Long-Term Forecasts Revised On Solar Flare

BMI View : We are maintaining our forecasts for non-hydropower renewable energy generation in Brazil this quarter as recent developments in the sector are unlikely to impact our near-term forecasts. However, we have revised up our long-term forecasts for the sector to account for a surge in interest in solar energy. 

We are maintaining our 2014 forecasts for non-hydropower renewable energy generation in Brazil this quarter. While there were a number of major developments in the sector over the third quarter of 2014, these developments are unlikely to have any foreseeable impact on our forecasts over the near-term.

We are forecasting 1.3GW of new wind capacity in 2014, with the majority coming from projects that have been awarded power purchase agreements (PPAs) in the A-3 and Reserve power auctions in 2011. A total of 1.9GW of PPAs were awarded to wind projects during the two auctions, but we expect a number of these projects to experience delays or even cancellations. Information released by the Brazilian electricity regulatory agency ANEEL in October 2013 showed that a large number of wind projects were behind schedule ( see 'Brazil Renewables: Moderations To Wind, Mixed Overall', October 23 2013). An example of such a delay was evident in March, when Renova Energia had to postpone the launch of six of its wind farms with a combined capacity of 153MW. The delay occurred because the federal utility Chesf had not completed construction of the substation.

Wind Playing Catch Up
Brazil - Non-Hydropower Capacity By Type, MW

BMI View : We are maintaining our forecasts for non-hydropower renewable energy generation in Brazil this quarter as recent developments in the sector are unlikely to impact our near-term forecasts. However, we have revised up our long-term forecasts for the sector to account for a surge in interest in solar energy. 

We are maintaining our 2014 forecasts for non-hydropower renewable energy generation in Brazil this quarter. While there were a number of major developments in the sector over the third quarter of 2014, these developments are unlikely to have any foreseeable impact on our forecasts over the near-term.

We are forecasting 1.3GW of new wind capacity in 2014, with the majority coming from projects that have been awarded power purchase agreements (PPAs) in the A-3 and Reserve power auctions in 2011. A total of 1.9GW of PPAs were awarded to wind projects during the two auctions, but we expect a number of these projects to experience delays or even cancellations. Information released by the Brazilian electricity regulatory agency ANEEL in October 2013 showed that a large number of wind projects were behind schedule ( see 'Brazil Renewables: Moderations To Wind, Mixed Overall', October 23 2013). An example of such a delay was evident in March, when Renova Energia had to postpone the launch of six of its wind farms with a combined capacity of 153MW. The delay occurred because the federal utility Chesf had not completed construction of the substation.

Wind Playing Catch Up
Brazil - Non-Hydropower Capacity By Type, MW

We also expect around 400MW of biomass capacity to come online in 2014. PPAs were awarded to a total of 580MW of biomass projects in the two auctions in 2011, and we estimate that development has commenced on around 400MW of projects at the time of writing. We note that there is a possibility for the remaining 180MW of projects that received PPAs but have yet to start development to be completed by the end of 2014. This poses a slight upside risk to our forecasts.

There were a number of major developments in the sector over the third quarter of 2014. These developments include:

Solar financing: On July 28, the Brazilian National Social and Economic Development Bank (BNDES) said that it had finalised the details for a new financing scheme for solar energy. While the exact details of the scheme have not yet been released, industry sources have said that the scheme will help to lower the cost of capital for solar developers, but come with a local content requirement. We note that the Brazilian energy agency Empresa de Pesquisa Energética (EPE) had designed a special contract for photovoltaic projects in April for the reserve energy tender. This is likely to be positive for investors as it takes the deterioration of the equipment over time into account.

Auctions: On July 10, EPE announced that it was postponing the A-5 and reserve energy auctions to September 30 and October 31, respectively. The auctions were initially scheduled for September 12 and October 10.

Long-Term: Solar Revised Up 

We have revised up our long-term forecasts for non-hydropower renewable energy generation and capacity in Brazil this quarter due to the improving outlook for solar energy. We are now forecasting non-hydropower renewable generation to grow an average of 7.1% per annum between 2014 and 2023 (up from 6.8% previously).

We have significantly revised up our forecasts for solar capacity and generation in Brazil on the back of strong commercial interest in the technology for the upcoming reserve auction. Developers have previously shied away from investing in solar energy in Brazil - there is currently less than 100MW of solar capacity in the country- but appear to be warming up to the technology. Some developers have cited the high resource level, land availability, increasing energy demand, and the improving regulatory and financing environment as key reasons for their interest in the energy.

A key sign of growing interest in solar energy is the surge in solar project registrations for the reserve auction which will be held on October 31. On July 29, EPE reported that it had registered 400 solar PV projects with a total capacity of 10.8GW in the reserve auction. This accounts for nearly 40% of the total projects registered in the auction (1,034 projects with a total capacity of 26.3GW registered). We note that this is the first auction at a national level to include a separate section specifically for solar projects.

Fact Box: Projects Accepted By EPE for Reserve Auction (October 2014)
  Number of Projects Capacity (MW)
Wind 626 15356
Photovoltaic 400 10790
Biogas/MSW 8 151
Total 1034 26297
Source: BMI, EPE

The strong level of solar project registrations in the 2014 reserve auction has prompted us to revise up our long-term solar capacity forecasts. We expect around 500-1,000MW of solar projects to be awarded in the reserve auction, and have revised up our 2017 capacity forecast by around 500MW (as the 2014 reserve auction stipulates that projects are ready for commercial generation by 2017). We have also revised up our forecasts for 2018 and beyond, and we now expect 2,650MW of solar capacity in 2023, up from 550MW previously.

We note that we do not expect any solar capacity to be awarded in the A-5 auction despite the large number of project registrations. In early June, EPE announced that it accepted preliminary project proposals totaling 50.9GW for the A-5 energy auction, including 225 applications for PV power projects with a total capacity of 6.1GW. While this is an encouraging signal for the sector, we do not expect any solar projects to be awarded in the A-5 as there are no separate quotas assigned to solar energy, unlike in the upcoming reserve auction. This means that solar projects in the A-5 will have to compete directly against thermal, hydropower, and other renewable energy projects on tariffs - a scenario that we find extremely implausible given the current costs of development. We note that this was precisely the reason why no solar projects were awarded in the A-3 and A-5 auctions, held in 2013.

Fact Box: Projects Accepted By EPE for A-5 Auction (September 2014)
  Capacity (GW)
Solar PV 6.1
Solar Thermal 0.2
Biomass 1.6
Wind 17.4
Coal 4.4
Natural Gas 20
Hydropower 1
Total 50.9
Source: BMI, EPE

Our forecasts for wind and biomass energy remain unchanged as the outlook for both technologies remains unchanged. In terms of awarded projects, we note that a total of 7GW of wind power projects with PPAs are contractually required to commence generation between 2014 and 2015. PPAs for an additional 4.7GW of wind projects were also awarded in the three power auctions in 2013, and these projects are due to come online in 2016 and beyond. While the amount of PPAs awarded to wind projects in 2013 declined from the highs of 2011 and 2012, the 2013 auctions show that private-sector interest remains strong ( see 'Bids Halved On Tougher Wind Auction Rules', August 20 2013). Meanwhile, we expect around 2-3GW of wind projects to be awarded in the A-5 and reserve auctions. Both auctions will be held later this year, and their awarded projects are expected to come online in 2019 and 2017 respectively.

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This article is tagged to:
Related sectors of this article: Renewables, Biomass, Solar - PV - Renewable, Solar - CSP - Renewable, Wind - Onshore - Renewable, Regulatory/Policy
Geography: Brazil
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