Preliminary prices cause concern -- Brazil finalises Proinfa

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After many months of delays, Brazil's government has finally published preliminary prices to be paid for green power produced under its Proinfa renewable energy program -- but they have been given a mixed review by investors. On the one hand, the publication of prices is a demonstration that the government of new President Luiz Inacio Lula da Silva is committed to Proinfa. On the other hand, a series of conditions attached to the Proinfa tariff introduce market distortions that are perplexing potential investors.

The federal government is under pressure to meet the deadline of April 2004 for its power company, Eletrobras, to auction 15 year power purchase contracts for up to 3300 MW of power from renewable sources, split equally between wind, biomass and small-scale hydro.

The preliminary prices published in July brought some surprises, not all of them pleasant. Investors are hoping the ministry will take heed of industry comments fed into a public consultation process. The definitive prices are expected to be published by early this month.

The first surprise was the government's decision to differentiate by region, offering greater incentives to projects outside the north and northeast, home to most of Brazil's best wind potential. In another twist, the government also decided to differentiate the wind projects based on capacity factor, splitting projects into three groups: less than 34%, 34-44%, and greater than 44%.

The decisions have bemused investors, who cannot understand why the government needs to promote regional or quality variations to meet the 1100 MW of wind power stipulated under the first phase of the Proinfa program.

"We don't see the need in Brazil to promote second rate sites because there are plenty of good sites available," says Henri Baguenier, president of the Brazilian unit of French wind project developer SIIF Energies. He is managing projects with a combined installed capacity of some 2000 MW.

Furthermore, the capacity differentiation "is a boost for old technology," adds Baguenier. "Of course, if they provide an advantage for bad technology, I will use it."

The prices vary from a low of BRL 181.46/MWh ($62/MWh) for plant with capacity factors greater than 44% in the north and northeast, to BRL 231.68/kWh for a capacity factor of less than 34% elsewhere.

If some of these distortions could be removed, the overall pricing is relatively fair, according to Baguenier, who says $70/MWh (about BRL 204/MWh) makes wind projects feasible in Brazil.


Clarification is being sought on how the prices will be adjusted over the 15 year life of the power purchase agreement with Eletrobras. Inflation indexation, in particular, has led to considerable strife with existing power purchase agreements (PPAs) in the electric power sector and regulated adjustments in telecommunications prices.

There is also considerable uncertainty about the guarantees to be provided by Eletrobras. The cash to pay for Proinfa will be raised through a direct levy on customer bills, to be collected by the distribution companies and transferred to an account at Eletrobras. Current rules state that if distributors do not make those payments, then Eletrobras will pro-rate the revenues it has received among the Proinfa investors, which Baguenier, echoing other investors' concerns, says is "not acceptable."

Nevertheless, there is evidence the government is prepared to make changes to its original proposals. It has already demonstrated flexibility throughout the broader overhaul of the entire electric sector regulation. Politicians in the northeast are reported to have secured some concessions from mines and energy minister Dilma Rousseff for reducing or removing the geographical distinctions.

Jobs and income

Rousseff, minister since the new government took office in January, says she will do everything to encourage investors to buy goods and services locally, an idea that has already been applied to the purchases of the federal oil company, Petrobras. "Subsidies must depend on their ability to generate jobs and income in Brazil," Rousseff says. "There is no point in subsidising demand from abroad."

If the government follows through on these stern words, the beneficiaries will doubtless be those companies that have set up manufacturing facilities for wind plant equipment in Brazil, such as Wobben Windpower, controlled by Germany's Enercon, and Fuhrmet Energy Brazil.

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