BRAZILIAN WINDS RISING

Wind Power in Brazil in a Sweet Spot
11 January 2012 (Barclays Bank)

"…Brazil wind power has caught up with hydro and thermal, with exponential growth opportunities at above-average returns. In less than 10 years, wind generation went from government sponsored to competitive on a standalone basis, and is now seeing consolidation. While competition has increased, there are clear leaders such as early entrants Renova and CPFL Renováveis which differentiate on scale, lower cost of capital and better access to higher non-regulated tariffs.

"…[W]ind power is only 1% of Brazil’s total installed capacity. We estimate there are large untapped resources of over 200 GW (almost 2x Brazil’s capacity) that are now economically attractive owing to: 1) a sharp decline in construction costs of about 20% over the last two years; 2) technological improvements increasing the load factor close to 50%, comparable to hydro; and 3) government incentives including cheap and abundant BNDES debt."

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"…Light recently bought a 26% stake in Renova, and CPFL Renováveis is a joint venture between former renewable developer ERSA and the renewable assets of integrated utility CPFL (63% owner of the company). These partnerships with Light and CPFL add value by: 1) facilitating access to sell capacity in the non-regulated market, at better tariffs; 2) providing scale for faster expansion; and 3) reducing the cost of capital.

"…Renova is a wind power developer ramping up capacity to 1,101 MW by 2017 and has a sizable project backlog of 7.0 GW…Our 12-month DCF-based price target for Renova is R$39.00, implying potential upside of 48%…[CPFL Energia] focuses on the development of wind, biomass, and small hydro power, and will account for 11% of parent CPFL’s ownership-adjusted EBITDA by 2015E. Installed capacity
should reach 1,417 MW by 2015, and CPFL management has plans to develop its
sizable 3.0 GW backlog…"