Brazil set for wind industry take off -- Prices and conditions of Proinfa program voted good enough

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Brazil's renewable energy support program, Proinfa, is finally off the ground, creating an instant market for 1100 MW of wind power. At the end of March, President Luiz Inacio Lula da Silva signed a decree that now paves the way for state power company Eletrobrás to contract 3300 MW of renewables capacity, split equally between wind, biomass and small-scale hydroelectric power.

Progress on development could be fast. Electric power regulator Aneel has already approved 7694 MW of new renewable energy plant for grid connection. Furthermore, the announcement of the long awaited Proinfa terms and prices, which were revised following industry consultation, have generally been voted "just good enough" by developers.

Under 20 year power purchase agreements, state power company Eletrobrás will pay BRL 204/MWh ($70.2/MWh) for projects with a capacity factor of up to 34.2%, with the price falling gradually to BRL 180/MWh ($61.9/MWh) for the most productive projects with capacity factors up to 41.9%. The utility will raise the money to pay for Proinfa power by adding a 1.3% surcharge to electricity bills.

Brazil's federal development bank, BNDES, has set aside BRL6 billion ($2 billion) to finance Proinfa projects. It is offering to finance up to 70% of total investment with ten-year loans. It will charge its long term interest rate (currently an annual 10%) plus a 2% basic spread and up to another 1.5% a year spread for risk. This is cheap in a country where consumer loans top 140% a year. In addition, investors will not be charged interest during construction and will only have to start paying back the loan six months after their projects are up and running.

First-come, first-served

With contracts being awarded on a first-come, first-served basis -- calculated from the date that environmental installation licenses were issued -- potential developers have been scrambling to meet the May 10 deadline to apply to Eletrobrás for Proinfa contracts. Eletrobrás plans to publish a list of projects to be built under the program within one month. The projects will be expected to be up and running by the end of 2006.

The prices on offer are about 20-30% lower than preliminary rates published last year (Windpower Monthly, October 2003). While a minority of borderline projects may no longer be feasible as a result of the reduction, most should still be viable. The Brazilian Real has been stable for over a year and is forecast to stay fairly strong for the foreseeable future. "Although you can have gains with generation capacity, I think the prices were below what was expected," comments Claudio Rossi Machado of ProWind Energias Alternativas, a representative of Germany's MVV Energie. Nonetheless, he adds, "I think our projects will be viable."

Others are more cautious. "We are satisfied with the publication of Proinfa, but investors are concerned that these values mean we will have to re-examine some of the projects that we were thinking of implementing," says Pedro Cavalcanti, president of Gamesa Energía Brasil. "The values are very low, the costs are very high, and although the financing conditions are excellent, they do not cover such a reduction in the price."

Some worries

Additional concerns remain. While plans to offer differentiated prices based on geographical location have been scrapped following developer concerns that the policy would encourage development of less productive sites, the controversial decision to maintain higher prices for less efficient plants operating at lower capacity factors has not been overturned. This has been widely condemned as being an archaic idea copied from a much-criticised clause in the German wind power program. Lack of transmission capacity could also, eventually, cause some difficulties, although most projects approved by Aneel include some first-stage transmission lines to get the power to the grid. In addition, projects of less than 30 MW only pay 50% of transmission costs.

Despite the concerns, few are in doubt that the Brazil market is about to take-off and today's miserly 22 MW of wind power will soon be resigned to history. Proinfa projects will be spread more or less evenly across the country -- the government has imposed a 220 MW limit on the amount that can be contracted in any one state.

Space for independents

While 50% of the planned 1100 MW in new wind capacity will be awarded to subsidiaries of Eletrobrás, the remaining 550 MW will be allocated to independent power producers. Among the companies expected to dominate the Brazilian wind energy landscape are the Brazilian unit of French wind developer SIIF Energies, with Aneel some 2000 MW planned, Enerbrasil, with permits for 1155 MW in 14 projects already secured, and Spanish developer Gamesa via its subsidiaries, with 560-700 MW in the pipeline.

In particular, companies with manufacturing facilities in the country will have a major advantage. Proinfa requires 60% of the total cost of wind plant goods and services to be sourced in Brazil. Everaldo Feitosa of the Brazilian Wind Energy Centre says the requirement can be met, given that Brazil has the capability to manufacture all wind turbine parts.

Among companies already able to build turbines in Brazil are Wobben Windpower, controlled by Germany's Enercon, and Fuhrmet Energy Brazil. Wobben Windpower's Ciro Ruiz Filho welcomes the publication of power prices under the Proinfa program, but says it is too early to know whether projects will be feasible. The government "did what could be done," he adds. Wobben has two manufacturing plants in Brazil, but remains circumspect about orders, saying only that it expects to be able to meet a significant part of the new demand.

Surprisingly, market leader Vestas does not seem to be hastening its plans for a manufacturing facility in Brazil, which were initiated by NEG Micon long before the merger of the two Danish companies. Second in command at Vestas, Torben Bjerre-Madsen, says the Brazil factory project has been put partially on ice because the Brazilian market has not developed as fast as expected. The merger of Vestas and NEG Micon has changed nothing about those plans, he adds.

manufacturing site

Enerfin, a subsidiary of Spanish power company Elecnor, and pubicly traded wind company Gamesa also intend to establish wind turbine manufacturing, both in the state of Rio Grande do Sul (Windpower Monthly, March 2003).

The Vestas hesitation aside, a Brazilian wind power market and industry seems certain -- at least in the eyes of Lula. "Signing this decree and launching this program are the clearest demonstration...that we are not kidding...when we state that the Brazilian economy will have sustainable growth," he said at the launch of Proinfa. Even environment minister Marina Silva, often sceptical about the prospects of renewable energy in the past, was beaming. She said Brazilian environmental laws cannot be seen as obstacles to be removed and pledged to work to help get projects off the ground. Indeed the environment agency Ibama is to hire 155 additional officials to speed up the licensing process.

Proinfa -- which has been awaiting the presidential seal since receiving parliamentary approval in April 2002 -- is expected to attract BRL 8.6 billion ($3 billion) in investments and create 150,000 direct and indirect jobs. Indeed, Feitosa suggests that Proinfa's biggest success will not be environmental but the creation of jobs and investment in remote, poor areas of Brazil: "Never in future centuries will these remote regions receive the millions of dollars of investments that will be allocated under Proinfa," he says. Brazil's power system is already one of the cleanest in the world, with more than 80% of power generation coming from hydropower. Excluding large scale plants, about 41% of installed capacity is considered renewable.

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