The price is more than 20% lower than last year, when the average was BRL 130.86/MWh ($81.30/MWh). This was seen as a mixed blessing for investors, power companies and equipment suppliers, who all agreed that the new contracts signalled a gain in scale and future growth.
"The auction is a clear signal of confidence in Brazil's wind-power sector and the consolidation trend will continue," said Fabio Alves, a renewables specialist at Brazilian law firm FHCunha.
In the two-day auction held last month, contracts for 114 projects with a total of 29TWh were agreed. Projects to deliver power by 2013 were auctioned on the first day - 78 in total - and the average price was BRL 99.58/MWh. The combined installed capacity of these projects was 1.9GW.
On the second day, the government bought 34 projects with a combined installed capacity of 861MW of 80GWh of reserve power that will be used by national grid operator Operador Nacional do Sistema Electrico to help guarantee system stability.
Most projects evolving from government auctions in Brazil benefit from interest rates offered by the national development bank BNDES, which are well below the local market rates. BNDES finances up to 80% of the cost of renewable-energy projects at rates of 7-8% a year for up to 16 years. By comparison, commercial rates for long-term financing are around 12% a year because they use the Brazilian Central Bank basic rate as a reference.
The fact that wind-power project owners were competing with each other and with companies offering power from natural gas caused the low prices, according to industry commentators.
"It was a battle for contracts between these two technologies and wind power won the day," said Eduardo Alfonso, also a lawyer at FHCunha. He also cited dramatically lower equipment prices and the fact that companies are now developing projects based on towers over 100 metres tall, which can significantly boost a wind farm's efficiency since there is more wind at increased heights.
Prices could fall further at coming auctions, probably scheduled for mid-2012, as new equipment suppliers start producing in Brazil, he added.
For power companies themselves, the strategy was to get a strong foothold in a growing market, even though this meant accepting lower return rates.
"It wasn't the price we wanted, but to stay in the game we had to reduce investment return rates to around 12%," said Sergio Marques, CEO of Bioenergy, a local wind-power company that won contracts of 86.4MW in installed capacity of new projects.
Marques confirmed that falling construction costs allowed its company to win the contracts, although it did not sell all the power it registered at the auction. He said that the growing experience of engineering contractors and logistics operators helped. Construction costs have fallen from some BRL 5 million a megawatt to around BRL 3 million a megawatt today, he said.
Brazilian state-owned power company Eletrosul won contracts for 492MW of new projects, all of them in joint ventures with pension and investment funds. Despite affirming that return rates were well above the minimum set by its holding company Eletrobras, Eletrosul's CEO Eurides Mescolotto said that prices could have been better.
Located in the south, Eletrosul has around 1.6GW in wind and hydroelectric projects. Fewer opportunities to build dams on rivers and tougher environmental regulations have resulted in the company's interest in local wind potential. After this auction, wind power will account for 10% of Electrosul's total capacity when operational, he said.
Mascolotto has already pre-signed contracts with Spanish firm Gamesa and Argentina's Impsa to supply the generators for its projects. But the company also hopes to strike a supply deal with the US's GE.
The lower-than-expected prices mean that suppliers will also be pushed to cut prices. "Wind power is all about equipment," said Christopher Vlavianos, CEO of Sao Paulo-based power trading company Comerc. "Equipment makers don't have a choice. Power consumption is stalled in Europe, in the US power consumption is very low and China has its own suppliers, so everybody is looking at Brazil where power consumption is growing at around 5% a year."
Indian wind developer Suzlon, which recently signed a BRL 10 million partnership to build an assembly plant in north-eastern Brazil, is now preparing to negotiate contract details with investors, project developers and banks.
"The low prices surprised the market," said Arthur Lavieri, Suzlon's Brazil country manager. "The main challenge now is to balance all factors to allow the local wind-power market to reach maturity."
Suzlon is in talks to supply equipment to several projects that sold power at the auction adding up to 300MW of installed capacity, said Lavieri, though he declined to give details. He said part will be supplied locally and part will be imported from Suzlon's international facilities.
Fabio Okamoto of asset management firm Rio Bravo, which manages the BRL 600-million Fipe I renewable-power private-equity firm, said that the downturn in the international markets had helped Rio Bravo get good prices from suppliers. Rio Bravo's Fipe I has stakes ranging from 41-51% in four projects with Eletrosul, with a capacity of 492MW.
"Our return rates are only marginally affected by the lower prices," he said. The firm was able to take advantage of the fact that suppliers were keen to get involved in an emerging market and therefore lowered their prices.
Okamoto said the equity firm guaranteed a rate of return of about 17% a year and calculated that when it sold its stake in about seven to eight years - via an IPO or a sale to a strategic investor - it could give a 25% overall rate of return.
Rio Bravo is currently preparing a second BRL 1 billion renewables fund to invest in greenfield wind-power projects. Companies are already looking at ways to make up for smaller-than-expected return rates by looking at the non-regulated market where prices are higher but contracts are significantly shorter - at three to five years. Bioenergy and Eletrosul are joining others, such as Belgian energy consultancy firm Tractebel and Brazilian electricity supplier CPFL, which are looking at the non-regulated market.
Comerc's Vlavianos said he hoped more companies would move to unregulated markets. "You need the longer regulated-market contracts to get financing but as the sector gets experience, there will be other options to diversify risk," he added.