Low cost wind projects from recent auction 'may not be built'

BRAZIL: A significant proportion of the wind projects awarded in Brazil's latest tender are likely to experience severe delay or even cancellation, analysts have predicted.

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The auction in August saw the average contracted price for energy drop to $62/MWh. Delving into the figures more closely, a report by analysts at Bloomberg New Energy Finance (NEF) has concluded that 40% of the total wind capacity tendered, representing 32 out of 78 projects, would yield equity returns below 10% for developers. This raises the possibility that many low-yield projects will not be built, said the analysts.

At least 25-40% of total tendered capacity in 2010-11 is likely to experience severe delay, the analysis concluded. Some cancellations are also anticipated, prompting NEF to revise its Brazil market forecast downward.

The revised forecast predicted installed capacity of 5.4GW by 2014, in contrast to the Brazilian government’s projection of 6.71GW by the same date. The latter was set out in Brazil’s ten-year plan, published before
the auctions.

The winning bidders in August’s auction have assumed unusually high capacity factors, with 28 assuming they will reach a capacity factor of 50-61%. There is no single wind project operating at those levels, the analysts noted. Such high expectations are due to bidders considering deploying turbines designed for low wind speeds in high wind-speed zones.

However, such projects might not be bankable, as they might not be able to service debt covenants if energy output is lower than expected, warned the analysts. Opting for turbines designed for low wind speeds in high-speed zones could also pose serious operational risks.

Half of the 1.93GW of wind projects auctioned in August have secured contracts. However, turbine contracts typically have "break clauses" that allow manufacturers to opt out if developers bid below certain levels in the auction. The analysts suggested a break point of $70/MWh, which suggests that several of the contracts for projects in August’s auction might need to be renegotiated.

Looking to China

Chinese turbines may have to be used to make such low-priced wind projects viable. In Brazil’s previous tender, turbine prices averaged $1.4 million per megawatt. These will have to decrease by at least a further 10%. Chinese turbines could in theory reach the Brazilian market for $1.12 million per megawatt, but developers and banks would be willing to back projects that require more than 50% capacity factors using Chinese equipment, said the analysts.

Chinese manufacturers are already eyeing Brazil as an important new market. Sinovel had a stand at the Brazil Windpower conference in Rio de Janeiro in August. In September, the company signed a deal to supply 23 1.5MW turbines to a wind farm in the north-east Brazilian state of Sergipe. It is now planning to build a factory in the region.

Low auction prices were the focus of much debate at the conference. Morten Albaek, a senior vice-president with Vestas, said it was thrilling that wind had become cheaper than gas. However, he admitted it would be difficult to maintain profitability at such prices. "We need a new model," he said. "We can’t make any mistakes in the value chain."

Steve Sawyer, secretary general at the Global Wind Energy Council, called the low prices astonishing, considering how new the Brazilian wind market is, and questioned whether they were sustainable.

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