Brazil

Brazil

Air leaks out of Brazil balloon

Brazil, not so long ago bursting with potential for serious levels of commercial wind development, is increasingly looking like a market with the air gone out of it. Its existing market framework is coming up woefully short, proposals for a replacement are vague, and the government appears to have lost interest. But optimists are confident that the balloon will go up again

A concerted lobbying effort is under way in Brazil to prevent the government pulling the rug from under the national wind market. Since the introduction of a renewables support framework, the Programa de Incentivo às Fontes Alternativas de Energia Elétrica (Proinfa), in March 2004, Brazil has been the most promising wind country in Latin America, with power purchase contracts potentially on offer for thousands of megawatts. In the last few months, however, the dynamism which launched Proinfa has seeped away. Conditions attached to a new government auction of renewables contracts, separate from the stalled Proinfa process, look almost certain to rule out wind bids and President Luiz Inácio Lula da Silva has publicly announced that wind power is not a feasible option.

More hydroelectric power is needed, not wind, says Lula, though the country is already 70% dependent on hydro. "Either we build hydro projects to supply power or we generate power by building nuclear, diesel-fired or even gas-fired plants using natural gas that we don't have," he contends. Renewable power technologies such as wind and solar power are not a feasible alternative, according to Lula, who made his remarks in May at the opening of the 210 MW Capim Branco II hydro complex in Minas Gerais, reports business news service BNamericas.

Government representatives have increasingly expressed support for nuclear -- including a controversial 1350 MW project near the coastal resort of Angra -- as the route for Brazil to meet both its emission reduction obligations and power demands. The nuclear focus is despite research published by the energy ministry in 2001 identifying Brazilian wind energy potential of around 143,000 MW -- and that figure is solely based on sites with wind speeds of more than 7 m/s.

Non delivery

But Proinfa has not delivered as expected and the government is disappointed. Just 200 MW of the 1423 MW of wind projects selected for 20 year contracts at premium prices have been built so far. Yet all must be complete by the end of next year to retain their Proinfa 1 contract. At most, the entire 3300 MW Proinfa 1 program for wind and biomass will result in 400-500 MW of wind projects, says Pedro Cavalcanti of the Brazilian branch of Spanish wind project developer Gamesa Energia.

Convincing government that the poor progress so far is down to the structure of Proinfa 1, rather than the inability of the wind industry to deliver when given subsidised power purchase agreements, will be no easy task. The country has achieved just 256 MW of wind development all told, when it needs several thousand megawatts of new generating capacity.

Some level of success for Proinfa is seen as vital if government support is to be retained. As one investment banker puts it: "There is just one chance to have Proinfa 2 and this is to have a complete success with Proinfa 1." He warns: "With so many projects under Proinfa 1 not being built or implemented, I do not think there will be a Proinfa 2." For that reason, most potential developers and wind turbine manufacturers with an eye to Brazil are now pinning their hopes on an improved second round of Proinfa, or a much rumoured alternative -- an auction of wind-only power purchase contracts.

Obstacles

Proinfa's requirement that wind farms contain 60% locally made content is a key deterrent. It has left developers with one choice for turbine supply: Wobben Windpower, a Brazilian arm of German turbine manufacturer Enercon. As the only locally based manufacturer, Wobben's monopoly gives it a strong market position, with one developer, who does not want to be named, saying Wobben's prices have gone up 14% over the last year. The price of equipment is 25% more than in Australia, adds Marco Stacke of Australian Pacific Hydro, which recently entered Brazil's market with its acquisition of Soluções de Energia Sustentáveis Ltda (SES) from German wind project developer Enersys (box). There is room to cut the price by at least 10%, he believes.

Developers like Stacke say conditions would improve if more manufacturers came to Brazil. So far, only Germany's Fuhrländer has taken up the challenge. Fuhrländer's boss in Brazil, José George Lima, says the first turbine assembly unit, in the northern state of Ceará, will be turning out 1.5 MW and 2.5 MW turbines by September. The company received $10.8 million from federal bank Banco do Nordeste do Brasil to set up the facility with 100 workers.

Lima dismisses claims that Proinfa will fall short. He is planning to build an initial ten machines a month, rising to around 20-24 MW a month by January if all goes well. To speed up the process, the company will import equipment from Germany within Proinfa's 60% rule, says Lima, although he hopes to produce 90% of equipment locally within two years.

India's Suzlon has also declared its interest in Brazil and has a foot in the door through Portuguese renewable power company HLC, which acquired the local unit of French wind power company Siif in 2005. Under Proinfa 1, HLC expects to build six wind plants with a combined capacity of 220 MW in Ceará using 2.1 MW Suzlon turbines. The first wind farm should begin operating at the end of this year, while the last one is expected to start in December 2008 to meet the Proinfa deadline.

Suzlon has contracted a local company to make over 100, 80 metre steel towers, says HLC's Armando Abreu. So far that is Suzlon's only manufacturing commitment; blades and nacelles will be imported. Like Fuhrländer, it is taking a relaxed approach to Proinfa's 60% rule, presumably with the nod from government officials.

A second potential Suzlon customer, should a revised Proinfa program or a new market framework be introduced, is Pacific Hydro. The company's Janine Hoey says it is in talks with Suzlon on possible Brazilian projects. She warns that Pacific Hydro will halt further investment in Brazil if it cannot find a competitive turbine supplier. Econergy's Marcelo Souza shares Hoey's view. "The government so far hasn't been flexible on this 60% issue," he says. But he adds: "Rumours indicate they are working to resolve it." Econergy is building the 25.6 MW Berberibe wind farm, a Proinfa project, in Ceará. Comprising 32 Wobben 800 kW turbines, construction is to start in the last quarter of this year with commercial operation slated for the second quarter of 2008.

A new approach

While waiting to see how Proinfa may or may not progress, interest in building wind plant in Brazil is being kept alive by a government auction of power purchase contracts for renewable energy completely independent of Proinfa and scheduled for this month. Energy regulator Aneel and Brazilian federal energy research company EPE are in charge of the process, which may or may not result in contracts for wind power. Although wind and biomass projects are expected to compete for an unknown volume of contracts, the main intent of the auction is to foster development of small hydro. Under the plan, 15 year power purchase contracts based on availability are being offered for wind and biomass plant while 30 year contracts, based on quantity of power delivered, are available for small hydro.

The key attraction for wind players is the absence of a local content mandate. The result: developers for 24 wind projects totalling 1786 MW of capacity registered an interest in participating in the auction. Also by mid- March, 77 hydro projects (1281 MW) and 42 biomass projects (1504 MW) joined the list. To register, companies had to provide detailed project proposals and take steps to secure environmental licences for each project.

Price caps

The wind industry, already concerned about the lowest price wins mentality of an auction, received a further blow in mid-April when the energy ministry announced price caps as part of the selection process for those who may compete in the auction. Prices are capped at BRL 140/MWh ($71.3/MWh) for wind and biomass power projects and BRL 135/MWh ($68.77/MWh) for small hydro, far lower than in Proinfa 1. Under Proinfa 1, rates varied from BRL 180.18/MWh (at the time $69.3/MWh, but now $91.78/MWh) to BRL 204.35/MWh (then $78/MWh, but at today's exchange rate $104.0/MWh).

At BRL 140/MWh wind is not viable in Brazil, says Souza. HLC's Abreu agrees. "We registered two wind projects in the auction but the limit is impossible for our wind projects," he says. Souza says government needs to send a clear message of support for wind by confirming a follow up to Proinfa 1. "Regarding wind, Brazil is in the middle of an impasse," he says.

Short list

Last month, EPE announced a shortlist of projects eligible to take part in the auction, should they wish to. Six wind projects with a combined capacity of 622 MW are included (table next page) along with 49 hydro projects (751 MW) and 15 biomass bids (649 MW). The final auction was scheduled for May 24, but a week before that date the government rescheduled it to June 18, saying that around 30 of the EPE approved projects, totalling 1300 MW, had not received environmental licences, including two wind projects. Bidders will compete on the day for purchase contracts for an unknown volume of green power, with the lowest bids winning contracts at the end of the process.

Pacific Hydro submitted two projects with a combined capacity of 153 MW via SES, both of which have been accepted for participation in the auction. Stacke does not expect to win a contract. "Once the cap was set, it was clear that zero megawatts of wind would be selected," he says. While small-scale hydro projects are viable at BRL 130-140/MWh ($66.2-71.3/MWh), wind under market conditions in Brazil costs around BRL 190-200/MWh ($96.7-101.8/MWh), Stacke says. "I cannot say whether we will bid, but it is almost impossible."

Wind only auction

The sudden introduction of price caps in April led to criticism that the government is doing no more than paying lip-service to the wind industry rather than providing solid support. Other industry players are confident a new wind-only contracts auction with a better pricing structure is on the way. And while the government rejected an appeal by Brazilian representatives of the World Wind Energy Association on April 13 for separate auctions of wind contracts, saying to do so could trigger each alternative energy group to demand the same, a source at the energy ministry now says its specialists are studying the options for a wind power auction. "The objective is to have an auction only for wind this year," he says.

"I am 100% sure there will be a bidding process just for wind," says Abreu. Consultant Everaldo Feitosa, a long time member of Brazil's wind sector, agrees. He says members of Brazil's congress favour separate wind rates around BRL 200/MWh ($101.8/MWh). The Global Wind Energy Council also seems optimistic. In its recent Global Wind Report 2006, it says its expects Brazil's federal government to "announce a 5000 MW wind energy program to be realised between 2009 and 2015."

The real game

Feitosa says the highly competitive auction process is good preparation for all sides. "It is like a warm-up in a football match and the real game will begin in the second half of 2007, when the wind companies hope to have new prices," he says. Auctions just for wind will give the industry time to become competitive and to create a solid market, adds Stacke. He believes the auction guarantees 1000 MW for two years.

The government is, for the most part, staying tight-lipped about any possible future market for wind. If there is no second round of Proinfa nor a wind-only auction, "it will be drastic" for the industry, Feitosa concedes.

"The market will struggle and [the industry will] mainly rely on exports," agrees Marcelo Storrer of Eólica Brasil, which would like to manufacture 2 MW turbines in Ceará state from 2008, assuming it can find a suitable investor to help finance its plans. He adds: "We will take orders [for equipment] from anywhere inside or outside of Brazil." Without Proinfa 2 or a wind-only contract auction, he adds, the only local market for wind power post 2008 will come via possible contracts with large energy users such as supermarket.

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