Brazil's latest auction brings mixed blessing for wind sector

BRAZIL: Brazil's latest round of energy auctions shows that wind power is set to become a serious player in the country's energy matrix, but concerns remain about whether the projects will be built at cut-throat prices.

Seventy wind projects with a total capacity of 2.05GW were contracted through an alternative energy auction and an auction for reserve energy - extra power to be sold as needed to guarantee energy security - at the end of August. The average price for wind at the two auctions to supply electricity from 2013 onwards was BRL 131/MWh ($75/MWh), down almost 12% compared to the previous wind energy auction in December.

The average price for wind at the two auctions was also lower than competing renewable energies, such as biomass, which contracted energy at BRL 144/MWh ($83/MWh), and small hydroelectric projects at BRL 142/MWh ($82/MWh). The December auctions did not include these rival energy sources, so the government introduced them in this round to see whether wind could compete in the same auction against rival renewable sources.

Steve Sawyer, secretary general of the Global Wind Energy Council, says prices for large volumes of wind energy were among the lowest worldwide from auctions, except for areas in northern China. Sawyer was impressed by the large capacity contracted at the auctions. "It will be even more impressive once these projects are in operation," he says.

Fifty wind projects agreed to sell energy in the alternative energy auction, with another 20 contracted to supply energy to the country's electricity clearing house, Comercializacao de Energia Eletrica, in the reserve auction.

Brazilian renewable energy company Renova Energia secured the greatest capacity of wind at the December and August auctions. In the latest round, it secured around a quarter of the wind energy in the reserve auction for six wind farms at an average of BRL 121/MWh ($70/MWh).

Roberto Honczar, the company's finance director, says Renova has the scale to negotiate better prices with suppliers such as GE Energy and has the capacity to gain efficiency of scale from its fixed costs for investments in roads, transmission lines and heavy equipment. "These contracts will provide adequate returns for us," he says.

Honczar adds that long-term financing provided by Brazil's national development bank, BNDES, is a key factor contributing to lower prices in the auction. The bank recently extended its loan from 14 to 16 years. Renova secured attractive annual interest rates of around 8.2% with BNDES, he says.

Ricardo Simoes, president of Brazil's wind energy association, Abeeolica, says the auctions show that the government considers wind a vital part of the energy matrix to complement hydroelectricity. Auctions for 20-year power purchase agreements give global manufacturers the confidence to establish manufacturing operations in the country, Simoes says.

As a result, companies such as India's Suzlon, France's Alstom and US giant GE Energy have recently announced plans to s et up local manufacturing operations. Vestas and Clipper are assessing separate options in order to meet BNDES requirements that 60% of investments in auction projects be made domestically.

Price concerns

However, the low prices have caused concern among developers and suppliers. Lauro Fiuza, president of Servtec in Sao Paulo, one of the main developers in Brazil's Proinfa renewable energy programme that preceded the auction, withdrew from the bidding process. "The auction is a positive step for wind, but some of the prices are very low," Fiuza says.

Although reputable wind companies calculated that they could sell energy as low as BRL 122/MWh ($71/MWh), Servtec decided that the price was too low. "They can do it at this level, but we can't," he says. "We pulled out at BRL 130/MWh ($75/MWh)," he adds. But Servtec will continue to talk to manufacturers and financial organisations to make bids to sell energy at future auctions, he says.

Everaldo Feitosa, president of developer Eolica Tecnologia is also concerned about the price. An acceptable price for wind energy is around BRL 140-150/MWh ($81-87/MWh), he says. Projects that accepted below BRL 130/MWh are often new players and do not have long-term, precise wind measurements, according to Feitosa. There is a risk that some projects will fail, he says.

Manufacturers also see risks ahead. Per Sorensen, commercial director of Suzlon Energia in Brazil, says low prices will force more than half of the companies that won bids to reassess their plans. They will need to reopen talks with everybody from turbine manufacturers and engineers through to crane suppliers and logistics companies. "The industry will need to go back to the drawing board," he warns.

Despite the euphoria among many players and the large volume of wind energy contracted, the government still has not announced details of its next steps. New reserve-energy auctions are likely in 2011, says Marcio Zimmermann, minister of mines and energy. But he refuses to give a concrete time frame or details that are needed by the wind industry.

Abeeolica's Simoes says future auctions for the wind industry are essential for the industry to develop further. About 2GW a year is needed, he says.

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