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Article published on 9th December 2019
The Brazilian Market for renewables is growing at an increasing rate. The country’s energy market is divided into one regulated and one unregulated available only to larger companies. Brazil is mostly dependent on hydro plants for its energy production, however, seasonality largely affects the country’s actual output compared to its potential output and this has historically resulted in energy crises, large price fluctuations and shortages. There is potential to fill up this void with energy from renewable sources. Legislation and government policy is also being adapted to the new reality of renewable energy and to stimulate growth in the market. Intersolar, a fair with focus on the photovoltaic industry, took place in Brazil during September 2019. Thousands of people participated and it was characterized by a general positive atmosphere about the growth potential of the industry in Brazil and South America. The government agency ANEEL has lately sold off large development contracts for renewable energy projects in energy auctions, indicating a continuous growth in the upcoming future.
Together with size and special features to be considered unique in the world, Brazil is regarded as a hydrothermal system, with a predominance of hydroelectric power plants. The diagram below illustrates Brazil’s continental dimensions.
Source: IBGE 2019
The Brazilian Electrical System has unique characteristics that guide the operational decisions and planning, such as:
Source: MME & ANEEL 2019
The graph below presents the installed capacity forecast for 2026 (A total of 209 GW):
Source: MME/EPE (2018)
Source: MME/EPE (2017)
Brazilian Energy supply is divided into two main markets with different access: A regulated Market (ACR) which is the main energy source for small consumers (e.g. domestics consumers and smaller businesses) and a Free Market (ACL), accessible only to larger consumers that fulfill some special requirements according to current legislation.
ACR consumers are limited to buy energy from the region’s provider with tariffs based on auctions organized and supervised by ANEEL. Power providers purchase the right to distribute a certain amount and for a certain time through these auctions while consumers have no bargaining power over tariffs. ACL consumers can instead privately negotiate the energy price in supply contracts or PPAs (Power Purchase Agreement), directly with the power provider. In common, both markets are regulated by CCEE and ANEEL, and all contracts must be registered with CCEE.
Pursuant to current legislation there are two different categories of consumers in the Free Market (ACL) as following:
Special Consumers: consumption in the range of 0.5MW to 2.5MW and the energy must necessarily be acquired from renewable sources.
Free consumers: consumption is higher than 2.5MW. In this case, the consumer can choose the energy provider without restrictions. However, the consumer can take the advantage of acquiring energy from a renewable energy source by claiming significant discounts on TUSD (Distributor fees) and TUST (Transmitter fees) granted by the government as an incentive, sometimes achieving up to 100% discount.
According to CCEE the Free Market as share of total market increased from 27,4% to 31.9% between July, 2016 and July, 2019.
Source: CCEE 2019
Brazil’s dependence on cheaper energy from hydroelectric plants becomes apparent when analyzing the variation of actual output, according to data gathered by The Brazilian Power Commercialization Chamber (CCEE) during the year. The next diagram shows that the average monthly output has declined during the period Jan-19 to Jul-19, from 69 GW to 60 GW, however the Installed Capacity remains mostly unchanged on 167 GW. Brazilian Energy Output variates largely because of the variation in rainfall during the year. Nevertheless, wind power has increased from 5.6 GW to 6.9 GW during the period (also due to seasonal variation). Thermal power stations have also increased their output in July to 7.4 GW compared to 4.6 in January, to compensate for the loss in output from the country’s hydroelectric plants, consequently increasing CO2 emissions during the period.
The next table demonstrates, in percentages, how much output is actually generated compared to its capacity . E.g. Nuclear plants, which at 92% operated at almost full capacity in July, generated 1.8 GW (rounded figures) of output on average compared to its capacity of 2 GW. We have compared figures from January, 2019 with the Brazilian drought period in July, 2019. Hydroelectric plants are ultimately dependent on rainfall which feeds rivers and water deposits. Precipitation can fall to less than 5% during the drought period in June – August, compared to its peak periods in November – March. In January 2019, Average Hydroelectric power output was around 49% of its total capacity and went down to 34% in July, 2019. Ideally, Brazil would need to increase its output of renewable energy with around half of its current output to avoid using CO2 emitting thermoelectric plants when compensating for its loss of output from hydroelectric sources.
Biomass is in generally known to be able to operate at higher capacity factors compared to other renewable fuels and technologies. Nevertheless, we see that this is not the case in Brazil where small hydroelectric plants and wind plants top the renewables list. Biomass based thermoelectricity has large potential in Brazil since the residual bagasse from sugar canes used in alcohol production and sugar production can be used to produce biofuel, and also because there already exists an efficient and well developed wood industry. Brazilian forest plantations have a relatively high turnover rate from sapling to full grown forest and large areas of cheap and available land exist in the country.
Wind farms run on freely available fuel meaning that once wind farms are up and running, variable costs are close to zero compared to other energy sources. Ideally, a wind farm should have a stable capacity factor with low variability in output. It is nevertheless impossible to have a completely stable output since wind speed and direction is uncontrollable and seasonal as well. Wind speeds must be high enough to be able to generate energy but without risks for storms which could damage the instalments. Willet Kempton, Richard Garvine and Felipe Pimenta, three scientists researching on wind energy, believe that Brazil with its large coastline, have large potential for off-shore wind farm development. Off-shore wind farms need a combination of factors to be viable including, as previously mentioned, stable and high wind speeds, and relatively shallow coastal shelves as the most significant factors. There is still little data available for a full assessment, but their study in the south-eastern region indicates that there is potential for 102 GW, or more than Brazil’s total average electricity use.
Photovoltaic energy production is still a small part of Brazil’s total energy production but is growing quickly. As photovoltaic technology becomes more efficient, there is large potential because of Brazil’s location on the equatorial line and long drought periods during the winter months.
On the regulated market, when generated volumes are lower than those determined by the contract these differences are settled at the CCEE by what best represents a spot price on the energy market, the (PLD), calculated through centralized models which doesn’t always reflect the companies’ marginal costs resulting in inefficient prices.
Also, the same is not applied to the free market, maintaining the whole sector is exposed to commodity price risk and this has also created opportunities for speculation because once a determined company has not guaranteed a minimum output, it can sell excess output at market prices and make large profits in periods of crisis.
Brazil's economy has during the last years (mainly in 2015 & 2016) been characterized by a number of negative headlines, including large structural deficits, rising inflation, political scandals and large corruption cases. As a result of this uncertain scenario, Brazil entered into a recession leading to generally lower domestic and foreign investments. However, with more favorable prospects and increasing market optimism, the country is again the focus of foreign and domestic investors in basically all sectors, including infrastructure in general.
The new Brazilian government (incumbent since 2019) is systematically working to implement a reform and pro-market agenda which, in addition to de-bureaucratization, privatization and a fundamental tax and pension reform, also provides for market opening. The main turning point will be the pension reform plan which is still in discussion by legislators, and most assessments conclude that final approval will take place soon (probably still in 2019). Gross estimates claim it will reduce Brazil’s deficit by billions of reais. Future economic growth in Brazil will nevertheless depend on the government’s ability to implement these major reforms, but the pension reform and other proposals are major steps forward.
A positive result of the Government agenda is that after basically 20 years of negotiation between South America – Mercosur (around 512 million inhabitants) and the European Union (around 260 million inhabitants), a long-awaited free trade agreement was made and it might duly start in the following years. This trade agreement might impact all industries including the renewable energy sector – by facilitating the entrance of foreign investors in Brazil. Among several structural changes the deal will gradually the abolition of customs duties: 91 percent of existing import tariffs on EU goods are to be eliminated (92 percent from EU to MERCOSUR imports). According to the EU, this could result in a potential savings for European importers of approx. 4 trillion euros.
Despite protectionism and being one of the most closed markets, Brazil has showed a great potential for investors from different countries & industries regarding renewable energy opportunities. It has in the last few years been the target of several big investments from multinational companies. In particular, 2019 was again a great year for the industry, with several different investments and events within the area. The government’s pro-market agenda and opening up to global commerce is certainly driving up expectations again after the recent economic recession.
"Intersolar" eventFrom August 27 to August 29, took place in São Paulo, Brazil a fair regarding PV energy source i.e. Intersolar fair. It is a global event which takes place on different dates in Munich, Mumbai, Beijing, São Paulo and San Francisco, and the fair’s focus is on renewable energy and in particular photovoltaics, PV Production Technology, Thermal Technologies and Electrical Energy Storage. With more than 300 exhibitors and 25,000 visitors (including large manufacturers and investors to government officials and policymakers), it’s the largest branch fair in South America for solar industry. A number of new technologies and projects were presented at the fair by both larger companies and smaller start-ups bringing new ideas to the industry.
Expectations are that German and other foreign companies see investment opportunities and introduce new technologies and projects, to Brazil and South America, and the fair is an excellent opportunity to get to know these technologies. The amount of people and companies present at the fair gives an indication that Brazil is experiencing a small solar “boom”. Power prices are high, combined with falling costs for panels and new regulations for PV energy. Several states have during the last years introduced “ICMS” (i.e. VAT tax) exemptions for solar power producers.
Renewable Energy auction: Brazilian Electricity Regulatory Agency (ANEEL) recently ratified the results from its latest auction where 401 MW in projects were approved and split between 10 different bidders in a total of 15 projects: 5 small hydroelectric plants, 6 solar power plants, 3 wind farms, and 1 biomass driven thermoelectric plant.
Tax exemption: A tax exemption was approved on September 25th, by the Constitution and Justice and Citizenship Committee of the Brazilian Senate, for importation of goods and equipment for solar power generation, if no equivalent equipment is available in the Brazilian market.
The Paranaense Energy Company “Copel”, specialized in energy generation, transmission, distribution and trading, has contracted through an auction 127.9 MW in wind and solar power with a term of 15 years, on September 20th, 2019. Winning projects have an installed capacity of 444.3 MW. The plan is to start power supply on January 1st, 2023 through December 31st, 2037.
The Brazilian energy company, “Cemig”, has contracted more than 196 MW of solar and wind power through an auction held on September 13th, 2019, with a term of 19 years. The total contracted installed capacity was 476 MW. The company did not disclose the victorious companies and prices charged. A new auction will be held on November 14th, 2019 to contract wind and solar power.
The board of directors of the Brazilian power company Neonergia, authorized on September 20th, 2019, the construction of the projected Oitis wind farm complex in the states of Bahia and Piauí. The construction is planned to generate around 567 MW and is estimated to start operating in mid-2022.
Further, according to Thomson Reuters, the Norwegian State-owned renewable energy company Statkraft AS, in an announcement made by its head of the Brazilian unit, Fernando de Lapuerta on September 4th, 2019, said it will participate in the procurement of projects and licenses for new power plants in Brazil. The aim is to at least triple or quadruple its current capacity of 450 MW, and focus on providing energy to the non-regulated Brazilian market.
Change in legislation The consumption ranges that specify each different category in the Free Market (ACL) changed in December, 2018. The Ministry of Mines and Energy promulgated Ordinance No 514 reduced the minimum consumption required for Free Consumers. The purpose was to further open up the Brazilian energy market to competition. Since July 1st, 2019, the limit was cut to 2.5 MW (previously it was 3 MW) and will be further reduced to 2.0 MW starting on January 1st, 2020. The idea is to increase the efficiency in the market and ultimately benefit the consumer.
________________________________________________________1 A gross analysis on available data, a more accurate analysis would be to measure production in GWh to potential output which is the industry measure of capacity factors.
2 Not necessarily high capacity factors, since wind turbines are deliberately designed for technical reasons not to operate at full or high capacity.
3 Pimenta F., W. Kempton, and R. Garvine. 2008. Combining meteorological stations and satellite data to evaluate the offshore wind power resource of Southeastern Brazil. Renewable Energy, doi:10.1016/j.renene.2008.01.012.
Phil Klose
Managing Partner South America
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Rafael Silveira Martins
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