Brazil - Regulatory framework for wind energy generation II

The model for regulated procurement: a dynamic link in wind power investment:
International experience shows that the model of regulated auctions for wind farm projects implemented in Brazil has represented a regulatory solution to secure continued investment in this technology. Given the characteristics of the model introduced in the two-phased PROINFA programme, and the fact that its target of 3,300 MW of renewable energy installed capacity for the first phase is expected to be reached for wind farm projects this year, the existing gap with the original completion date (2008) should be closed before the start of the programme’s second phase.

The development of wind power through the competitive bidding process established in 2009 is a pioneering regulatory approach for Brazil, which has spurred large investments in wind energy. Had it not been for these auctions, Brazil would have continued its slow growth, with negative effects on the establishment and continuity of the supply chain. Wind power access to the auctions since December 2009 boosted investments ahead of the fulfilment of the 1,400 MW PROINFA target for wind power, providing a larger market for this technology in the short term, as well as continuity for many projects already in the pipeline.

The new regulatory approach of holding auctions which include wind power could be improved by accommodating the provisions of PROINFA into this framework in order to provide the whole system with greater legal certainty and predictability. The development of wind power in Brazil through competitive bidding constituted a marked change from the PROINFA methodology. While PROINFA was implemented with the aim of diversifying the electricity mix, the auction model is based on different energy policy objectives, aiming to efficiently increase the country’s energy supply security.

Electricity suppliers and other public service agents for the National Interconnection System (SIN) must guarantee supply to the entire market through regulated procurement by means of tenders. This system was put in place to handle public service distribution, i.e. the volume defined by the government and not in order to diversify the electricity mix in the way that PROINFA does.

However, this framework also applies to wind energy generation, which can only be contracted by RPE (auctions). This interim regulatory framework in which wind power is developed could be improved if it were possible to enable and stimulate the open procurement environment so as not to interrupt the ongoing investment process.

This would be a step towards increasing investor certainty in the medium and long term, and make the system more consistent with the energy policy objectives for new renewable energy technologies in the PROINFA programme on the one hand, and with the new electricity sector model on the other.

Characteristics of tenders for procurement of wind energy generation:
General conditions: With the exception of the first windonly tender in 2009, the framework of regulated contractual arrangements for power generation capacity is aimed at a variety of technologies without distinction and, as pointed out earlier, pursues the objective of securing the country’s electricity supply.

However, the projected rules on procurement apply without distinction to all power generation installations taking part in the tendering process, whether or not they use renewable energy sources which are variable in nature, with the same production obligations for all technologies.

In reality, however, it is not possible to apply the same regulation to conventional dispatchable energy sources and renewable power generation with variable output, and the same obligations cannot be imposed on both sectors. A specific regulatory framework is required to address the specific characteristics of wind power generation, and particularly the variability of wind power output. This would require specific rules to allow for flexibility in the rigid obligations for power production and delivery, which are currently imposed as part of the regulated procurement process, which was established with different objectives in mind.

Nationalisation index for equipment and services: For the first and second phase of PROINFA, local content requirements (so-called ‘nationalisation indices’) were stipulated for equipment and services of 60% and 90% respectively.

In the regulated procurement environment of the auctions, protectionist measures were introduced in the guidelines approved for the wind energy reserve tender in 2009. These included a stipulation prohibiting the import of wind turbines with nominal capacity below 1.5 MW (see Art. 3 of the MME Portaria No. 211, 28 May 2009, in the draft introduced by Portaria No. 242, 25 June 2009). This reduced the restriction that had initially been set for wind turbines smaller than 2 MW.

Nevertheless, there are no similar measures to be found in the Portarias approving the guidelines on the tenders held in 2010 (LFA and LER), and no nationalisation index is required to take part in the tender process. However, the nationalisation index of 60% remains as a condition to access funding from the Brazilian development bank BNDES, and since BNDES financing comes at a lower cost, this condition established a de facto local content requirement similar to the ones stipulated under PROINFA and the Portarias for the wind-only auction. The result of this has been a rapid expansion of the local supply chain, attracting manufacturers who have become eligible for BNDES funding by fulfilling the local content requirements, as well as meeting deadlines for implementation and other conditions.

Nevertheless, not all wind farm projects in Brazil are financed with the involvement of BNDES. In fact, there is a noticeable gap between the rate of wind farm projects contracted in the 2009 and 2010 tenders (4,316 MW, including pending PROINFA projects), ongoing projects under construction (928 MW), and the number of wind farm projects actually financed by BNDES (including PROINFA), which amount to only 1,342 MW.

This current situation, which shows a gap in the wind power development process, could be anticipating scenarios in which some projects might be delayed, and not come into operation by the stipulated completion date. This issue could be addressed by relaxing the local content requirements and making public finance more accessible.

Prices in regulated procurement:
The prices per kWh following the tendering process give a quick snapshot of the learning curve experienced in other more developed markets.

The final prices have been reduced dramatically, squeezing commercial margins across the entire value chain and representing reductions of around 50% on the tariffs guaranteed under PROINFA. This can be explained by the global dynamics of this market and the deceleration witnessed in other regions and countries with more mature wind power markets, and this is considering the fact that
the cost of the wind turbines represents the largest share in the overall investment in a wind farm.

It is foreseeable in the regulated procurement environment that wind power generation will start to develop in the best locations. The average capacity factor resulting from the reserve energy tender (LER 2010) amounts to 50%, twice the average capacity factor for wind turbines in Europe, and the conditions for competition imposed will most likely result in the flourishing of wind farm projects on the best sites.

For the same reasons it is foreseeable that in future the conditions of competition will stimulate the formation of consortia to take part in the tenders and facilitate the process for large energy providers with lower financial costs, better access to funding and economies of scale.

Returns for the consumer:
The tendering process for LFA 2010 (alternative energy sources), which took place in August 2010 showed the benefits for consumers of wind energy becoming part of the electrical system in terms of cost. Average operating costs were reduced by close to 8% compared to certain scenarios considered in the electricity ten-year plan (PDDE 2010-2019), due to a decreasing use of thermal electricity capacity.

This effect is similar to other markets where wind power generation is well established, and the benefits could be even greater in Brazil if there was an indication that the continuity of investment was secured in the long term and if there was an increase in the share of electricity generated from wind power in the electricity grid.

The whole system would benefit substantially from a reduction in costs as the result of an in-depth review of the current tax scheme in place for wind energy generation, which is very cumbersome compared with other markets. A study commissioned by ABEEólica found that the cost of wind energy generation is rising between 25.7% and 32% as a result of the cascade tax affecting the supply chain, with subsequent loss of competitiveness. The study recommends the introduction of a tax relief mechanism for wind energy investments to stop this loss of competitiveness.

Update on electricity planning:
Currently, players in the wind power sector lack information concerning market development volumes in the medium and long term. There is a lack of clarity in the regulation affecting the potential options for development of wind farm projects implemented from 2013, which lies in the discretionary and random nature of the regulated procurement procedures.

While the total volume of wind farm projects accepted under the tendering process is known (including the auction set to take place in August 2011, for which wind farm projects totalling 10,950 MW have registered), the discretionary nature of the proposals, together with current energy planning forecasts for this technology, is creating uncertainty concerning the size and the rates of development in the medium and long term.

Wind power provides a comprehensive response to the principles of sustainable and competitive development implicit in the 1988 Constitution of the Federative Republic of Brazil and guarantees an indigenous energy supply, which justifies a very substantial increase in its share in the electricity grid compared to current forecasts and a specific regulatory framework which incentivises investment in this technology.

The Electrical Energy Ten-year Plan 2010-2019 contains annual expansion forecasts for the generation of wind energy, and for renewable energy in general. This needs to be updated with a view of the wind farm capacity contracted in the 2009 and 2010 tenders, which would result in a rate of annual installations of around 2,000 MW up to 2013. This needs to be reflected in the forecasts in the Electrical Energy Ten-year Plan 2010-2019, which did not foresee this current situation.

The process of energy planning is participative and dynamic, which enables new situations and improvements to be incorporated in the expansion criteria for future studies. A new and much more ambitious approach for wind energy generation should be outlined according to the technology’s capacity and potential.

It is fair to attribute one third of the average annual increase in power generation to wind energy within the time scale of the Electrical Energy Ten-year Plan 2010-2019. Achieving sustained development of activities in the sector requires a new regulatory framework which would provide certainty in terms of the development volumes in the medium and long term, legal security in the processing of projects, and a support system which would enhance competitiveness. The Electrical Energy Ten-year Plan could help to provide the longterm investor certainty required by the wind energy industry in order to develop into a more secure and stable environment.

Since 2004, we have seen increasingly intense parliamentary activity bringing together various societal demands geared towards improving the regulatory model for renewable energies in Brazil.

From the perspective of the international wind power industry, it would be desirable to establish a legal framework that would address the most relevant issues for sustainable growth of wind farm development in Brazil. This should:
• include annual targets for consumption of electricity from wind energy by 2019, taking into account the results from tenders held in 2009, 2010 and 2011 and create a specific institutional body charged with planning, controlling and breaking down barriers to reaching these objectives;
• define the support mechanisms and financing systems taking into account technological realities, energy consumption profiles and requirements, and the need to increase economic efficiency and competitiveness, in order to develop a mechanism for each technology according to its state of technological maturity and development;
• establish a specific tax regime to incentivise the wind energy industry because of its potential for growth and competitiveness compared with other sources of renewable energy;
• introduce specific regulation for electricity supply based on wind power and the rights of connection and access to power infrastructure networks, taking into account all the benefits arising from the expansion of these networks;
• contain a development programme for power infrastructure in line with the renewable energy targets;
• include a specific, harmonised administrative procedure for evaluating the environmental impact of projects, with an unambiguous system of administrative powers.

By Ramón Fiestas, GWEC. Contributions from: Pedro Perrelli, ABEEólica, Mauricio Trujillo, GWEC. www.gwec.net/fileadmin/documents/Publications/Brazil_report_2011.pdf

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