The Summary Report "Analysis of the regulatory framework for wind power generation in Brazil", published on 1 September, shows that the current efforts of the Brazilian government to tap into the country’s vast wind energy potential are bearing fruit, but that a long-term specific policy framework for wind power is required to sustain investment in the sector.
Brazil currently has 1,120 MW of installed wind turbines capacity in 55 wind farms, mostly located in the eastern coastal states of the country. In addition, several energy auctions held since 2009 have added 5,175 MW of wind farm projects contracted by the Ministry of Mines and Energy, which would bring the country’s wind power installations up to more than 7,200 MW by 2014 and attract more than 12 billion US$ in investment. “The current pipeline for wind power projects looks very healthy,” said Ricardo Simões, President of ABEEólica.
“International experience has shown that long-term investor certainty is key for developing and sustaining a wind power market,” said Ramon Fiestas, Director of GWEC’s Latin America Committee, and author of the study. “The positive outcome of the auctions and the competitiveness of wind power need to be reflected in Brazil’s future electricity planning. This clearly justifies a more determined approach by the government to set ambitious long-term targets for wind power development, specific policy measures and infrastructure investments, to ensure a sustainable growth of the industry and its supply chain.”
The study evaluates the effects of the regulatory approaches to date, analyses the market and the industry, pinpoints remaining obstacles and challenges, and provides recommendations for legislative improvements. These recommendations include key issues such as the need for long-term targets and a specific policy framework for wind power, a tax regime to encourage investment, grid access for wind farms, an upgrade of the power infrastructure and efficient administrative procedures for environmental impact assessment.
“This is a truly comprehensive study” notes Marianne Osterkorn, Director General of REEEP, “and we are optimistic that it can help spur the long-term planning process for the wind industry in Brazil.”
The development of wind power in Brazil started in 2002 based on the public policies adopted under the Programme of Incentives for Alternative Electricity Sources (PROINFA), which had the aim of diversifying the electricity mix in the country by increasing the use of new alternative energy sources.
The programme, which was divided into two phases, extended to small hydro power plants, biomass and wind farm power, and is divided into two successive phases. Law No. 10. 438 of 26 April 2002 set out the targets and timescales for PROINFA, as well as the mechanisms for assigning projects and determining the prices at which electricity will be sold.
For the first phase, a total capacity of 3,300 MW was assigned, distributed between wind farm, biomass and small hydropower, of which 1,429 MW were allocated to wind energy.
This first quota had to be implemented before 30 December 2008, and included provisions for a fixed tariff and grid access for all electricity produced over a period of 20 years, distributed equally across all participating sources. The first phase of the programme was based on a 20-year guaranteed power purchase agreement with ELETROBRÁS at the price defined by the government, with floors of 50%, 70% and 90% (for small hydro, biomass and wind farm respectively), of the average retail power price in the final twelve months, and where participation in the programme is via an Independent Power Producer, and provided that the nationalisation index for equipment and services is at least 60% in the first stage.
For the second phase, the law set the target for new renewable energy sources to provide 10% of the country’s annual power consumption within 20 years. This phase was due to come into force after the target capacity of 3,300 MW of the first phase had been met. The price for electricity in this phase will be equal to that of competitive energy generation, defined as the weighted average cost of the generation through new hydro power plants with capacities greater than 30 MW and natural gas power stations.
The acquisition will be again made under a 20-year PPA with ELETROBRÁS, by means of annual scheduled purchases from each producer, so that new RE sources achieve a minimum annual increase in power output of 15% to be supplied to the consumer market.
Evaluation of PROINFA: During the implementation of the first phase, several practical issues undermined the development of some wind farm projects, which led to a delay in the start of operations. These problems included:
• onerous demands and heavy bureaucratic procedures to obtain or renew environmental licences;
• obstacles in connecting to the grid, particularly in the Central Western region;
• difficulty for the domestic industry to meet high demand for equipment.
Due to these first experiences, the deadlines set out in the Programme have been repeatedly postponed and, by the end of 2010, 926 MW of wind farm plants were installed in Brazil, spread over 51 wind farms and corresponding to 40 PROINFA wind turbines projects.
Brazil has recently achieved the threshold of 1,000 MW of installed wind farm and is expected to reach the target of the first phase of PROINFA in 2011.
The rate at which new wind power capacity was installed increased during the last two years of the PROINFA programme, demonstrating a trend towards sustained growth. Currently, over 97% of the installed wind farm generation capacity was achieved through PROINFA projects.
In December 2009, and again in August 2010 (LER-2009, LFA-2010 and LER-2010), the Brazilian Ministry of Mines and Energy held regulated procurement procedures, which allowed for the participation of wind power. These auctions greatly boosted the development of wind power, and it is expected that by 2013, 5,300 MW of wind power will be installed in Brazil as a result of both PROINFA and the auctions, attracting investments in excess of $10 bn to the wind energy sector in the next three years.
The wind turbines industry
The wind power industry and its supply chain is becoming firmly established in Brazil and, in 2010, offered a varied production capacity across the country of over 1,000 MW per annum. Rising industrial investment will significantly increase this capacity, and the sector aims to implement a manufacturing base capable of producing between 2.0 GW and 2.5 GW of wind power equipment per year.
Brazil has a wind power equipment supply chain, which includes the following key global manufacturers:
Wind Turbines assembly plants: Total manufacturing capacity of 1,500 MW/year
Wobben (Sorocaba): 500MW/year; Impsa (Suape-Pernambuco): 600MW/year; Gamesa (Bahía) 400 MW/year; General Electric – HUB Assembly – Campinas São Paulo. Manufacturers such as General Electric, Alstom, Vestas, Siemens, Suzlon, and the Chinese manufacturer Guodian United Power have announced investments in Brazil in response to the positive results obtained in the 2009 and 2010 tenders, which could increase local production capacity to reach around 2,000 MW/year.
Rotor blade plants
Total manufacturing capacity of 2,000 MW/year: Tecsis (Sorocaba-Sao Paulo): 1,500MW/year; Wobben (Sorocaba) for E70-E74-E82 turbines, Wobben (Pecén-Ceará) for E-40, E48 wind turbines; total Wobben capacity: more than 600 MW/year.
In addition, there are plans to establish the following manufacturing facilities: LM-Bahía 300 MW/year and announced by Suzlon- Ceará, Aerys Tecnologia. Implementation is scheduled by 2012.
Wind tower plants
Total manufacturing capacity around 1,600 MW/year: Brasilsat, Curitiba, PR – 80towers/year, Engebasa – SAWE, Cubatão, SP 120+ towers/year; Máquinas Piratinga, Recife, PE – 80 towers/year; Tecnomaq, Fortaleza, CE – 150 towers/year; ICEQ, Mirassol, SP; INTECNIAL, Erechim, RS – 80 towers/year; RM Eólica Pernambucana (Gonvarri + Arcelor Mittal), Recife, Pernambuco. 200 towers/year.
Concrete towers are manufactured in three facilities by Wobben, as well as the Spanish manufacturer INNEO. The Brazilian Wind Energy Association (ABEEólica) is the representative industry association for the Brazilian wind energy industry. Over the last three years, it has significantly increased its membership, established itself as an important institutional presence within Brazil, and forged links with other national and regional associations. ABEEólica is a board member of the international umbrella association, the Global Wind Energy Council (GWEC).
As Brazil achieved its first 1,000 MW of installed wind farm capacity, the wind turbines manufacturers’ market was distributed as shown below:
The tenders held in 2009 (Wind only tender), and in 2010 (Alternative energy tender and Reserve energy tender), present a wind farm developers market distributed as follows:
Market share wind power developers: 2009 and 2010 auctions
SM/JM 4% Gestamp 4%
The main challenges facing the wind energy sector in Brazil in the short term are directly related to the projected growth of the wind turbines market, which will require a significant increase in the rate of wind power installations compared to previous years in order to realise the energy supply programme which will result from new auction procedures planned for 2013 and beyond. This will involve:
• mobilising and securing greater financial resources to the wind farm projects and increasing the rate of financing;
• increasing the production capacity of the wind power industry, strengthening its presence in Brazil, and developing technological innovations adapted to the specific characteristics of wind power in Brazil as well as the country’s power system;
• meeting the logistical requirements of the supply chain for both equipment and services for the professional, manufacturing and business activities involved in the development of the wind farm projects and investments.
In the short term, the potential for the development of the wind power sector is limited to the wind power capacity planned under both the ongoing PROINFA target and the results of the auctions.
It is noteworthy that over 80% of contracted wind power capacity will be sited in the North Western region of Brazil. This should be reflected in the next update of the plan for electrical infrastructures for transport and distribution. Grid access is one of the key challenges facing wind power in Brazil, and additional investments are needed to allow wind farms to be effectively connected to the power grid in order to transport the produced power to the demand centres. The Brazilian wind power sector supports the reinforcement of grid infrastructure in the North East region via a transmission line running parallel to the coast, which l should connect São Luís (MA) and Recife (PE), and would also benefit Ceará, Rio Grande do Norte and Paraíba.
The model for regulated procurement: a dynamic link in wind power investment
International experience shows that the model of regulated auctions for wind farm projects implemented in Brazil has represented a regulatory solution to secure continued investment in this technology. Given the characteristics of the model introduced in the two-phased PROINFA programme, and the fact that its target of 3,300 MW of renewable energy installed capacity for the first phase is expected to be reached for wind farm projects this year, the existing gap with the original completion date (2008) should be closed before the start of the programme’s second phase.
The development of wind power through the competitive bidding process established in 2009 is a pioneering regulatory approach for Brazil, which has spurred large investments in wind energy. Had it not been for these auctions, Brazil would have continued its slow growth, with negative effects on the establishment and continuity of the supply chain. Wind power access to the auctions since December 2009 boosted investments ahead of the fulfilment of the 1,400 MW PROINFA target for wind power, providing a larger market for this technology in the short term, as well as continuity for many projects already in the pipeline.
The new regulatory approach of holding auctions which include wind power could be improved by accommodating the provisions of PROINFA into this framework in order to provide the whole system with greater legal certainty and predictability. The development of wind power in Brazil through competitive bidding constituted a marked change from the PROINFA methodology. While PROINFA was implemented with the aim of diversifying the electricity mix, the auction model is based on different energy policy objectives, aiming to efficiently increase the country’s energy supply security.
Electricity suppliers and other public service agents for the National Interconnection System (SIN) must guarantee supply to the entire market through regulated procurement by means of tenders. This system was put in place to handle public service distribution, i.e. the volume defined by the government and not in order to diversify the electricity mix in the way that PROINFA does.
However, this framework also applies to wind energy generation, which can only be contracted by RPE (auctions). This interim regulatory framework in which wind power is developed could be improved if it were possible to enable and stimulate the open procurement environment so as not to interrupt the ongoing investment process.
This would be a step towards increasing investor certainty in the medium and long term, and make the system more consistent with the energy policy objectives for new renewable energy technologies in the PROINFA programme on the one hand, and with the new electricity sector model on the other.
Characteristics of tenders for procurement of wind energy generation
General conditions: With the exception of the first windonly tender in 2009, the framework of regulated contractual arrangements for power generation capacity is aimed at a variety of technologies without distinction and, as pointed out earlier, pursues the objective of securing the country’s electricity supply.
However, the projected rules on procurement apply without distinction to all power generation installations taking part in the tendering process, whether or not they use renewable energy sources which are variable in nature, with the same production obligations for all technologies.
In reality, however, it is not possible to apply the same regulation to conventional dispatchable energy sources and renewable power generation with variable output, and the same obligations cannot be imposed on both sectors. A specific regulatory framework is required to address the specific characteristics of wind power generation, and particularly the variability of wind power output. This would require specific rules to allow for flexibility in the rigid obligations for power production and delivery, which are currently imposed as part of the regulated procurement process, which was established with different objectives in mind.
Nationalisation index for equipment and services: For the first and second phase of PROINFA, local content requirements (so-called ‘nationalisation indices’) were stipulated for equipment and services of 60% and 90% respectively.
In the regulated procurement environment of the auctions, protectionist measures were introduced in the guidelines approved for the wind energy reserve tender in 2009. These included a stipulation prohibiting the import of wind turbines with nominal capacity below 1.5 MW (see Art. 3 of the MME Portaria No. 211, 28 May 2009, in the draft introduced by Portaria No. 242, 25 June 2009). This reduced the restriction that had initially been set for wind turbines smaller than 2 MW.
Nevertheless, there are no similar measures to be found in the Portarias approving the guidelines on the tenders held in 2010 (LFA and LER), and no nationalisation index is required to take part in the tender process. However, the nationalisation index of 60% remains as a condition to access funding from the Brazilian development bank BNDES, and since BNDES financing comes at a lower cost, this condition established a de facto local content requirement similar to the ones stipulated under PROINFA and the Portarias for the wind-only auction. The result of this has been a rapid expansion of the local supply chain, attracting manufacturers who have become eligible for BNDES funding by fulfilling the local content requirements, as well as meeting deadlines for implementation and other conditions.
Nevertheless, not all wind farm projects in Brazil are financed with the involvement of BNDES. In fact, there is a noticeable gap between the rate of wind farm projects contracted in the 2009 and 2010 tenders (4,316 MW, including pending PROINFA projects), ongoing projects under construction (928 MW), and the number of wind farm projects actually financed by BNDES (including PROINFA), which amount to only 1,342 MW.
This current situation, which shows a gap in the wind power development process, could be anticipating scenarios in which some projects might be delayed, and not come into operation by the stipulated completion date. This issue could be addressed by relaxing the local content requirements and making public finance more accessible.
Prices in regulated procurement
The prices per kWh following the tendering process give a quick snapshot of the learning curve experienced in other more developed markets.
The final prices have been reduced dramatically, squeezing commercial margins across the entire value chain and representing reductions of around 50% on the tariffs guaranteed under PROINFA. This can be explained by the global dynamics of this market and the deceleration witnessed in other regions and countries with more mature wind power markets, and this is considering the fact that
the cost of the wind turbines represents the largest share in the overall investment in a wind farm.
It is foreseeable in the regulated procurement environment that wind power generation will start to develop in the best locations. The average capacity factor resulting from the reserve energy tender (LER 2010) amounts to 50%, twice the average capacity factor for wind turbines in Europe, and the conditions for competition imposed will most likely result in the flourishing of wind farm projects on the best sites.
For the same reasons it is foreseeable that in future the conditions of competition will stimulate the formation of consortia to take part in the tenders and facilitate the process for large energy providers with lower financial costs, better access to funding and economies of scale.
Returns for the consumer
The tendering process for LFA 2010 (alternative energy sources), which took place in August 2010 showed the benefits for consumers of wind energy becoming part of the electrical system in terms of cost. Average operating costs were reduced by close to 8% compared to certain scenarios considered in the electricity ten-year plan (PDDE 2010-2019), due to a decreasing use of thermal electricity capacity.
This effect is similar to other markets where wind power generation is well established, and the benefits could be even greater in Brazil if there was an indication that the continuity of investment was secured in the long term and if there was an increase in the share of electricity generated from wind power in the electricity grid.
The whole system would benefit substantially from a reduction in costs as the result of an in-depth review of the current tax scheme in place for wind energy generation, which is very cumbersome compared with other markets. A study commissioned by ABEEólica found that the cost of wind energy generation is rising between 25.7% and 32% as a result of the cascade tax affecting the supply chain, with subsequent loss of competitiveness. The study recommends the introduction of a tax relief mechanism for wind energy investments to stop this loss of competitiveness.
Update on electricity planning
Currently, players in the wind power sector lack information concerning market development volumes in the medium and long term. There is a lack of clarity in the regulation affecting the potential options for development of wind farm projects implemented from 2013, which lies in the discretionary and random nature of the regulated procurement procedures.
While the total volume of wind farm projects accepted under the tendering process is known (including the auction set to take place in August 2011, for which wind farm projects totalling 10,950 MW have registered), the discretionary nature of the proposals, together with current energy planning forecasts for this technology, is creating uncertainty concerning the size and the rates of development in the medium and long term.
Wind power provides a comprehensive response to the principles of sustainable and competitive development implicit in the 1988 Constitution of the Federative Republic of Brazil and guarantees an indigenous energy supply, which justifies a very substantial increase in its share in the electricity grid compared to current forecasts and a specific regulatory framework which incentivises investment in this technology.
The Electrical Energy Ten-year Plan 2010-2019 contains annual expansion forecasts for the generation of wind energy, and for renewable energy in general. This needs to be updated with a view of the wind farm capacity contracted in the 2009 and 2010 tenders, which would result in a rate of annual installations of around 2,000 MW up to 2013. This needs to be reflected in the forecasts in the Electrical Energy Ten-year Plan 2010-2019, which did not foresee this current situation.
The process of energy planning is participative and dynamic, which enables new situations and improvements to be incorporated in the expansion criteria for future studies. A new and much more ambitious approach for wind energy generation should be outlined according to the technology’s capacity and potential.
It is fair to attribute one third of the average annual increase in power generation to wind energy within the time scale of the Electrical Energy Ten-year Plan 2010-2019. Achieving sustained development of activities in the sector requires a new regulatory framework which would provide certainty in terms of the development volumes in the medium and long term, legal security in the processing of projects, and a support system which would enhance competitiveness. The Electrical Energy Ten-year Plan could help to provide the longterm investor certainty required by the wind energy industry in order to develop into a more secure and stable environment.
Since 2004, we have seen increasingly intense parliamentary activity bringing together various societal demands geared towards improving the regulatory model for renewable energies in Brazil.
From the perspective of the international wind power industry, it would be desirable to establish a legal framework that would address the most relevant issues for sustainable growth of wind farm development in Brazil. This should:
• include annual targets for consumption of electricity from wind energy by 2019, taking into account the results from tenders held in 2009, 2010 and 2011 and create a specific institutional body charged with planning, controlling and breaking down barriers to reaching these objectives;
• define the support mechanisms and financing systems taking into account technological realities, energy consumption profiles and requirements, and the need to increase economic efficiency and competitiveness, in order to develop a mechanism for each technology according to its state of technological maturity and development;
• establish a specific tax regime to incentivise the wind energy industry because of its potential for growth and competitiveness compared with other sources of renewable energy;
• introduce specific regulation for electricity supply based on wind power and the rights of connection and access to power infrastructure networks, taking into account all the benefits arising from the expansion of these networks;
• contain a development programme for power infrastructure in line with the renewable energy targets;
• include a specific, harmonised administrative procedure for evaluating the environmental impact of projects, with an unambiguous system of administrative powers.
By Ramón Fiestas, GWEC. Contributions from: Pedro Perrelli, ABEEólica, Mauricio Trujillo, GWEC. www.gwec.net/fileadmin/documents/Publications/Brazil_report_2011.pdf