Brazil

1. Brief overview of the renewables sector

Brazil has a well-established renewable energy sector. Hydropower is particularly strong, accounting for more than 60% of Brazil’s installed capacity. Energy generated from biomass (primarily through the burning of sugar cane waste) accounts for a further 9% of capacity, and over 9% is generated by wind. Perhaps surprisingly, only a small percentage of installed capacity (around 2.9 GW or almost 2%) comes from solar power generation, but this is growing rapidly. Overall, over 83% of Brazil’s installed capacity for electrical energy comes from renewable sources.

Although Brazil has recently suffered an economic downturn, which has in turn slowed growth in demand for electricity, rising demand for energy is forecast for the near future. The BP Energy Outlook 2019 projects that Brazil’s energy demand will grow at an average annual rate of 2.2% to 2040, as compared to just 1.2% globally.

In recent years, several periods of drought in the south-east of the country have compromised Brazil’s hydropower generation capability. This has led the government to take steps to diversify and place greater reliance on other sources of energy. In this context, the Brazilian government has identified the importance of renewables in the country’s capacity expansion. With the additional benefits of above-average wind quality and geographical areas that experience up to 6kWh/m2 of solar radiation, Brazil demonstrates huge untapped potential for further development of wind and solar energy generation.

2. Recent developments in the renewables sector

The past few years have seen considerable levels of M&A activity in the Brazilian power generation sector, including from private equity investment. This demonstrates confidence in the growth potential of the sector, which has also been bolstered by increasing licensing rounds in recent years. For example, in October 2018 a joint venture between the Canada Pension Plan Investment Board (CPPIB) and Brazil’s Votorantim Energia acquired control of Brazilian hydropower generation company, Companhia Energética de São Paulo (CESP), for R$ 1.7bn. Other investors in the sector include Canada’s Brookfield, Italy’s Enel Green Power, France’s EDF, as well as Brazilian domestic energy companies.

The wind sector in Brazil (concentrated in the north-eastern states of Rio Grande do Norte, Ceará and Bahia) has been growing steadily and is attracting healthy levels of investment. The average capacity factor of Brazilian wind farms is 50%, around double the global average. In 2019, the Global Wind Energy Council announced that Brazil had the fifth-largest installed capacity for wind power in the world (and the largest in Latin America) after increasing capacity by 1.9GW in the year 2018. Over 600 wind farms provide an estimated installed capacity of 15GW, and the government aims to expand wind energy capacity to nearly 27GW by 2027.

The development of renewable energy sources has also been aided by improvements to the country’s energy transmission system and reforms to the process of gaining access to the grid ahead of project development.

3. Forthcoming developments / opportunities in the renewables sector

The Ministry of Mines and Energy (MME), in conjunction with the Energy Research Office, has developed the “Ten Year Energy Expansion Plan to 2027” (PDE). The PDE forecasts an increase in the share of installed capacity from renewable sources, from around 126GW in 2017 to 164GW in 2027, as part of a medium-to-long-term national strategy. In contrast to earlier projections, a greater share of the increase is projected to come from wind (14.3GW) than hydropower (9.9GW). Increases in biomass (3GW) and solar (8GW) are also projected.

The latest A-4 energy auction was held in June 2019, for generation projects to commence operation on 1 January 2023.  A total of 401.6MW of renewable energy generation capacity was contracted, over half of which (211MW) was for solar, which set a new world record low price of R$ 67.48/MWh.  The next auction is an A-6 auction to be held in October 2019 for commencement on 1 January 2025. According to the MME, a total of 1,829 projects have been proposed representing more than 100GW, including wind, solar, hydropower and biomass.

The hydropower sector is likely to remain strong, despite the government’s aim of diversifying the supply of energy. The PDE forecasts that, by 2027, hydropower capacity in Brazil will increase to 103.4GW (from the 2017 level of 93.6GW).

Solar power remains an under-developed source of renewable energy in Brazil. This is despite Brazil having an average solar radiation far exceeding that of many of the leading countries that generate solar power. With an installed capacity of 2.9GW in May 2019 (of which 0.8GW comes from distributed generation), the Brazilian Association for Photovoltaic Solar Energy has said that there are projects currently in development which represent a further 1.7GW of capacity and that are due to come online by 2022. The MME forecasts that this will reach 8.6GW by 2027. However, this figure remains very low in the context of an estimated potential generation of up to 28,500GW of solar capacity.

4. Incentives and financing

Despite the government’s goal of increasing the percentage of energy generated from renewable sources, no large-scale tax incentives have yet been introduced to encourage the growth of the sector in Brazil. Local content requirements also continue to hinder development. One exception for renewables is the favourable tax regime applicable to producers and importers of biodiesel.

High levels of import taxes remain an obstacle to developing other non-hydro forms of renewable energy. This is particularly the case for solar power generation, which requires specialised technology, usually manufactured outside Brazil. In 2011, import tax exemptions for wind power equipment and a reduced import tax for solar photovoltaic (PV) equipment were introduced (provided that there is no equivalent local production). This was later extended to include wind turbine components. State tax exemptions for wind and solar energy are expected to continue until at least 2021.

Discounts on the transmission system usage rate and distribution system usage rate of 50%are also available for solar, wind and biomass generation projects whose capacity is 300MW or lower. However, the federal government is currently considering cancelling these discounts. A bill proposing a special tax regime for the development of alternative energies, which was introduced to congress in 2009, was finally rejected in December 2018.

The Brazilian development bank, BNDES, offers financing for renewable energy projects that achieve minimum levels of local content.  However, over recent years, BNDES interest rates, which were previously heavily subsidised, have been converging with normal commercial lending rates, so the advantages of this financing have been reduced.

Picture of Ted Rhodes
Ted Rhodes
Partner
Rio de Janeiro