1. Market Overview
Brazil’s solar market offers attractive supply and investment opportunities in the coming years. The following drivers and obstacles are currently determining the market environment:
- New business models for independent electricity generation
- Falling interest rates and favorable loans for the solar sector
- Independent electricity generation is gaining attractiveness due to higher feed-in tariffs
- Long-term power purchase contracts are awarded only to a small extent
- Capital costs remain high
2. Political Objectives
Expansion of solar parks by 1 GW annually from 2022 onwards
In the current ten-year plan, the Brazilian energy planning authority Empresa de Pesquisa Energética (EPE) predicts an expansion of grid-connected solar parks from currently 2 GW to 9 GW in 2027. Starting 2022, around 1 GW per year will be added, according to the estimates. The projects are concentrated in the northeast of Brazil, but new solar parks will also be built in the south-east and the central-west. In decentralized generation, solar energy will by far be the most important source of energy. EPE is expecting an expansion from currently 0.6 GW to just under 10 GW by 2027. In total, centralized and decentralized plants are expected to provide around 9% of the country’s electricity in 2027.
The share of renewable energies in Brazil’s current electricity mix rose to 86.4% in 2018. Photovoltaic (PV) systems generated only 0.6%. Hydroelectric power plants provided 72.6% of the electricity, wind power 8.5%, natural gas 7.0%, and biomass 4.8%.
Brazil postponed its entry into solar energy for a long time. According to the industry association ABSOLAR, the country missed out on 15 years of development. But now, the sector is growing intensively. In 2017, the installed solar capacity increased more than tenfold to 1.1 GW and doubled in 2018. For 2019, ABSOLAR expects solar capacity to reach 3.3 GW.
3. Market Organization
Brazil’s electricity market offers diverse business opportunities
Brazil’s electricity market is unbundled in all three segments, i.e. generation, distribution, and transmission. Private companies already account for more than 60% of installed capacity. The state-owned Eletrobras Group, which is expected to be privatized in 2020, manages about 30% of the electricity generated. Following the privatization of six Eletrobras subsidiaries, almost all electricity sales are now in private hands. The transmission is dominated by the government – Eletrobras alone operates 50% of the Brazilian grid.
Many foreign companies are among the investors. Private companies are allowed to participate in the Brazilian electricity market through a variety of models. Long-term power purchase agreements (PPAs) are auctioned off to supply the fixed market. On the growing free market, which already accounts for 30% of the Brazilian electricity market, large-scale consumers, traders, and producers negotiate ‘over-the-counter’ (OTC). The BOT (Build, Operate, Transfer) business model, which has not been used widely to date, also offers opportunities. Electricity can also be traded on the spot market.
The electricity price on the fixed market and the grid fees are regulated by the national electricity regulatory authority ANEEL. Large consumers, who purchase electricity from renewable sources on the free market receive preferential grid fees.
Solar power is becoming cheaper and cheaper
Photovoltaics are becoming more interesting for the auction of long-term contracts for the fixed market. Bilateral OTC trading and own generation offer particularly good growth prospects. In April 2018, when 20-year power purchase agreements (PPAs) were awarded, solar energy surprised with the lowest prices. 29 solar parks were contracted at an average price of 118 Brazilian Reais (R$, about 35 US$) per MW hour. The price was almost 20% below the average price of the previous auction in December 2017.
Falling world market prices for components and increasing competition in Brazil’s solar energy industry indicate that the trend will continue. The renewed depreciation of the Real against the US$ due to ongoing political uncertainty is preventing an even stronger fall in prices.
Auctions secure 49 new solar parks
The two auctions of long-term power purchase agreements (PPAs) from 2017 and 2018 guarantee the construction of 49 solar parks with a total installed capacity of 1.3 GW. Total investments are expected to amount to R$ 8.1 billion. Among the major winners are Brazilian construction company SteelCons, the Canadian solar module manufacturer Canadian Solar and Italian energy group Enel Green Power. Over 80% of solar projects are located in the northeast, the region with the highest solar radiation in Brazil. The measured values here are, on average, twice as high as in Europe or the US. The rest will be built in the southeast of Brazil.
On 31 May, purchase agreements for the power supply of Roraima state will be auctioned off. The northern federal state is the only one not yet connected to Brazil’s integrated grid. Various solar energy projects have been registered. In addition, the electricity regulatory authority ANEEL set two auction dates per year for the period from 2019 to 2021. So far, however, solar energy projects have only been permitted the so-called A-4 auctions. The next one will take place on 27 June 2019. The 20-year contracts to be awarded will apply from 2023.
Net metering, electricity tariffs, and credit market encourage the decentralized generation
Brazil’s electricity tariffs are among the highest in the world. In 2018, the electricity regulator ANEEL approved significant tariff increases. Between 2014 and 2019, the average tariff rose by almost 50%. With the tariffs, interest in investing in own electricity generation is increasing, mainly via solar systems. The legal framework for electricity generation from renewable energy sources for own consumption has been in place since 2012. Directive 687 extended net metering in Brazil in 2015 and made a number of new business models possible.
In addition, the positive development of the credit market favors investments. The Brazilian development bank BNDES (Banco Nacional de Desenvolvimento Econômico e Social) and the development bank of the Northeast BNB (Banco do Nordeste do Brasil) offer particularly favorable credit lines.
Models that liberate the consumer from the high purchase costs and instead issue monthly bills that undercut the conventional tariffs are very popular. Installation and distribution companies offer rental or leasing under so-called third-party ownership models. In addition, start-ups provide consumers with uncomplicated access to cheaper solar energy.
Medium-sized solar parks offer very good market opportunities
Many large consumers, especially those who cannot switch to the free market, are looking for alternatives due to rising electricity costs. In order not to deprive the core business of any capital, the business models mentioned above are recommendable. Open space plants of up to 5 MW represent a correspondingly attractive capital investment, which attracts more and more investors.
According to Guilherme Mattos of Siemens, the segment of medium-sized parks of up to 5 MW offers very good market opportunities along the entire value chain. Mattos puts the business potential of decentralized generation at R$10 billion over the next four years.
Strong competition for complete systems
Competition in the complete systems segment is already quite high. The annual market study conducted by the IDEAL Institute (http://institutoideal.org) shows that the market has matured over the past five years. Due to the high sales volume, sales companies of complete systems are strongly courted by component manufacturers. The price pressure is very high. After bad experiences with cheap suppliers, many distributors now pay close attention to protect them from warranty claims. This could create opportunities for high-quality foreign suppliers.
Agriculture and remote communities need off-grid systems
In rural areas, preferential electricity tariffs are increasingly being omitted. Thus, many agricultural cooperatives and farmers face massive tariff increases. Off-grid systems can lead to significant savings.
More and more photovoltaic systems are replacing expensive diesel generators in isolated grids in the Amazon region. In addition to programs run by the Ministry of Energy, the privatization of power utilities intensifies this trend. In the catchment area of the electricity suppliers Eletroacre in the state of Acre, Ceron in the state of Rondonia, Boa Vista Energia in the state of Roraima and Amazonas Energia, which were all privatized in 2018, there are many isolated grids.
Storage technologies will gain in importance
Brazil’s isolated grids, as well as the strong regional concentration of wind and solar energy in the northeast, require increasingly inexpensive storage technologies. There is a great deal of interest among local utilities, especially due to the risk of power outages, which affect consumers to varying degrees depending on the region. Thus, storage technologies will increasingly be taken into account in energy planning.
Brazil is gradually beginning to invest in storage technologies. In March 2019, Brazil’s first large solar power storage facility went online in Uberlândia (Minas Gerais). The lithium-ion storage with a capacity of 1.36 MW was imported from China and is a research project of Alsol and the state-owned Cemig Group. Three further CPFL Energia projects of the Chinese State Grid group will be installed before the end of 2019.
5. Market Barriers
Uncertainties and irregular allocation of PPAs complicate planning
Brazil’s electricity sector has been waiting for five years to clarify responsibility for the risk of insufficient rainfall. As a result of drought, hydropower plants were temporarily unable to fulfill their contracts in 2014. The alternative supply of expensive electricity from gas-fired power plants resulted in costs running into billions. As long as the question of responsibility has not been clarified properly, numerous legal actions will prevent payments for electricity surpluses to the short-term market.
Uncertainty also hampers investment in the independent electricity market. Congress debates a law that would create a new legal basis for the so-called Generation Scaling Factor (GSF) concept. The positive consequences of this solution are not expected until 2020.
Business association ABSOLAR asks for more involvement in the award of long-term purchase contracts. An annual contract volume of 2 GW is required for sustainable growth in the sector. The industry association is currently working to ensure that solar energy projects can also participate in the so-called A-6 auction on 26 September, in which 20-year contracts are awarded, starting 2025.
6. Local Industry Structure
Imported components are often less expensive than local products
The high market potential and various government commitments for investment promotion attracted international manufacturers to Brazil in 2016. The module manufacturers BYD Energy and Canadian Solar are among the most important investors. However, there is a lack of implementation of the commitments.
The distortion in taxation and customs clearance is particularly serious. Rodrigo Sauaia of ABSOLAR complains that manufacturers in Brazil pay far higher taxes on the import of solar cells than companies importing finished modules. Moreover, due to the time gap in the award of PPAs, the companies will have two more years without major orders ahead of them. As a result, many module manufacturers are not making full use of their capacities. The future of the eight module manufacturers in Brazil depends heavily on the implementation of political commitments.
In general, the prospects for the development of the solar industry in Brazil are good. According to ABSOLAR CEO Sauaia, around 30 companies already manufacture all the components for PV systems in Brazil. Only a few preliminary products such as ingots and silicon wafers, silicon solar cells, backsheets, and junction boxes are not yet produced locally.
In a study on the PV value chain in Brazil, the Brazilian institution for the promotion of small and medium-sized enterprises SEBRAE recorded more than 400 suppliers and 1,000 service providers. The SEBRAE study expects the competitiveness of domestic suppliers to increase significantly in most segments by 2020. Following major successes in the domestic market, the Brazilian WEG group is already expanding into Argentina and other emerging markets.
|Ministério de Minas e Energia MME||http://www.mme.gov.br|
|Agência Nacional de Energia Elétrica ANEEL||http://www.aneel.gov.br|
|Empresa de Pesquisa Energética EPE||http://epe.gov.br|
|Câmara de Comercialização de Energia Elétrica CCEE||https://www.ccee.org.br|
|Intersolar South America||https://www.intersolar.net.br|