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Star performance marred by grid delays

BRAZIL: This year is turning out to be one of change for Brazil's wind power sector after a three-year boom. Growth pains are being felt as the first projects commissioned through its auction process start commercial operations.

Huge delays in connecting projects to the grid are revealing a need to rethink the planning process in the country's transmission sector, and a recent decision by national development bank BNDES to cut off five foreign suppliers from cheap financing for failure to meet local content requirements is adding to the pain (see overleaf).

Several new wind projects in north-eastern Brazil totalling 600MW capacity should be finished by August. But they will not be able to deliver the power contracted at the 2009 auction until 2013 because federal power firm Chesf has already said that it cannot finish transmission connection in time, mainly due to environmental-licensing red tape. Chesf will likely be fined for the delay, and the wind-farm owners will still be paid by the government from July, as written into their contracts. Additionally, auctions that had been scheduled for the first half of this year have been postponed until October.

"The wind-power producers cannot be penalised," says Jean-Paul Prates, president of CERNE, a renewable-energy think tank based in the north-eastern state of Rio Grande do Norte. "But this is a specific problem that reveals the necessity for planning of the transmission sector to be reviewed to include smaller and distributed renewable-power sources such as wind and solar."

The 500-kilometre transmission line in the north of Brazil and the system of collective connection points, known as ICGs, for the wind projects was awarded to Chesf at auction in September 2010, but since then the utility has been battling with licensing procedures that have grown in complexity, and tighter environmental laws. "Between 1999 and 2009, the average time for transmission companies to obtain all the environmental licences has risen from four months to 17 months," says Cesar Pinto, executive director at Abrate, the Brazilian association of transmission power companies.

The ICGs were created in 2008 by power regulator Aneel as a way to reduce the cost of connecting wind projects close to each other to the grid. The equipment collects the power in one place, from where it is transmitted to Brazil's 105,000-kilometre transmission grid - which does not necessarily reach locations where the best winds occur. Chesf's project was to be the first ICG to be built. According to Aneel, nine ICGs have been approved and all of them are being delayed.

"The problems that Chesf faces does not mean that ICGs are not a good solution," says Prates. "But they do not remove the need to revise planning of the transmission grid. Since it has always been developed to include large hydroelectric projects, the government now has the chance to adjust and close this time gap by predicting where the new wind or solar power generation units will be located."

According to the government, Brazil's national grid is expected to grow by 6.9% a year through the end of 2014 to around 129,000 kilometres and should include all 5GW in new wind-power projects that are due to come online in the coming years. The Brazilian association of wind power companies, Abeeolica, is one of the leading players in the effort to include the wind projects in the planning to avoid further delays.

"The problems encountered include delays in the signing of concession contracts, environmental licensing by some states - which in general do not keep pace with the projects - as well as the fact that licensing wind projects is new to most environmental bodies in the country," Aneel officials say.

In a recent report, the regulator estimates as much as 70% of wind-power projects currently face some kind of restriction. Licensing issues, delays in equipment supply, financing and grid connection have stalled build for most of the projects, says the report.

"These are all barriers that can be overcome in time," insists elbia Melo, Abeeolica's executive president. "By our count, only 5% of wind-power projects are truly delayed, and this is below the 10% average for other power-generation technologies.

"But what has become clear," she says, "is that the government needs to carry out a more detailed inventory of wind-power projects and plan the transmission system for a longer period, as it clearly takes longer than two years to build a transmission line."

Abrate's Pinto agrees but, while most of the projects are in the north-east and south of the country, the sheer number of diverse projects does not allow for a detailed outline of new power line projects. For example, some 500 wind power projects have been preliminarily registered, in eight different states, in preparation for this year's auction, now scheduled for October. "Until the contracts are signed it's hard to say which lines are needed," says Pinto. "With the new renewables being inserted into Brazil's power matrix, the government needs to decide now what it will look like in 20, 30 years' time.

"It's not hard to do this, but it requires political will. It's important because Brazil may have very competitive wind power prices (at around BRL 100/MWh ($50/MWh)), but it could actually be more expensive if you have to build lines to connect them," he adds.

Another issue, says Pinto, is how to deal with the intermittent production of wind power in a system used to predictable hydroelectric power generation. Recent data from national grid operator ONS shows that Brazil's wind-power production has been less efficient than expected, with some projects achieving 24% below the expected average capacity generation. This must be accounted for by transmission firms, as the revenue is based on the power carried on the lines. Abrate advises more detailed planning plus revision of regulations and rules to speed up licensing. "Since 1999, we calculated that increasing delays because of licensing has caused losses of BRL 1.3 billion ($645 million)," he says.

Still, by December, Brazil should see 2GW installed wind-power capacity, a 42% increase from the end of 2011, even if only a fraction of the 1GW of new projects commissioned are expected to be connected to the grid. According to Melo, despite delays and postponements, agents' appetites are still strong. She points out that there are seven manufacturers producing in Brazil and by the end of 2013, this number will rise to 13. "There will be years when demand will be low", she says. "But investors are still interested, we have to take into account that 2012 is a very important year when the first wind projects auctioned in 2009 will start operations."

Brazil's biggest and oldest supplier, Wobben Wind Power, part of Germany's Enercon, is currently producing 500MW a year of turbines in its three locations and sees no reason to reduce its operations. "The auction delays were expected and have happened every year since 2009," says Eduardo Lopes, Wobben's commercial director. "What's important is that they will happen every year, but this year wind-power companies will have to analyse other options such as the non-regulated market."

HICCUP IN FINANCE STRUCTURE - SUPPLIERS PUSH FOR CONTINUED INVESTMENT AID

Foreign wind turbine suppliers say they remain committed to investing in Brazil despite the BNDES national development bank's decision to cut access to the Finame cheap financing programme, announced in July.

Vestas and Suzlon, two of the biggest firms affected, with contracts to supply more than 500MW of wind projects under construction, are working with BNDES to have access reinstated.

Finame is granted to foreign companies with plans to build local factories to supply the local market. In exchange, they commit to gradually raising local content to 60% in five years. Finame was offered to 12 wind turbine makers in the past few years as they signed deals to supply the country's growing wind industry.

By 2015, more than 5GW of new wind projects will come online. Germany's Fuhrlander and Siemens, Spanish firm Acciona and Clipper of the US were also delisted after a routine audit by the bank that registered interim local content rates below the target of around 40% for two years into the programme.

US giant GE, Argentina's Impsa, Germany's Wobben Wind Power, France's Alstom, Spain's Gamesa and Brazil's Weg passed the audit.

Abeeolica, the Brazilian wind power association, met BNDES, arguing that the bank needs to consider the importance of financing for the industries as it is needed to ensure the low energy prices of BRL 100/MWh ($50/MWh). "We expect the bank to understand this," says Abeeolica's executive president elbia Melo. "Capital costs are expensive in Brazil and financing from abroad carries foreign exchange risks. BNDES is the only source of financing here."

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