Brazil - Project and production activity set to spiral

BRAZIL: Brazil added more than 40% of new capacity in 2011 and investors have the appetite for more in 2012.

Brazil expects significant activity in 2012 as wind continues to compete in the government's energy auctions. The first auction is scheduled for March for which 13GW of wind power have been proposed. Meanwhile, the surge of manufacturing capacity will continue as Suzlon and Vestas are expected to open factories to produce turbines and nacelles with a capacity of 1GW a year.

In March, the government will hold an auction for delivery of wind power in 2015. Over 13GW from 528 projects have already registered to take part, according to government energy planning company EPE. So far, this is the only auction where wind projects will be commissioned. In order to boost the competitiveness of the auctions, the government does not announce how much energy will be contracted at each auction.

Bucking the trend

This activity will build on the recent strong performance of the country's wind industry, which grew by over 40% capacity in 2011. Behind this is a growing economy that shunned most of the economic troubles of the rest of the world, a stable and predictable policy, favourable natural conditions and reasonably strong government backing for the sector.

At the close of 2011, Brazil had over 70 wind farms with a combined installed capacity of some 1.38GW, according to the country's power regulator Aneel. The country boasts one of the lowest prices for wind power in the world, at around BRL 100/MWh ($57). Prices began to stabilise in the December auction, with a slight rise in the average price to BRL 105.12/MWh, representing a maturing of the market.

The low prices have been caused by manufacturers flocking to Brazil as orders in other parts of the world faded away in the midst of the economic crisis. In 2011 six foreign companies announced plans to build manufacturing facilities in Brazil: GE, Siemens, Alstom, Gamesa, Vestas and Suzlon.

Gamesa's factory started operations in the state of Bahia in July, while Alstom began operations in November. In 2012, Vestas and Suzlon should inaugurate their facilities in Brazil. GE is concluding studies and plans to start production in 2013, while Siemens is still studying the possibilities.

Manufacturing hub

The country's north-eastern region is becoming a manufacturing hub. It is one of the most promising areas in the country since the wind blows when most of the country's hydroelectric reservoirs - that supply about 70% of the country's power - are low because of seasonal droughts.

This year should also see the increased presence of large energy companies in the wind sector as they buy up and progress projects from smaller developers, leaving behind the risky trend for development based on small companies with limited technical and financial capacities.

Companies like Brazil's federal power company Eletrobras, the regional state of Minas Gerais' own power company Cemig, Brazilian private-energy giant CPFL Renovaveis and Portugal's EDP Renovaveis are all jockeying for pole position in the market. In the first few days of 2012, CPFL Renovaveis announced the acquisition of four wind-power projects totalling 120MW and EDP Renovaveis has announced plans to boost its presence in the sector after years of managing just three parks in the south of country.

Last year, installation costs tumbled from over BRL 5 million per megawatt in 2009 to around BRL 3 million per megawatt, according to Brazil's state development bank BNDES. The burgeoning market attracted Chinese suppliers, who, avoiding the risk of investing, relied on borrowing from Chinese official banks. In September, Sinovel signed a supply deal with one of Brazil's biggest engineering firms Engevix. This was backed by a $55-million loan from the China Development Bank Corporation, lowering installation costs further.

All this reduced annual returns from wind projects in Brazil to 10-15%, far lower than those for investments in other sectors. Yet appetites have not been diminished. Brazil's model is consistent and developers know that the government will contract some 1-2GW wind a year.

While world economic growth slumped in 2010 and 2011, power consumption in Brazil grew at an average of 5.7% a year, topping 420TWh and, according to EPE, it will continue growing at a rate of 4.5% through the next decade.

This power demand is likely to keep the wind industry busy for some time - over 5GW is due to start operating by 2015.