month, but owners and operators of the projects have instead received more than R$360 million (US$161.2 million) from the government as compensation for their inactivity while transmission lines remain under construction.

"Add this to the well-known market challenges in Brazil such as environmental risks, logistics and questions of rural land ownership by foreigners - all of which can certainly increase the costs of a wind project and undermine its competitiveness," says Esteves de Souza.

The situation began to improve in August of last year, when a long-term auction finally stipulated that wind projects have to be located near existing transmission infrastructure. This will help avoid major transmission line investments and delays, and reduce the number of competing bids at energy auctions, allowing the average price per megawatt hour to rise.

"I think Brazil has learned its lesson from these transmission line mistakes, and, moving forward, it will have to have bid-ready projects with transmission already figured out," says Gaylord. "Most of the 4.7GW in new projects from auctions in 2013 had to have their transmission connections settled, so those shouldn't be an issue when they are completed."

A learning process

The Brazilian Government is evolving in its understanding of the dynamics of wind power generation, and that's resulting in some helpful changes to regulations.

In January, the National Agency for Electrical Energy (ANEEL) decided to suspend rules requiring wind parks to guarantee maximum energy supply during peak evening hours. Brazil's electrical sector requires any power supplier to have a reserve in their system of 1.5 times the energy they are contracted to supply to the network. If a generation company can't guarantee this backup supply, it's obligated to buy excess energy from the grid, or face fines.

When the first wind parks began operating last year, ANEEL began to realise that it couldn't demand the wind to blow harder at peak hours of the day, although by the end of 2013, at least four operating wind projects had been warned they could be fined for not having the conditions necessary to guarantee emergency power supply.

Speaking of the rule suspension, Élbia Melo, president of ABEEólica, says: "This was an important decision. We aren't asking for a pass from the rules, but they have to respect the nature of the power source - the behaviour of the wind sector is different from any other.

"We're still building a regulation process for energy in Brazil. Because of that, engineers end up applying rules from other sectors onto wind energy."

Rules of the game

For Brazil to truly correct the course of its energy matrix development in the long term, many industry sources say the federal government should create auctions restricted by region and power source, which would weaken the dominant position wind power has assumed in the public energy auctions of recent years.

The nation's current methodology for most long-term auctions favours the cost of investment and the volume of energy to be generated but doesn't consider the transmission costs for a project. That has allowed wind parks in the extreme south and north-east of Brazil to win auctions with low price per megawatt hour, despite the fact they're being contracted primarily to supply distant urban centres through the national grid.

Hence, small-scale hydro and biomass energy projects have struggled in the price-focused auctions, even though they're closer to demand centres in Brazil's mid-south, where transmission infrastructure already exists.

The government altered financing rules in 2013 to increase competitiveness of small-scale hydro and biomass projects. While that helped, both sources will still face stiff competition in upcoming auctions from wind parks that can compete at lower prices per megawatt hour.