Wind projects were previously excluded from the longer-term auctions because of their relatively high price compared with hydropower, uncertainty about the capacity to sell guaranteed power and the short time span to build the projects.
But as prices for wind power have fallen, the government has allowed wind projects to be included in the A-5 auction, as the tender that takes place five years ahead of delivery is known.
"This is something we have been battling for a long time," said Elbia Mello, president of Brazilian wind energy association Abeeolica. "The government has perceived that wind power can make the auctions more competitive and (help) maintain the amount of renewable energy in the country's power matrix."
Brazil's auction system was introduced in 2004. Power distribution companies have to buy 95% of future power needs for the next 20 years one, three or five years ahead of delivery. The system was intended to guarantee supply following the 2000-01 power supply crisis, while giving project developers long-term contracts that enable them to seek financing.
The A-5 auction was conceived to allow for bigger hydro or thermal projects that need more time to obtain licensing and financing and take longer to be built. The auctions three year ahead of delivery are for smaller, less complex power projects. Projects that offer the lowest prices are the most likely to be awarded contracts.
Wind projects have been included in specific renewable-energy auctions since 2009. As the price for wind power at the auctions fell, they were included more regularly. All projects in the A-5 auction need to be new projects, while the shorter auctions can include expansions or reselling power from existing projects whose previous contracts had expired.
According to Mello, most of the projects registered for December's auctions are those that did not sell power at previous auctions. Although just over 10GW of wind-power projects were registered in August's power auction, only 1.93GW were eventually contracted to be delivered in three years' time and for reserve.
Registering for the A-5 auction potentially offers wind developers a bigger return on their investments and could help avoid facing penalties for delays in licensing and obtaining financing - which are common risks in Brazil. It also opens a window of opportunity to sell power in the more profitable spot market until the contracts signed at the auctions commence.
"Because it takes two or two and a half years to license and build a wind farm in Brazil, (developers) can start producing power ahead of the contract," said Armando Abreu, chief executive of wind-power consulting firm Braselco.
Spot market prices are higher, especially when there is a drought that depletes the reservoirs of hydroelectric plants, which account for 70% of the country's power generation. According to Abreu, one year of power delivery ahead of contract raised the annual internal rate of return between 10 or 15 basis points.
This is a significant increase and is calculated in the cash flow of the projects, improving financing and other costs. In Brazil, wind-power projects have a rate of return of about 13%. Such gains will allow wind-power projects to be very competitive at December's auction.
Abreu believes that prices at the A-5 auction will continue to decline to close to BRL $90/MWh ($54/MWh) from BRL 99/MWh at the August auction. He also believes that Brazil's installed wind-power capacity will surpass the 17GW projected for 2020 by the government.
