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energy were lower than biomass and comparable with small hydro. The authorities are de-
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to be an important step towards achieving or possibly exceeding the government target of
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believe that project returns are now approaching the cost of capital, creating controversy as to
how much of the contracted capacity will actually get built.
As one of the BRICs, quick to rebound from the global reces- DVLJQL¿FDQWSDUWRISURMHFWHGHQHUJ\GHPDQG1RQHWKHOHVVHI- sion, the Brazilian economy continues to advance at a fast forts were focused on wind and biomass. Energy planners were pace with projected GDP growth rates for this year approaching particularly keen on wind energy, because of the complimentary 8%. Government plans are targeting rapid expansion in green nature between wind and hydro. Hydro schemes still represent energy, as part of a major push on infrastructure investment. 75% of total installed capacity and 90% of electricity production March saw the launch of the second four-year growth accel- LQ%UD]LO:KHQK\GURÀRZVDUHDWWKHLUEHVWIURP-DQXDU\WR eration program (PAC 2), which envisages R$11 billion (US$7 June, there are lower winds and vice versa. Effectively by hold- billion) in renewable energy investment. Brazil already occupies ing water in the reservoirs, hydro can act as a virtual storage the high ground with the best energy matrix of any of the major HFRQRPLHVʊRIWRWDOHQHUJ\XVDJHLVIURPUHQHZDEOHsources. Early entrants in the Brazilian wind energy market enjoyed comfortable returns based upon the highly attractive feed-in At the same time, Brazil is playing catch-up on the world stage, tariffs ranging from R$ 258 to 294 (US$ 150 to 170) per MWh. as one of the fastest growing wind energy markets. Capacity %\WKHHQGRI¿IW\IRXUZLQGIDUPVZHUHFRQWUDFWHGXQGHU grew at 75% in 2009. The present aim is to achieve 5GW of in- 352,1)$ZLWKDWRWDO0:FDSDFLW\ʊWKLUW\¿YHRIZKLFK stalled wind capacity by 2014. In their recent report IHS Emerg- are now in operation. Despite the relatively high prices paid, ing Energy Research—“Latin America Wind Power Markets and most observers agree that government stimulus was essential Strategies: 2010 – 2025,” concluded that Brazil will lead the to nurture the embryonic wind sector. The PROINFA program region with 31.6 GW installed by 2025. This is considered an has been an important step toward establishing a longer term optimistic view. However, longer-term, the overall prospects for wind energy along Brazil’s 9,600 km wind-swept coastline are not in doubt. The estimated potential is a massive 144 GW and The next stage in the process came in December 2009 with the could be doubled with higher towers over 100 meters. ¿UVWQDWLRQDOZLQGHQHUJ\DXFWLRQVSRQVRUHGE\%UD]LO¶V1DWLRQDOElectricity Regulatory Agency (ANEEL). It moved away from the 7KH¿UVWWHQWDWLYHVWHSVWRZDUGVFUHDWLQJWRGD\¶VEXUJHRQLQJ feed-in tariff system, which depends on monthly production and wind energy industry were taken in 2002. The original PROIN- produces an unstable income pattern. Bids were based upon a FA program provided government incentives for alternative quantity of MWh annually divided by twelve to smooth monthly energies through feed-in tariffs and twenty year contracts with income. The auction contracted 1,806 MW capacity over a guaranteed demand. A number of government tax incentives twenty year period, at an average price of R$ 148.39 (US$87) and discounts on transmission tariffs have further encouraged per MWh, with the lowest bids at R$ 131.00 (US$75) per MWh. development. Perceptions at the beginning were that wind en- The substantial fall in prices began to raise fears about the HUJ\ZRXOGDOZD\VEHH[SHQVLYHDQGZRXOGEHXQDEOHWRIXO¿OO long-term viability of the wind industry. This was especially true at the bottom end of the scale, where yields were perceived to 2011 and all must be completed before the end of 2012 to meet With turbine manufacturers and international developers facing The latest round of auctions on August 25th and 26th has increasing competitive pressure in their traditional markets of produced even more intense competition. The average price Europe and North America; Brazil with its stable economy, high achieved for wind energy was R$130.86 (US$75) per MWh, a SURMHFWHGJURZWKUDWHVDQGKHUHWRDWWUDFWLYHSUR¿WDELOLW\KDV 12% reduction from Dec 2009. Wind tariffs are now lower than invited increasing attention from the global industry. biomass and comparable with small hydro. There are now many major international players from the wind 7KHLQH[RUDEOHSUHVVXUHRQSURMHFW¿QDQFLDOUHWXUQVLVIXUWKHU WXUELQHLQGXVWU\SUHVHQWLQ%UD]LOʊ$OVWKRP(QHUFRQ*DPHVD bringing into question the economic feasibility of many of these some players in their desire to establish a strategic position in the Brazilian wind turing facilities to meet local content tar- Chinese, including Asia’s largest wind turbine manufacturer—Sinovel. They are of the market. Time will tell—there is a ¿QDQFLQJIURP&KLQHVHEDQNV6SXUUHG become operational or there is the risk of MW of installed capacity today have fallen by more than 30% compared to Nonetheless, from the perspective of the regulator, the auction was a resounding success. According to Nelson Hübner, PHQWHGLQWRIRXUPDLQFDWHJRULHVʊODUJHinternational developers such as Spain’s “The results of the energy auction repre- Brazilian utilities like CHESF and CPFL; LQ%UD]LOEHFDXVHWKH\FRQ¿UPLWLVSRV- mid-size Brazilian developers including, that is competitive with those of thermal neurs who are looking to sell licensed projects with PPA. In general inter- As the tariffs are falling it is anticipated that there will be a trend for developers capitalize on the boom in the Brazilian wind energy market and to move away from the regulated market and seek PPAs in the leverage their procurement muscle and international expertise open market, where better prices are achievable. The regulated in project execution. Less experienced Brazilian developers market with tariffs set by government auction represents 70% have been more successful in winning bids, which is arguably of the Brazilian electricity market. The remaining private market why projects are slow to get going. Red tape also appears to consists of special consumers, traders and self-generation. In- be holding up the process. None of the seventy-one projects dividual or groups of consumers with a demand of 3MW qualify awarded at the end of 2009 have commenced construction. The as special consumers and are free to negotiate and enter into ¿UVWSURMHFWVDUHH[SHFWHGWRVWDUWEXLOGLQJLQWKH¿UVWTXDUWHURI bilateral contracts with generators.
7KHPDMRULW\RIEDQN¿QDQFLQJLQWKHUHQHZDEOHHQHUJ\VHF- UHWXUQDQGDWKUHHWR¿YH\HDUH[LWZLOO¿QGLWLQFUHDVLQJO\PRUH tor to date has been through the national development bank, GLI¿FXOWWRPHHWWKHLULQYHVWPHQWREMHFWLYHV,QWKHVDPHZD\ %1'(6DQGJRYHUQPHQWRZQHGEDQNVʊ%DQFRGR1RUGHVWH it will be harder for the smaller entrepreneurial and less experi- and Caixa Federal. All seventy-one projects from the 2009 enced developers to compete against the scale and negotiating providing the remaining 30%. To date, there are few interna- pants in the PROINFA program. What is more, as investment PD[LPL]HYDOXH6SHFLDOLVWDGYLFHRQSURMHFW¿QDQFLQJFDQDGG levels ramp up, there is a growing opportunity for international VLJQL¿FDQWYDOXH,WLVPRUHDQGPRUHLPSRUWDQWWRSUHVHQWSURM- LQYHVWPHQWLQFRQMXQFWLRQZLWKORFDO¿QDQFLQJ ects to international investors in a language they understand, to ensure projects are ‘bankable’. Financial leverage and effective 'HFOLQLQJSUR¿WDELOLW\KDVDQXPEHURISRWHQWLDOFRQVHTXHQFHV ULVNPDQDJHPHQWDUHWZRRIWKHPRVWLPSRUWDQWGULYHUVRISUR¿W- It is expected to impact the type of investors wil ing to participate DELOLW\IRUWKHSRWHQWLDOLQYHVWRU([SHUW¿QDQFLDOVWUXFWXULQJ in the Brazilian wind energy sector favoring: utilities, IPPs, green as applied in Europe and North America, incorporating such funds and pension funds, which are able to take a longer-term DOWHUQDWLYHVVXFKDVYHQGRU¿QDQFHZLOOXQGRXEWHGO\EHFRPHD view. Private equity investors, typical y aspiring to higher rates of critical success factor as the industry matures.
Mark McHugh is Managing Partner, Brazil of Bauhaus Capital Partners, a boutique M&A and investment DGYLVRU\¿UPIRFXVHGRQWKHUHQHZDEOHHQHUJ\VHFWRU7KH¿UPEULQJVWREHDUVXEVWDQWLDOH[SHUWLVHZLWKGHEWDQGHTXLW\UDLVLQJDQGVWUXFWXUHG¿QDQFHJDLQHGLQ(XURSHDQG1RUWK$PHULFDDQGDSSOLHVLWWRWKHemerging renewables market in Brazil. Mark was until recently, Vice President of Marketing Americas for Shell based in the US. His extensive know-how of the energy business was developed during a thirty-year international career in marketing, sales, strategy consulting, and general management. He is skilled in investment strategy, leading new business development initiatives, M&A, and managing new business start-ups. He has developed a close “on the ground” understanding of clean-tech and the alternative energy market in Brazil.

Source: http://www.alabc.com.au/Portals/54/Content/Documents/News/1_Renewable%20Energy%20in%20Brazil_Dec10.pdf