Bright Future for Brazil's Solar Industry
Solar power has been slow to start in Brazil but some major recent advances suggest that it is about to take off in Latin America’s largest economy. Control Risks Analyst, Thomaz Favaro investigates Brazil’s solar boom…
The last 12 months have been a positive period for the solar industry in Brazil – a sentiment few of the country’s economic sectors can share. In October of 2014, the Brazilian government hosted its first-ever auction dedicated exclusively to solar power, and 890 MW were awarded—a strikingly better result than most industry players expected. Industry players have long expected a separate tender for solar projects, as cheaper sources such as wind power have dominated previous auctions for renewables.
The auction represented the beginning of a large-scale expansion of the solar industry in the country. According to government figures, total photovoltaic capacity was a mere 35 MW at the time of the auction, with most facilities located in rural areas to meet demands not covered by the national power grid. The successful auction is likely to attract manufacturers of inputs and services critical to the industry to establish a presence in the country. This is expected to reduce supply chain costs for developers, who were awarded 20-year contracts. Furthermore, Brazil has some of the world’s largest silicon reserves, a key input for photovoltaic panels.
A second successful auction was held in late August with over 830 MW awarded. The Electricity Trade Chamber (CCEE) estimates that the winning projects represent a combined total of approximately BRL 4.3bn ($1.15bn). The energy regulator National Electric Energy Agency (ANEEL) had improved terms for investors by raising the ceiling price (the government establishes a maximum price and companies bid down for the price they will sell the energy) by 33%, compared to the 2014 bid. The move was an attempt to offset losses related to currency depreciation which has seen the BRL lose nearly 25% of its value against the dollar so far this year—and higher borrowing costs as the Central Bank’s nominal interest rate stands at 14.25%. A third auction is scheduled for 13 November for wind and solar power projects. Winning bids will secure 20-year contracts starting in November 2018. According to government figures, there are 730 proposals for solar farms.
Natural advantages
Brazil is certainly well-placed to heap the benefits of falling costs of solar power globally. Large swathes of its territory are relatively close to the equator, which means that solar radiation is both intense and frequent throughout the year, with limited seasonal variability. The average annual irradiation for Brazil varies between 1,200 and 2,400 kWh per sq metre per year, a range significantly higher than most European countries such as Germany (900 – 1,250) and France (900 and 1,650). The northeast region is considered the area of greatest potential.
"Precedent from other renewables suggests that Brazil can succeed in fostering a local supply chain…"
Local content requirements will pose a growing challenge for companies in the sector, particularly on project financing. The state-owned Brazilian Development Bank (BNDES) offers loans at below-market rates for renewable energy projects, but these are tied to local content requirements. In August of 2014, the BNDES established new rules for such loans, lowering local content requirements in the short term, but progressively raising them to 60% by 2020. Together with high import duties, these conditions will make solar projects more expensive than elsewhere, reducing profit margins. The availability of domestically manufactured photovoltaic modules is limited and the additional costs for importing and transporting foreign modules is 30% higher than international price levels, according to government estimates. The success of the auction indicates that this challenge remains manageable; precedent from other renewables suggests that Brazil can succeed in fostering a local supply chain for the sector.
Auction time
No official calendar for auctions has been set, but Control Risks believes that the government will hold them at a steady pace—most likely on an annual basis—because solar power brings multiple benefits to the country: increased energy production, greater diversity to the energy mix and much-needed foreign investment. More than three years of unusually low rainfall are straining traditional reliance on hydroelectric dams and forcing the government to look for alternatives. The Ministry of Energy and Mines expects solar power to respond for 3.5 GW of a total of 38.2 GW to be contracted between 2014 and 2018. This capacity will come from large-scale projects as well as domestic micro generation.
The government’s favourable approach to renewables is not limited to solar power and public officials expect to repeat the success achieved in fostering the wind industry. A series of technology-specific auctions have created a local supply chain, driving down costs and making wind power one of the most competitive sources in the country. The total level of wind power contracted through 2014 was 2.5 GW, the fourth largest expansion globally behind China, United States and Germany. A competitive bidding system, 20-year contracts, favourable resource endowment and the availability of subsidised loans via the BNDES were among the ingredients of wind power’s success story in Brazil—all of which are now being replicated for the solar industry.