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Business as usual promises growth for Brazilian renewables

EY - Lucio Teixeira

Lucio Teixeira
Partner, Infrastructure Advisory
+55 11 2573 3008
LinkedIn

EY - Jose Ricardo Oliveira

Jose Ricardo Oliveira
Partner, Risk Advisory
+55 11 2573 5703
LinkedIn

The future for Brazil’s renewable energy sector following last October’s presidential election is now becoming clearer.

Although Jair Bolsonaro made almost no mention of clean energy in his manifesto, and had pledged to withdraw Brazil from the Paris Agreement on Climate Change, it appears – so far – to be business as usual for the sector.

The large-scale auctions that have underpinned substantial growth in Brazil’s wind and solar capacity are set to continue, lower interest rates are tempting private sector investors back, and unsubsidised distributed generation is growing rapidly.

Historically, hydroelectric plants have supplied the bulk of Brazil’s power, meeting 73% of its consumption in 2018. However, from almost zero in 2009, wind now represents 8% of the total, with almost 15GW of capacity installed. An additional 4GW is contracted and due to start generating by 2024. Solar, meanwhile, generated less than 1% of Brazil’s power in 2018, from around 2GW of capacity.

Large-scale renewables have been supported predominantly through public auctions, which tend to be open to a range of technologies, including thermal plants, and where developers bid for power purchase agreements with distribution companies. In March, Brazil’s Ministry of Mines and Energy announced six ‘new energy’ auctions, typically open to renewables projects, to be held over 2019–21, with the amount of power required yet to be announced.
Despite the uncertainty created by the election, significant renewable energy investments continue to go ahead.

In October, for example, Italian utility Enel began constructing a 475MW solar farm in north-eastern Brazil, believed to be Latin America’s largest, backed by 20-year contracts with distribution companies. In the same month, Brazilian development bank BNDES provided US$158m of funding to cover 30% of the investment needed for the Cutia and Bento Miguel wind complexes, totalling 313MW of capacity, also in the north east.

At the end of last year, EDF Renewables and Canadian Solar reached financial close on the 399MW Pirapora solar project, illustrating a new development in the Brazilian market: the involvement of capital market investors in funding renewables projects. As part of the total US$373m financing, the two project sponsors raised US$59m through the private placement of 16-year bonds, rated AAA by Fitch.

This reflects renewed appetite for Brazilian clean energy assets.

During the its recent economic slowdown, when interest rates rose above 14%, funding renewables became more challenging for investors. However, now interest rates have returned to more normal levels funders are increasingly turning their attention to opening alternative sources of capital, with BNDES’ support, to renewable energy developers. Private banks are becoming more important sources of long-term debt to the sector, which is also increasingly able to raise funds from the capital markets directly, through bond issues.

In addition, the Brazilian market is seeing dramatic growth in distributed renewable energy systems, as smaller commercial and industrial buyers recognise the opportunity to cut energy costs by contracting directly with smaller developers. Most of these projects – which are below 5MW – use solar photovoltaics and are being developed by companies using new business models to challenge incumbent developers.

Regulatory changes in the pipeline are likely to benefit renewables.

For example, co-located wind and solar projects currently have to pay twice to be connected to the grid, even if they use the same connection. Given that the wind can blow through the night, such co-location makes economic sense, and the Government is understood to be planning to reduce these connection costs.

Renewables advocates are also hopeful that the planned part-privatisation of Eletrobras, Brazil’s largest power generator and transmission operator – expected this year – could invigorate the local market, allowing its renewable energy division to invest in new areas under new management.

Investors shouldn’t expect to snap up the company’s renewable energy assets on the cheap, however. Some previous privatisations have attracted strong demand from investors, leading to sales at market-level, risk-adjusted returns.

Contact the RECAI team

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Ben Warren

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