Competitive auctions could help Brazil
Brazil has one of the world’s fastest-growing wind sectors: it wasfourth-largest for total installations last year.
Projects totalling 2GW were completed in 2016, which is higher than the five-year average of 1.9GW, and the nation is set to maintain similar levels for 2017 and 2018 according to forecasts from Abeeolica, the Brazilian wind energy association.
But Brazil has also spent the last three years in a deep recession, which this month turned into a depression. The South American nation's economic downturn has already curtailed growth in the sector, and those steady installations are set to drop.
Abeeolica has forecast that installations could fall to 1.3GW in 2019 and 555MW in 2020; and, if current growth levels are to continue post-2018, the sector will rely on Brazil’s leaders. The government is planning new set of renewable power auctions – but even the detail around these may carry a big cost to investor confidence.
Now, the government is right to take seriously the impact of the recession on wind. It has resulted in high unemployment and inflation that have affected the sector’s growth.
Brazil’s power consumption fell 2.1% in 2015 and 0.9% in 2016, weakening demand for new sources. In addition, to fight high inflation, Brazil’s central bank hiked interest rates to a decade-high of 14.25% in 2015, and they are now 12.25%.
Wind companies have hence faced sluggish electricity demand and expensive credit, making some of them unable to build projects. The 2GW in 2016 was good, but it could have been far better.
The Brazilian government is now looking to address this.
Energy minister Fernando Coelho Filho has reportedly said that a ‘reverse auction’ could start within months to provide a way out for financially-distressed companies that hold licences for wind or solar projects but cannot build them. The projects are in limbo and, unless the developer formally cancels them, the government cannot pass on the development rights to other firms. There is also a disincentive for firms to cancel: anyone that fails in their contractual responsibilities can pay fines of up to 15% of the project value.
However, the proposed ‘reverse auction’ would allow them to return licences by making exit payments, which would be lower than the potential fines. The projects would then be made available for fresh bidders that are, in theory, better equipped to build them. That would bring fresh investment to the sector; and clear the way for new licencing rounds later, because the government is not so worried about a huge number of projects that could still be built.
The idea has potential, but we see two main risks.
The first one is related to the country’s sluggish energy demand. Brazil cancelled an auction for new wind and solar generation in December due to lack of demand. This reverse auction would make more projects available, but that is irrelevant if there is little need for new capacity or demand from developers.
Secondly, these auctions could create a vicious cycle in an already-troubled industry. They could be seen as an amnesty for firms that haven’t performed. This could encourage further bids from those unable to build projects, because they feel they will go unpunished even if they breach their contracts. This will further undermine the confidence of firms seeking to invest under such a regime.
It is not clear yet if the companies that have failed to complete projects would be able to participate to future tenders. If government permits this, it looks like a bad move. If a firm has failed to make a project work with subsidies fixed by central government, why should we trust that it will be able to do so with lower market-based tariffs?
It is important that the government uses these auctions to identify competitive bids, but it also needs to ensure that it awards these contracts to credible bidders.
There will be credible bidders. State development bank BNDES has said it is seeing more investors seeking to lend money for infrastructure projects; and developers such as US company AES, China Three Gorges and Engie have all stated an interest in Brazil. Reverse auctions could open opportunities for major players.
But, with depression and sluggish energy demand, they will have to be brave too.