August 23 (Renewables Now) - Moving past the country's economic recession, the Brazilian renewable energy sector is picking up its pace again. Next Friday (August 31), the country will hold a new tender to contract power from wind, biomass and hydro power plants, among others. Two more auctions for operating facilities are planned by the end of the year.
Renewables Now connected with Juliana Vasconcelos, Coordinator of Foreign Direct Investment at the Brazilian Trade and Investment Promotion Agency (Apex-Brasil) to discuss financing options for renewable energy in Brazil.
Q: How do investors see the Brazilian renewable energy market?
A: Brazil is the third largest renewable energy market in the world, behind China and the United States, if we take into account hydropower. However, this source is no longer dominate the generation capacity expansion over the next years. Solar, wind, small hydro and biomass are the main technologies for future projects.
Wind power, in particular, is expected to become Brazil's second largest (after hydropower plants (HPPs)) source of electricity in 2019. At the moment, biomass is the second largest source.
It is important to keep in mind that, according to the Ten-year Energy Plan 2026 (PDE 2026), Brazil is expected to increase the capacity of the National Interconnected System (SIN) to a total of 212.5 GW. Non-hydro sources will account for about 50% of new additions.
Q: In Brazil, BNDES and Banco do Nordeste (BNB) are some of the key institutions in terms of renewable projects financing. In Apex's view, what does an investor need to know about their long-term strategy for renewable energy financing?
A: BNDES is historically the largest lender. The develoment bank generally offers financing for up to 80% of the capital costs in solar and up to 70% of capital costs in the wind segment, but the lines of finance are highly specific to the business model.
However, recent changes in fiscal policy will now favour other market financing options. BNB, for example, has great representation in the financing sector with competitive rates and (unlike BNDES ), it also works with imported panels.
Following the reform of BNDES' capital structure and the TJLP rates transition to market interest rates, opportunities are opening up for commercial banks to provide long-term competitive financing. The country has other options such as FNO Energia Verde of Banco da Amazonia and individual finance through Constitutional Funds, among others.
Q: What investors need to know to build a successful model of renewable energy financing using bonds and climate finance? And about working in the local currency (BRL)?
A: The financial model depends on the strategy of each company. Certainly, it is necessary to take into account strategies to minimize risks of possible exchange rate fluctuations.
Dollarization of long-term power purchase agreements (PPAs) is used in some countries and has been under constant discussion and analysis by the Brazilian government. However, the strategy for now is to keep contracts in the local currency and, because of the long-term periods, any exchange rate swings are usually diluted over time.
Q: In Apex's view, what are the future prospects for investments in Brazil?
A: There is an expanding market with diverse business models. Brazil's is also seeing improvements in its regulatory laws, tax exemptions for consumer units in most of the country's states and reduction in the price of technologies.
The Brazilian onshore wind market is a consolidated one, but there are great opportunities for equity investors in generation parks. In addition, there is the prospect of expansion considering the offshore potential.
With regard to the solar photovoltaic (PV) sources, it is still necessary to consolidate demand in the regulated market in the coming years. On the other hand, there is a growing tendency for expansion in the free market as well as in the distributed generation. In this latter segment, the solar source represents approximately 80% of the total national market.
It is also worth mentioning the the National Biofuels Policy (RenovaBio), a programme that is part of the Brazilian effort based on the commitments made in the Paris Agreement. Renovabio is aimed at increasing the nation use of biofuels thus reducing greenhouse gas emissions.