"We need at least 2GW in new contracts every year so we can guarantee prices and do not have to resort to exporting our equipment again," says Pedro Vial, CEO of Wobben Windpower, part of Germany’s Enercon.
Wobben has the main share of Brazil’s wind equipment market. Other serious contenders import equipment, but are planning local facilities to supply a market with an installed capacity that is projected to grow by 30% a year.
"We welcome all competitors because, from our point of view, it is better to have a 20-25% share of a big market than 80% of a smaller market," says Vial.
Incentives to buy locally
With wind power prices coming down fast at government-led auctions (20% in 2009 and 2010), equipment suppliers badly need scale to guarantee competitiveness, especially as local finance from the National Development Bank (BNDES) requires 60% of equipment to be locally supplied. After 16 years in the country, Wobben has achieved that, says Vial, using 1,700 local companies for its three factories in the states of São Paulo, Pernambuco and Rio Grande do Norte, compared with around 100 foreign suppliers.
"It wasn’t easy to build up this supply chain. And to guarantee good prices, we need constant contracts with suppliers. We calculate that we need to sell equipment for the construction of about 300MW a year," says Vial.
Germany’s Siemens and Fuhrländer, Denmark’s Vestas, the US’s GE, India’s Suzlon, Spain’s Gamesa and France’s Alstom have either announced firm plans or are seeking tax advantages from state governments and BNDES financing to build plants in the country. Alstom is investing BRL 50 million ($31 million) in a generator factory with a 300MW annual capacity, Gamesa opened its turbine factory in July, while Argentina’s Impsa is also expanding its turbine equipment plant.
According to Abeeólica, Brazil’s wind power association, other major wind players are interested, while Brazil’s electric motor company Weg signed a technology transfer agreement in March with Spain’s MTorres Group to manufacture wind turbines.
Driving this interest is fast-growing power demand, currently over 4.5% a year, and a government directive to use its wind potential of 140GW to maintain power from renewable sources at around 80% of supply, with hydropower accounting for about 70%. After a slow start in the early 2000s, when renewables legislation was put in place, adjustments to market processes and government incentives have helped increase installed capacity. It grew by 717% from 29MW in 2005 to 237MW in 2006, and by over 50% a year since then.
Doubling capacity forecast
Projections have now been revised from 6GW installed capacity by 2019 to 11GW by 2020.
"There was a significant gain in knowledge and reductions in the cost of financing," says Fábio Alves of legal consulting firm FH Cunha Advogados Associados. Loans are available from BNDES for as little as 6% interest over 16 years, a rate that substantially reduces the cost of wind energy being generated.
The bank also offers finance for acquisition of equipment directly to project developers but only gives credit for imports if there is no equivalent made in Brazil, says Antonio Carlos Tovar, head of alternative energy at BNDES. "These policies have helped develop local markets," he says, adding that nine equipment makers are formally seeking finance for factories.
The bank already provides around BRL 3 billion ($1.8 billion) for 28 wind projects, and held talks with project proponents for this year’s power auction, for which 10GW of wind power has been registered.
One such company is federal power firm Chesf, which operates in north-eastern Brazil, where 50% of wind potential is located. It has prioritised wind power and local suppliers when offering power contracts at the auction, says director of engineering and construction, José Ailton de Lima. "Suppliers not producing wind equipment in Brazil lose a big opportunity because this policy helps obtain finance and reduce costs," he says.
In the competitive auctions, the 20-year power supply contracts are won on price alone. Power prices are down to around BRL 130/MWh ($82) and were expected to fall again in the auction, according to players like Chesf and large local power utility CPFL Renováveis.
The price drop is exacerbated by the government offering wind power alongside other sources. "One of the biggest threats is that wind power competes with other sources on price. Natural gas is, and will be, very competitive in Brazil," says Mônica de Souza, head of alternative energy at consultants Andrade & Canellas, referring to the start of gas production in south-eastern Brazil and natural gas discoveries in the north east.
A further price drop will squeeze returns for foreign equipment makers, many of whom started planning plants in Brazil after the slowdown in the international market, says de Souza. Several foreign equipment makers, having recently secured large contracts and announced studies to produce equipment in Brazil, are now unwilling to disclose details.
Politically, this competition keeps power prices down while allowing the government to boast green credentials to the international audience. "This is the success of our power-sector model based on competitive auctions," says de Lima of government-controlled Chesf.
For end consumers, prices are knocked down further by separating bids for new generation projects from those for power lines, despite the risk of transmission delays (see Gearing Up, below). Power regulator Aneel, which shares the political pressure to keep prices down, welcomed the results of June’s transmission auction, which will link several wind projects to the country’s 95,000 kilometre grid. Aneel not only controls power prices but awards contracts in the government’s name. At the auction, Chesf won the contracts for the three lines after pledging to charge transmission rates 20-50% below the maximum starting price at the auction.
"We are pleasantly surprised by wind power," says André Pepitone, an Aneel board director. "We now want to improve regulations to ensure that the cost of subsidies offered are divided between all Brazilian consumers and not only by those in the areas where the wind projects are located."
Need for regulatory update
These subsidies are an important part of government stimulus to the sector. They give a 50% discount on renewables transmission and distribution rates, yielding the cheapest possible power for consumers, says Pepitone.
Despite the government’s plans to continue to auction wind power alongside sources such as hydroelectric power, which is often sold below BRL 100/MWh ($63), industry players want new regulations to take into account renewables not previously considered. Wobben’s Vial worries about wind prices falling below BRL 130/MWh, because it is close to the limit of viability.
"Our regulatory model is 14 years old. It needs to be revamped," says Abeeólica’s president Pedro Perrelli. Abeeólica is lobbying to keep incentives for the next ten years and for separate auctions for wind power, to allow the sector to consolidate.