This article was first published in Renewable Energy Focus magazine. For a free subscription, click here (this is the online version).
In a very tough global wind power market, Brazil is one of the bright spots. With virtually all of the projects under the early-stage PROINFA programme finally built and operating, the pipeline generated by the auctioning system established in 2009 is now starting to come on line.
Having passed the 1GW market in 2011, ending the year at just over 1500MW of wind power capacity installed, Brazil passed the 2GW mark earlier this year and will probably have passed 2.5GW by the time this article is printed.
With the power contracted in the auctions so far, Brazil will top 8000MW by the end of 2016, and there is another auction coming up this year, probably in October.
Wind power has rapidly emerged as the ‘second energy source’ in Brazil, after hydro, as noted by Brazilian Energy Secretary Dr. Altino Ventura in his keynote address at the 2012 edition of Brazil Windpower, held in Rio de Janeiro at the end of August. With controversy and delays over new large hydro projects in the Amazon and other far-flung regions of the country, the future for wind power in Brazil is bright indeed.
EPE President Dr. Mauricio Tolmasquim, the maestro of electricity planning in Brazil, suggested that 14,000 MW by 2020 was a reasonable target for the sector – the manufacturers present in Brazil found that a reasonable and achievable target, if perhaps a bit conservative.
Wobben (Enercon) was the early manufacturing pioneer in Brazil, building a factory in Rio Grande do Sul in the 1990s, and was only joined by Suzlon and Argentina's IMPSA a few years ago. But the combination of a tight global market, Brazil's booming economy and electrical demand and the prospects of a new growth market have lured no fewer than seven other OEMs to the market in the past two years, including Vestas, Gamesa, GE, Alstom, Siemens, Acciona, and LM Windpower; Sinovel is considering a factory, and Brazilian electrical manufacturer WEG decided to enter the market in 2011.
But, of course, all is not roses. With any fast-growing market there are teething problems, and Brazil is no exception.
Challenges
Brazil is noted for its world-leading PROALCOOL (ethanol) programme and is generally considered an environmental leader internationally. But most of Brazil's CO2 emissions come from the forest and agriculture sectors, with the energy sector a distant third, and power generation a relatively small sub-set of that.
Most of the country's power comes from hydro. The prime motivations for Brazil to get into wind power were a power shortage in the early part of the last decade, and the increasing cost competitiveness of the technology. With Brazil's excellent wind resources, particularly in the north east, energy planners were eventually convinced that wind could be competitive, and indeed it turned out to be so.
Starting with average auction prices in 2009 of BR$169/MWh (€62.95), competition eventually drove the price down to as low as BR$102/MWh (€37.99) in the first auction in 2011, although prices crept up to BR$106 by the end of that year.
It will be interesting to see what happens to prices in the next auction later this year.
Now these prices are great for the competitiveness of the technology, but many industry observers were sceptical that the projects could be operated successfully at these prices, even with capacity factors of 40–50%. As one manufacturer put it, “it reduces the margin of error to practically zero.”
Time will tell, but so far the combination of long term relatively low interest loans from the Brazilian National Development Bank (BNDES) and excellent wind resources have kept investors coming back for more. But these prices are difficult to swallow for an industry that is cash strapped and plagued by overcapacity globally already.
Secondly, as in all rapidly growing wind markets, getting sufficient grid capacity and interconnections ready in time is a challenge. It looks like in 2012, 5–600MW of the projects auctioned in 2009 will be complete on schedule, but will have to wait some months for their grid connection, probably into 2013.
Interestingly, because of the way the contracts awarded in auction system work, developers will get paid for some approximation of the electricity they would have produced anyway, even without a grid connection; as they would be penalised had their construction been late. But this is not a tenable situation for the long term, and it's not a good look for the industry.
Brazil has a very well developed national grid system, but even so, building wind farms is faster than building grids and without some sort of anticipatory planning, this will be an on-going problem for the sector. There are various potential fixes in the works, but they go against the concept that pure market forces are the best drivers, which is the dominant ideology in the Brazilian energy sector at present. But that will have to change if late grid connections are not to become chronic.
Local content pressures
Finally, there is the thorny question of local content. While Brazil has no formal local content requirements, the BNDES requires ∼60% local content and a less well defined quantity of local manufacturing, in order to qualify for its low cost loans. With the low prices being offered for wind-generated electricity, there is no viable alternative to the BNDES. So, for everyone in the marketplace, this local content requirement is a reality. The notion that Chinese manufacturers/developers would arrive with their own low cost financing has not (yet) materialised.
There are two problems here: one, the requirements are not particularly clear or transparent, and it appears as though they are one-off negotiations between the OEMs and the BNDES. This is not sustainable in the long term. Secondly, this is forcing manufacturers to build new manufacturing plant in a global marketplace where one of the biggest problems is excess turbine manufacturing capacity. This is not only a global problem. Brazil will have ∼5 GW of manufacturing capacity by the end of this year, for what is essentially a 2 GW market, at least for the time being.
Those manufacturing in Brazil put a brave face on the situation, talking about expanding regional markets. Which ones, I wonder? Uruguay is interesting, but it's a few hundred MW at most. The Argentinian president just slammed the door (again) on investment in her country by nationalising Repsol, and Chile is still trying to sort out its electricity market to accommodate more renewables…it has been for the last five years.
Africa? I think they'll find significant local content requirements in South Africa, and no doubt elsewhere. Finally, Brazil is hardly a low cost manufacturing location, so the competition outside the country for Brazilian-made turbines will be difficult, at the very least.
Every country wants local manufacturing. Every state and provincial leader wants to attract international investment. Every mayor wants a plant in his city. But that just can't work, and our industry is going to have to face up to the fact that if the wind industry is going to succeed on a global basis, it needs to act like a global industry and demand free trade for its products and services; if the goal indeed is to deliver the largest quantity of renewably generated electricity at the lowest cost.
But there is no denying the excitement and enthusiasm surrounding the Brazilian wind market. Nearly 3000 visitors and 160 exhibitors from 22 countries packed the more than 7000 m2 of exhibition space at Brazil Windpower 2012, alongside a sold out conference. We look forward to next year's 4th edition of the event (which will also be at the SulAmerica facility in Rio de Janeiro, from 3–5 September, 2013) for the next installment on what now is the world's fastest growing wind power market.
This article was first published in Renewable Energy Focus magazine. For a free subscription, click here (this is the online version).
About: Steve Sawyer is Secretary General of the Global Wind Energy Council.