Brazil puts market framework in place -- Concern at unexpected clauses in two stage plan for first 3300 MW

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Wind power in Brazil seems to have taken two steps forward and one step back with the approval of a key piece of power sector regulation last month. Among the 32 articles of the MP14 bill, which needs only presidential ratification to become law after passing through both parliamentary chambers, is the creation of the Alternative Power Source Incentive Program (Proinfa) that establishes a series of measures favouring wind and other renewables.

The bad news is that Congress added a clause that means the benefits of Proinfa are applicable only to "autonomous independent power producers," which are defined as those that have no direct or indirect ownership links to generators, distributors or transmission companies in Brazil. This clause may rule out most of the nearly 4000 MW of wind capacity authorised for development late last year (Windpower Monthly, January 2002).

Wind developers with ownership connections to turbine manufacturers, however, are still considered as independent producers on the condition that Brazilian parts account for at least 50% of the turbines' value. Germany's Enercon, which has a major Brazilian subsidiary, appears to be the main beneficiary of this legal loop.

The line-up

Brazil has only 20 MW of wind power, but at end-2001 regulator Aneel authorised wind plant with a combined capacity of 3680 MW. Significantly, over 93% of the authorised capacity was for two companies: Enerbrasil, with strong links to Spain's second largest utility, Iberdrola and wind developer Energia Hidro-

eléctrica de Navarra (EHN); and SIIF do Brasil, owned 30% by French utility Electricité de France (EDF). Both Enerbrasil and SIIF have ownership connections to electricity distributors in Brazil -- Enerbrasil to distributors Cosern, Coelba and Celp through 50% parent Iberdrola, and SIIF to Rio de Janeiro distributor, Light, through an indirect link to EDF. Neither, therefore, qualify as independent producers. Not surprisingly, SIIF and Enerbrasil are reconsidering their project economics in the light of the legislation that was approved.

SIIF do Brasil chairman Henri Baguenier says the changes were "unexpected," but do not necessarily mean that plans are off. "We are studying the situation," he says. But speaking before MP14 passed through the Senate, Enerbrasil executive director Alberto Seisdedos said: "As it stands there would be no possibility of developing projects." He declined to comment after the Senate rubber stamped the measure.

Regis Martins of the Association of Independent Power Producers (Apine) describes the extra clauses as "absolutely unnecessary" with "no practical objective." Martins, however, does not think that the news is necessarily bad. He points out that instead of bringing on the mass cancellation of wind projects, it is more likely to mean there will be fewer wind developers on the market. Conceding that projects will be harder to develop, he nonetheless says that the autonomous producer element of MP14 affects only one part of projects -- selling the power generated.

"The market is not only Proinfa," Baguenier says. His view is echoed by Aneel's Antonio Matiello, who explains the legislation allows wind developers not only advantages in selling on the wholesale power market but also the opportunity to sign bilateral contracts.

Guaranteed purchase

What MP14's Proinfa program sets out is a two stage plan, in which the first phase would install 3300 MW of renewables power -- not just wind -- that would be in operation by December 30, 2006, with federally-owned power sector holding Eletrobras guaranteeing to buy the power under 15 year contracts at prices the government still has to decide on. The only indication on the price is that it will be at least 80% of the rates paid by final consumers.

Projects eligible to apply for Eletrobras power purchase agreements (PPAs) are those that have their installation and environmental licenses in place. In the event that licensed capacity is greater than 3300 MW, Eletrobras will sign contracts with those projects whose environmental licenses have shorter periods of remaining time.

The second phase of the project aims for renewables generation sources -- defined as wind, small hydro (up to 30 MW) and biomass -- to meet 10% of demand in the country's grid within 20 years. PPAs will be signed with renewables generators to the extent that renewables cover 15% of the annual increase in demand. PPAs must be distributed evenly between each of the three stipulated renewable energy sources, although after five years of the start of the second phase (which will be 2012), the federal government can transfer unused power purchase agreement capacity from generation sources that have for whatever reason not developed as much as expected to other sources within the program.

Wind, biomass and certain cogeneration projects in both phases of Proinfa will have discounts of up to 50% on transmission and distribution charges.

Cross subsidies

The key financing mechanism in the Proinfa scheme is the Energy Development Account (CDE), which will use cross subsidies to both encourage renewables and extend electric power to as much of Brazilian territory as possible. CDE will pay renewables developers the difference between the government-established price of power from their particular generation source (which in the case of the CDE includes not only wind, small-scale hydro and biomass but also natural gas and Brazilian-produced coal) and the price that "competitive" generators (hydroelectric generators) produce at. Funds to finance CDE will come from the federal government through taxes that all energy traders will pay from 2003 and from fines charged by Aneel for whatever offences that may come up.

None of the five generation sources covered by CDE can receive more than 30% of total CDE resources; any wind or other renewables project that starts operations before end-2006 can ask CDE to advance funds for the first five years of operations; and CDE will last for 25 years.

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