1st wind energy auction - Brazil

Brazil

Brazil is set to see a step change in the level of foreign investment into renewables projects.  Following a report on the expansion of wind energy in Brazil that was released by the Organisation for Energy Research (EPE) earlier this year, the Brazilian Ministry of Mines and Energy (MME) has now declared that the country’s first wind energy auction will be held by the National Agency for Electrical Energy (ANEEL) on 25 November 2009. 

This announcement is being followed closely by companies with experience in the development, operation and financing of wind farms, and with very few foreign renewables sector investors active in Brazil already this will be an opportunity for those seeking to cross-sell experience gained from projects elsewhere.

It is expected that the auction will capture the interest of a number of international generating companies, as well as some new local players.  For example, the Director of Gas and Energy of Petrobras, Maria das Graças Foster, has announced their intention to participate, as part of an ongoing process of diversification.

Background

Despite Brazil’s current low level of wind generation (installed capacity of 359MW), the EPE report highlights Brazil’s huge wind energy potential (143,000GW onshore) and its importance to Brazil’s energy mix.  Brazil currently relies on hydroelectric generation for the vast majority of its power generation, which relies in turn on consistent rainfall.  With wind energy potential greatest during the dry season and in some of the drier regions of Brazil, including the North East, wind is seen as a potential hedge against low rainfall and the geographical spread of existing hydro.

Details of the Auction

ANEEL is inviting bids from generators for the supply of wind energy over a 20-year period beginning in January 2012.  Power will be sold into the regulated energy market pursuant to so-called “Contracts for the Commercialisation of Energy in the Regulated Environment” entered into between the generator and the distribution companies.  Bidders will specify the quantity of power to be supplied and a price for their output in R$/MW.

To take account of the fact that wind power potential in Brazil has not yet been thoroughly assessed, investors will benefit from a 10% margin of error and a four year period in which to balance supply. 

  • Above the 10% margin of error, power will be valued at the lower of: (a) the contract price; (b) the Reference Value, which is determined by ANEEL based on a weighted average auction price; and (c) the Price for Liquidation of Differences (PLD), which is used in the short term electricity market and based on marginal costs of operation.
  • Below the 10% margin of error, where a generator does not supply at least 90% of the contracted amount, its output will be valued at the contract price, subject to fines.
  • At the end of each four-year reconciliation period, the contracted quantity will be adjusted to the average annual production over the preceding four years, subject to a cap at the level of the originally contracted amount.

How to bid in the auction

To be eligible to bid in the upcoming auction, generating companies must register in an online system (AEGE) established by the EPE and provide technical details of their projects by 29 May 2009 and various documentation relating to environmental licensing and access to the transmission network.  In particular, to receive technical approval, companies must undertake to use brand new wind turbines and provide historic wind measurements for the area for a period of at least 12 consecutive months since December 2003.

Potential use of CERs

A number of European generators have already stated an interest in the auction, which could provide them with the additional incentive of receiving Certified Emission Reduction credits (CERs) if the proposed wind farm developments become accredited under the United Nations’ Clean Development Mechanism (CDM).  These credits can then be traded to companies subject to strict greenhouse gas emissions caps, such as companies in the EU that are subject to the EU Emissions Trading Scheme.  While current CER prices for primary purchases from such projects (compared with secondary trades) remain low, it is expected that the current fall in prices resulting from the economic downturn will have been reversed by the time the investments in these projects realise CERs.