TODAY’S STUDY: DEVELOPING BRAZIL’S WIND

Analysis of the regulatory framework for wind power generation in Brazil; Summary Report
1 September 2011 (Brazilian Wind Energy Association and the Global Wind Energy Council)

Foreword

With its large unpopulated land areas, a coastline of 9,600 km and excellent wind resources, Brazil is in a prime position to become a true wind energy giant, and it is slowly emerging as a key market for the international wind power industry. While growth in 2010 was still small in absolute terms, it represented a 50% increase in terms of total installed capacity, and Brazil just recently reached the magic threshold of 1,000 MW of wind power operating across the country.

The drivers for wind power in Brazil are twofold: firstly, the country’s fast developing economy drives up electricity demand that can no longer be met with the existing infrastructure; and secondly, the Brazilian government is looking at diversifying its energy mix, with wind power perfectly suited to complement the large share of existing hydro power.

Hydro and wind power are perfect partners in Brazil. Not only are the country’s windiest areas located conveniently close to demand centres, but in addition, the variable nature of wind power is best accommodated in a highly flexible system such as one dominated by hydropower. Furthermore, wind power can help alleviate some serious energy security concerns in Brazil, especially during the dry winters.

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Two very different models have spurred growth in the Brazilian market: the PROINFA programme which was introduced in 2002, and the regulated auctions that have been taking place regularly since December 2009. As a result of both these efforts, it is expected that as much as 5,000 MW of wind power could be installed in Brazil by the end of 2013.

These developments have not gone unnoticed by international players, who have been piling into Brazil to secure a piece of the cake. With large turbine manufacturers such as Wobben Enercon, Impsa, Suzlon, Siemens, Vestas, Alstom, Gamesa, WEG and GE Energy now operating in the country, Brazil is well equipped to service its domestic market, as well as other Latin American countries. However, to maintain the investment pouring into the sector in Brazil, both short-term and long-term policy certainty are of essential importance…

Analysis of the regulatory framework for wind power generation in Brazil

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PROINFA

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 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 power, biomass and small hydropower, of which 1,429 MW were allocated to wind power.

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 ELETROBRAS at the price defined by the government, with floors of 50%, 70% and 90% (for small hydro, biomass and wind farms 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 ELETROBRAS, 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…

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Evaluation of PROINFA:

During the implementation of the first phase, several practical issues undermined the development of some 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;

• problems and delays in obtaining the Declaration of Public Utility (DUP) for projects, a qualification which facilitates negotiations to obtain the right to use the assets and rights affected by the projects, in particular the land, which in many cases is affected by complicated terms of use and occupation, and disputes between owners and landholders which make it difficult to identify the property;

• 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 power were installed in Brazil, spread over 51 wind farms and corresponding to 40 PROINFA projects. Brazil has recently achieved the threshold of 1,000 MW of installed wind power 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 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 power 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…

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Turbine assembly plants: Total manufacturing capacity of 1,500 MW/year

Wobben (Sorocaba): 500MW/year; Impsa (Suape-Pernambuco): 600MW/year; Gamesa (Bahia) 400 MW/year; General Electric - HUB Assembly - Campinas Sao 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 (Pecen-Ceara) for E-40, E48 turbines; total Wobben capacity: more than 600 MW/year.

In addition, there are plans to establish the following manufacturing facilities: LM-Bahia 300 MW/year and announced by Suzlon- Ceara, Aerys Tecnologia. Implementation is scheduled by 2012

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Wind tower plants

Total manufacturing capacity around 1,600 MW/year: Brasilsat, Curitiba, PR – 80towers/year, Engebasa - SAWE, Cubatao, SP 120+ towers/year; Maquinas Piratinga, Recife, PE - 80 towers/year; Tecnomaq, Fortaleza, CE - 150 towers/year; ICEQ, Mirassol, SP; INTECNIAL, Erechim, RS – 80 towers/year; RM Eolica 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 (ABEEolica) 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. ABEEolica is a board member of the international umbrella association, the Global Wind Energy Council (GWEC).

The wind power market

As Brazil achieved its first 1,000 MW of installed wind power capacity, the turbine manufacturers’ market was distributed…

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…

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Challenges facing the sector

The main challenges facing the wind energy sector in Brazil in the short term are directly related to the projected growth of the 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 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 projects and investments.

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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.

Based on the current supply agreements, wind power generation capacity in 2013 will be distributed as shown in graph 6. 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 should connect Sao Luis (MA) and Recife (PE), and would also benefit Ceara, Rio Grande do Norte and Paraiba.

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The model for regulated procurement: a dynamic link in wind power investment

International experience shows that the model of regulated auctions for wind 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 power 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 power. 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.

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In the new model for the electricity sector in Brazil, power is purchased either through a tender processes or through open negotiations…

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…

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Recommendations for legislative improvements

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 power 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.