Steve Sawyer, Secretary General of Global Wind Energy Council (GWEC), will be a keynote speaker at Brazil Wind Energy Conference 2013. Cleantech Investor caught up with Steve ahead of the event to discuss the Brazilian wind energy market – and to get his thoughts on the wind industry generally.
Q. You have been observing the emergence of wind markets around the world for many years. How has the industry changed over the years as it has matured? Have the newer markets (especially those in Latin America) learnt from the best practices (and the mistakes) of others?
A. Just the fact of now being an established global industry means that the perception, and hence the treatment received, relationship with authorities, etc., has changed and matured. It’s more of a straightforward business proposition, although there are always new challenges in new markets.
I think the key actors in newer markets tend to study the established markets very intently; and they learn a lot on the technical side. But the political and regulatory reality is quite different in each country, as are the prevailing macroeconomic conditions, electricity market conditions and somewhere between 50 and 150 years of a national electricity system with all of its particular characteristics.
As I get older, I’m not sure that humans learn from other people’s mistakes…they generally have to make them themselves!
Q. The Brazilian wind market has grown rapidly over the last few years, with contracts being awarded through the reverse auction system. Other markets have attempted auctions in the past with only limited success. What – in your view – have been the key features contributing to the success of the Brazilian auction system? And do you believe this is a sustainable system?
A. The key reasons for the success of the Brazilian auction system are:
A pretty high bar to clear before entering the auction, keeping out the speculators;
A guaranteed 20 year PPA;
A binding contract to supply the power – if you are in to bid, you’d better be serious;
Brazil’s superb wind regime;
The availability of BNDES financing;
The fact that the rest of the global market was in a downturn when things were hotting up in Brazil meant that everyone was willing to do what it took to get in on the ground floor.
I do believe that the system is sustainable – with some tweaking. As wind penetrates the system more and more, there needs to be coordinated grid planning to go along with it, and regionally based planning as well as national. The market can only take you so far.
Q. What is your opinion of the recent changes to the auction system in Brazil to replace the P90 criteria with the P50 criteria? Was this a sensible move by EPE? And what will the implications be for the project developers participating in the auctions?
A. While it changes the metrics and will initially probably raise prices a bit, I don’t think it will have much of an impact in the long run. The industry is already paying much more attention to resource assessment and performance, O&M regimes, etc., which has always been necessary given the tight margins…they’ll just have to be a bit more careful.
Q. Local content has become a hot topic in the wind industry since the ruling against the Ontario local content rules (LCR) by the WTO last year (which is being appealed by the Canadian Government). The GWEC Global Wind Report 2012 points to “the demonstrable and inherent inefficiency of the local content requirement rules in a world where supply chains are globalised and manufacturers are seeking to restrict cost escalations for competing with highly subsidised conventional power generation”. What are your personal views on local content in the wind industry?
A. Just last week, Canada lost its appeal at the WTO. The problem with local content requirements for us is that we are faced with two conflicting imperatives: one, to deliver the largest quantity of carbon-free electrons at the lowest possible price; and two, to create local jobs and industries. We are constantly being accused of ‘living on subsidies’, even though renewable energy subsidies pale in comparison to the annual US$550 billion paid to subsidise fossil fuel energy. We have brought our costs down substantially, but local content requirements generally drive costs up, interfere with the development of an efficient global supply chain, and often create non-competitive situations in countries where you might only have one or two manufacturers able to supply a critical component needed to meet local content requirements.
Of course, we do not deny the local political imperative to create jobs, but we don’t believe that strict local content requirements are the best way to do it; and where they are imperative for whatever reason, at least they should be as flexible as possible and driven by the market rather than by bureaucrats picking out pieces of a technology they want to see produced locally to advertise on their political masters’ website.
Q. The GWEC Global Wind Report 2012 describes Brazil as having a “de facto local content requirement” – which has resulted in “a rapid expansion of the local supply chain”. Given that the Brazilian wind manufacturing base is now “capable of producing more than 2GW of wind power equipment per year and supplying the domestic market alone with 1,000 turbines, 1,000 towers and 3,000 blades”, to what extent do you think that this Brazilian style ‘local content’ policy can be described as successful?
A. Personally, I believe that the potential size of the Brazilian market and its tremendous wind resources would have created substantial local content and value simply through the market; but that can’t be tested now.
The policy has been successful in the sense that it has drawn a lot of investment from international players, and that prices have (until now) remained quite low. It is successful in the sense that nobody (yet) has challenged it at the WTO.
However, it has exacerbated the situation with oversupply in the industry globally, and is not contributing to the healthy and sustainable development of the global industry.
Q. The GWEC Global Wind Report 2012 suggests that there is a possibility that the Brazilian BNDES “LCR rules” may “drive up prices” and may “ultimately be challenged internationally”. Could you elaborate on both? Bearing in mind that the Ontario LCR was found to have violated international trade agreements, what form might an international challenge to the Brazilian rules take (bearing in mind that the system in Brazil is a ‘de facto’ LCR)?
A. The latest round of LCR rules will almost inevitably drive up prices, as it will be more expensive to acquire and/or manufacture some things locally, certainly in the first instance. Brazil is not a low cost manufacturing country and the market would need to grow substantially.
Q. Referring to markets such as China, the GWEC report acknowledges a role for local content, for example “when the proportion of required domestic content has been gradually phased in”. In your opinion, does Brazil fit the criteria for a market (to paraphrase Lewis and Wiser quoted in the GWEC report) where local content has a role (i.e. does it have sufficient potential? is the market sufficiently stable? and is the progressive introduction at the correct pace?).
A. Brazil’s market is certainly large enough, but I would say the market is not (yet) very stable, and I think the latest BNDES rules would be considered ‘too fast’.
Q. To what extent can the Brazilian wind energy market be compared to the markets in other ‘BRIC’ nations such as China or India? And what are the contrasts between Brazil and these other markets?
A. India’s market started 20+ years ago, and China’s nearly ten, so Brazil is still at the very beginning, in comparison. I would say that Brazil’s market has more similarities to China than India, simply because of the central role that the national Government has played in establishing both the market and the industry, where in India it is much more governed by individual state policies. Also, both China and India use feed-in tariffs of one sort or another, and the auctions in China haven’t really worked very well, but have been a rather blatant instrument to foster the development of national companies. But all three are large, rapidly growing economies with an insatiable need for power, some sort of a commitment to the environment, and without (until very recently, in the case of Brazil) major fossil fuel resources, except of course for China’s coal which is of course choking the country both literally and in terms of infrastructure and the economy.
Q. The GWEC report points out that Brazil, with 1,077MW of new capacity installed last year, has now joined “the small club of wind energy markets with annual installations of over 1GW globally” and that it “is likely to reach the 5GW milestone and to move from the current 16th position to become the 10th biggest” this year. However, it also observes that “sustained development requires a new regulatory framework, which would provide certainty in terms of development volumes in the medium and long term, legal security in the processing of projects, and a support system, which would further enhance competitiveness.” Could you elaborate on these comments?
A. Basically, all I would really want to add to what I’ve said above is the notion that there needs to be more coordinated planning between the expansion of wind power and the extension and strengthening of the grid.
Q. The wind industry is expanding into new markets all the time – including some which might on the surface appear unlikely, such as Saudi Arabia, which we understand you visited recently. Why are oil rich nations such as Saudi Arabia investing in wind? Which markets does GWEC consider to be the most interesting in terms of growth potential longer term? (Is Brazil amongst the markets with high growth potential? Which of the Latin American/Caribbean markets are currently interesting?)
A. Brazil is certainly one of the markets with the largest potential, others are Mongolia, and of course Russia, which may come out with new regulations which could kick-start that country’s renewable revolution as early as next week.
Saudi Arabia is an interesting case in many ways – but the basic premise is quite simple. Saudis’ domestic consumption is now more than 30% of their total production, and rising fast. Petrol and electricity are subsidised so heavily that they’re basically free. If domestic consumption continues to rise at the tremendous rate that it is at present, in a decade there will be very little income left from the sale of oil, and shortly after that it will become a net energy importing country. For a country whose wealth has been generated virtually entirely on oil exports, you can see why this doesn’t work.
So, a few years ago they established the King Khaled Center for Atomic and Renewable Energy, and although they want to build nukes for geo-strategic reasons (I’m never sure whether they’re more worried about Israel or Iran), the timelines involved mean that nuclear is not going to contribute much towards solving their problems. But there is a plan to roll out in excess of 50GW of renewable power in the next 15 years or so, and if it starts well, then it could go even faster. At the same time they need to diversify their economy and keep good jobs in the country to make full use of their workforce and not lose much of their talent overseas, as is the case at present. Renewable development (majority solar, but a healthy chunk of wind as well) can contribute to all of those goals.
The Torrebras wind tower manufacturing plant was officially opened in Bahia today by State Governor Jacques Wagner, providing Bahia with a full complement of wind generation equipment suppliers and consolidating its position as a key hub for the industry in Brazil.
The 120,000 m² facility established by Torrebras, part of the Spanish group Daniel Alonso, is located in the Pólo Industrial de Camaçari (an industrial complex close to the capital city, Salvador). It has involved investment of R$ 20 million (US$10 million) and will employ a staff of 300 on the production line. It has capacity for the production of 200 towers annually and all of the production capacity for 2013 has already been sold, according to the company - for projects in the State of Bahia. There are already plans to double capacity at the plant to supply the national Brazilian market.
Bahia already has three nacelle manufacturers (Gamesa, Acciona and Alstom). With the addition of Torrebras and the imminent arrival of blade manufacturer Tecsis (which confirmed last month that it would establish a plant in the state), the core supply chain for the wind sector is complete, opening opportunities for other related activities in the area, according to James Correia, Secrretary of Industry Commerce and Mining for the State of Bahia. Both Gamesa and Alstom are locatd in Camacari. Acciona's plan is also close to Salvador.
The State of Bahia has enormous potential for the generation of wind power (an estimated potential of 14.5 GW according to Correia) and is now also firmly established as one of the principal clusters for wind equipment manufacturing. Tecsis plans to invest R$ 200 million (US$ 100 million) in a new plant, also in Camacari - both for the domestic Brazilian market and for export.
Brazil's Ministry of Mines and Energy (MME) has confirmed the date for the next dedicated wind energy auction as 23 August 2013. Participants must register before 27 May to participate in the auction, which will contract energy to be supplied from 1 September 2015, with a contract for 20 years.
The MME has changed the criteria by which it will assess the ‘physical guarantee’ of projects participating in the auction. In future projects will be assessed on the ‘ P90’ criteria, which will replace the previously used ‘P50’ measure. ‘P’ values measure the ‘exceedance probabilities’ for wind energy production (P50 – also known as the Central Estimate – is the mean predicted level of generation, while P90 indicates the level of annual production that is forecast to be exceeded throughout 90% of the year – i.e. the probability of exceedance). The P90 measure is commonly used by investors for risk assessment. Higher project values (which secure more favourable loan terms) are typically accorded to projects with a lower gap between P90 and P50.
In Brazil, projects which are granted a 20 year PPA contract through the auction system are eligible for funding from Government owned development bank BNDES (subject also to criteria relating to the use of locally manufactured content). The deployment of P90 criteria by the MME should – in theory – reduce the risk inherent to BNDES from this lending (which is provided at very favourable terms).
The MME has stipulated that annual energy production certified should consider the reduction of losses, should take account of the arrangement of wind turbines, local meteorological conditions, the air density, the degradation of blades and aerodynamic losses of the park itself, the effects of wake turbulence and other parks, amongst other factors.
Research director of the EPE (the agency connected to the MME and which runs the auctions), José Carlos Miranda, quoted in Jornal da Energia, commented that the new conditions mean that project developers must invest more to ensure higher performances – and he has stated that he believes that prices of wind will increase in the August auction, although he believes that wind energy will remain competitive with other energy sources (such as biomass). Prices contracted for wind projects in Brazil had fallen significantly over the last few years.
The measure has been criticized by Sérgio Marques, President of Bioenergy, a company which was a major winner of recent auctions – at extremely low prices. However, it appears to have been widely anticipated by the market: many wind operators and equipment suppliers have expressed concern over recent months about the implications of the low prices in the auction last December. Commenting in Jornal da Energia, Brazilian Wind Energy Association (Abeeólica) President, Élbia Melo, confirmed that the changes had been anticipated by the industry.
Honda Automóveis do Brasil (HAB) is constructing a wind farm in Xangri-lá, in the Brazilian State of Rio Grande do Sul, which will generate sufficient energy to cover the needs of its car manufacturing plant in the city of Sumaré, in the State of Sao Paulo (around 1,000 km to the north). The farm, to be operated by Honda Energy do Brasil, a newly created subsidiary of HAB, will require investment of R$100 million. It is set to enter into operations in September 2014. The energy will be produced by nine 3MW turbines with installed capacity of 27 MW.
Honda Transmission Manufacturing of America, Inc., recently announced plans for two wind turbines at its plant in Russels Point, Ohio.
Gamesa has announced a contract to supply 75 G97 2MW wind turbines with combined capacity of 150 MW at five projects in Bahia. It has also signed a maintenance contract for 15 years for the projects, which are being developed by Consórcio Morrinhos (a consortium between Atlantic Energias Renováveis S.A. and Casa dos Ventos) and are located at Campo Formoso, in the State of Bahia. Installation of the turbines is scheduled to start in the second half of 2014 and end during the first half of 2015 with the creation of 870 direct and indirect jobs during the construction phase.
Gamesa established its manufacturing plant in Camaçari, close to Salvador, Bahia, less than two years ago and to date has now secured contracts for the supply of turbines with combined capacity of almost 1,000 MW, in Ceara, Bahia and Rio Grande do Sul. At year-end 2012, Gamesa had installed 96 MW of capacity in Brazil, which Edgard Corrochano, the company's Regional Director for the Southern Cone Region, describes as one of Gamesa's "priority growth markets for the near and medium term".
In September 2012 Gamesa had confirmed an order for 129 G97-2.0 MW turbines at 10 wind farms being developed by Santa Vitória do Palmar Holding (owned by investment fund Río Bravo Energía and Eletrosul, a subsidiary of national power company Eletrobras), in the State of Rio Grande do Sul. That order was valued at R$843 million (EUR340 million). No value was provided for the Consórcio Morrinhos contract.
The State of Bahía is considered to be the operational hub of Gamesa's expansion strategy in the Mercosur region. Gamesa is present in other Latin American nations, including Mexico, Honduras, Argentine and Costa Rica, where it has installed almost 1,000 MW of turbines. Overall in 2012, Latin America accounted for 47% of its order intake and 32% of total revenue and Gamesa has confirmed that Latin America and the Southern Cone are now "the main growth driver in this business."
Alstom’s President of Renewable Energy, Jérôme Pécresse, and Carlos Mathias Becker of Renova Energia, today announced a major partnership for the supply of wind turbines. The agreement between the companies will involve the supply of turbines worth over €1 billion – with capacity of at least 1.2 GW - in the State of Bahia. Both companies are strongly established in the wind industry in the state – which has conditions described by Elbia Mello (President of the Brazilian Wind Energy Association Abeeolica) as “perhaps the best in the world for generating wind energy” - and which has contributed to the falling cost of wind to some of the lowest levels in the world.
Paris listed Alstom has a manufacturing plant in the Camaçari industrial zone next to the State Capital of Bahia, Salvador. Renova has a total project portfolio of 9.7 GW (of which 29 MW is already contracted) in the state. Equipment for its projects was previously supplied by GE.
Alstom clearly intends to establish a significant wind power equipment manufacturing hub in Brazil, where it is already firmly established a major supplier to the hydro power industry. Alstom has operated in Brazil for 55 years, providing it with an advantage over some of the ‘pure’ wind equipment suppliers who are new to the ways of the Brazilian energy market. A number of world scale wind turbine manufacturers – including Vestas and Acciona – were ‘blacklisted’ by Brazilian development bank, BNDES, last year for failing to meet with the criteria for local manufacturing (while there are no legal restrictions on the use of foreign manufactured equipment in Brazil, most projects depend upon funding from BNDES, provided at a discounted rate and contingent upon the use of locally manufactured equipment). Alstom is developing a local supply chain in addition to manufacturing facilities – and has focused on the training of local employees and development of local know-how, especially in Bahia.
Renova Energia, which is listed in São Paulo, has been one of the most successful participants in the Brazilian wind energy auctions over recent years. Renova is a relatively new company, created in 2007. It came to the market through an IPO in 2010 and in 2011 raised funding of R$375 million from CEMIG / Light (one of the major electricity utility groups in Brazil). Last year it secured further funding through a capital increase backed by BNDESPAR (a BNDES fund).
The deal between Alstom and Renova Energia involves some 440 onshore wind turbines in the Alstom ECO 100 range, with capacities of between 2.7 MW and 3 MW, for delivery from 2015 onwards.
"An auction to be forgotten; and quickly." That was the verdict of Elbia Melo, President of Brazilian Wind Energy Association, ABEEólica, on last week’s A-5 energy action in Brazil. Ms Melo told local newspaper, Tribuna do Norte, that: “Not even our most pessimistic projections anticipated such low numbers. We expected low numbers, but this surprised us.”
Just 281.9MW of wind energy was contracted, in ten projects, for completion by 2017. Contrast this to the August 2011 auctions, which saw 1.9GW of wind power contracted for completion by 2016.
The average price in the A-5 2012 auction on 14 December was R$87.94/MWh (US$42.16). This was 9% below the lowest price contracted in the 2011 auctions, 12% below the average prices in 2011 – and 21.5% below the R$112/MWh ‘reference price’ set by the Brazilian Government Energy Agency, EPE, which manages Brazil's energy auctions. Taking into account the fall in the value of the Brazilian real against other currencies since the 2011 auctions, the low prices are even more concerning. Elbia Melo points out that, if inflation and exchange rates are taken into account, the prices should in fact have been around R$122/MWh.
Head of the EPE, Mauricio Tolmasquim, is also reported as saying that he had expected factors, including the exchange rate and recent revisions to the BNDES lending criteria, to have resulted in a higher price in the auction this time round.
Projects with combined capacity of 14.18GW had been approved to enter into the auction, which was open to all types of energy. The total contracted was 574.3MW, with two hydro projects in addition to the 281.9MW of wind projects. Buyers of the energy under the contracts (which extend from January 2017 for 20 years for wind and 30 years for hydro) included Copel Distribuição (contracted to buy 8,776 million MWh), Celg (7,899 million MWh) and RGE (6,591 million MWh).
For wind, according to Elbia Melo, supply was 28 times greater than demand - a key factor behind the low prices. She believes that wind projects contracted to provide energy at R$87.87 will find it tough to recover the cost of investment:
“The price definitely doesn’t cover the costs of production. This is a worrying price.”
Ms Melo sees a risk that some projects will not be completed. She hopes that the prices and volumes of wind energy contracted will recover in 2013, backed by a recovery in economic growth in Brazil, which should underpin demand for energy.
The latest auction throws up questions about Brazil’s wind energy policy and whether the country’s wind power industry can sustain the pace of growth. Brazil ranked as the fastest growing world wind power market amongst the major countries in 2011. It has a pipeline of around 7GW of capacity in development, most of which must be completed before the end of 2016. The hope is that auctions in 2013 can reverse the trend set in the A-5 2012 auction and sustain the longer term growth rate. However, confusion about local content rules also threatens to deter international investment in the sector – both in manufacturing and in project development.
The cornerstone of the Brazilian Government’s policy on wind power has been to provide reduced rate loans to project developers via the national development bank, BNDES. To qualify for BNDES loans, developers are obliged to purchase domestically manufactured equipment. Although less prescriptive than local content rules in markets such as China (where equipment must be manufactured locally) or Ontario, Canada (where incentives for local content are related to feed-in tariffs), the rationale for this policy, in common with those other markets, is to encourage the development of a domestic manufacturing industry.
Some Brazilian projects have bypassed the need for BNDES financing – notably a Desenvix project in the State of Sergipe, which was financed with loans from the China Development Bank and is using turbines supplied by Chinese manufacturer, Sinovel. Given the severe overcapacity in the global wind turbine manufacturing industry, projects based on imported equipment might be expected to have become more prominent – but such projects have failed to materialise.
The low prices contracted in the recent auction beg the question as to the extent that suppliers of (locally manufactured) equipment have been squeezed and whether they will be in a position to fulfill the contracts relating to these projects at a profit – even as their customers, the project developers, benefit from low BNDES financing rates.
The majority of the ten wind projects contracted in the recent auction were in the state of Maranhão, which secured contracts for capacity of 201.6MW. 52.3MW were contracted in Bahia and 28MW in Rio Grande do Sul. The low prices, which put off many participants, failed to deter Bioenergy, the project developer which emerged as the dominant player in this round of auctions. Bioenergy, which currently has two operational wind projects, Missaba 2 and Aratuá (both in the State of Rio Grande do Norte), secured contracts for seven plants in the state of Maranhão. The company’s President, Sérgio Marques (quoted in Tribuna do Norte), claims that: “The capacity factors of our projects in Maranhão are amongst the best in the country, which provides us with a considerable competitive advantage.”
Other companies which secured contracts in the auction included Enerfin Sociedad de Energia SA and Renova Energia SA.