BMI View : A greater-than-expected slowdown in the Brazilian economy has led us to revise downwards our renewables forecast for 2012. However, our outlook for renewables in the long run remains positive, as we expect to see significant growth in electricity consumption, and in boosting diversity in the energy mix. We particularly highlight the growth potential for wind energy and this is due to the country's wind potential and domestic manufacturing market.
We forecast non-hydropower renewable generation to grow by 6.9% in Brazil in 2012. This represents a marked slowdown from our previous forecast of 8.4% in June 2012. This downward revision in our forecast is attributed to a rapid slowdown in the country's economic growth. In July 2012, our Country Risks analysts downgraded our 2012 real GDP forecast from 3.9% to 2.4%due to structural economic imbalances in Brazil. This has prompted us to downgrade our full-year electricity consumption growth forecast from 4.5% to 2.5%.
Over the long term, we forecast non-hydropower renewable generation to grow an average of 8.6% per annum between 2012 and 2021. This will be driven by strong growth in electricity consumption, and by the government's decision to diversify the country's energy mix.
|Strong Growth In Renewables, Especially Wind|
|Brazil - Non-Hydropower Renewables Generation, TWh (LSH); Non-Hydropower Renewables Generation Growth, % y-o-y (RHS)|
The Long Run Growth Story
Our expectations for long-run electricity consumption growth in Brazil are based on the demographic boom Brazil is currently experiencing. The country's population is expected to grow from 191.5mn in 2010 to 205mn in 2020. Per-capita electricity consumption in Brazil is also relatively low at 2,400kWh (2011), as compared to 12,400kWh in the US. Per-capita consumption is set to increase drastically, as we are predicting a consumer spending boom during our forecast period. Industrial activity is also likely to grow, and we see the possibility of steel, cement, and aluminum production doubling over the next decade.
We believe that most of these increases in electricity consumption will have to be met by renewables. Brazil ranks as one of the top ten largest emitters of greenhouse gases in the world, owing largely to emissions-intensive industrial sectors such as petrochemicals and steel production. In recent years, the country has come under increasing pressure from both the international community and domestic environmental groups to reduce its emissions. The country is thus looking to develop the renewables sector as a long-term solution to its emissions problem.
Besides environmental concerns, the development of renewables in the country will also allow it to gain greater energy security. Brazil is highly dependent on hydropower (80% of power generated in 2011 was hydropower), and has suffered power shortages in the past due to dry spells. These factors have led the government to provide substantial incentives for the renewables sector, with a particular emphasis on the wind and biomass sectors.
|Lacking Energy Diversity And Security|
|Brazil - 2011 Electricity Mix|
Wind Energy - Price Parity With Thermal
The wind energy sector in Brazil has experienced remarkable growth over the last three years. This is primarily because the country has some of the strongest and most consistent winds in the world. Brazil has 9,650 km of coastline along the Atlantic, and winds along the northeastern coast blow consistently throughout the year. This has allowed wind farms to operate at extremely high capacities for most of the year, greatly lowering the cost of generation. During a government-organised power auction in August 2011, 44 wind farms were awarded to developers, at an average winning bid of $62.91 per megawatt-hour. This electricity price is below the average bids submitted during recent auctions for natural gas and hydropower plants, making it more cost-efficient for the Brazilian government to develop wind power.
We also believe that the fall in wind turbine prices has made the price of electricity from wind farms more competitive. Global turbine prices have dropped by 20% over the last three years as a result of fiercer competition, especially from the Chinese. Due to the attractiveness of the Brazilian market, many manufacturers have set up shop in Brazil, prompting domestic suppliers to cut prices as well. This influx of cheaper turbines has caused decreases in development, which has in turn reduced generation costs.
Local Manufacturing Sector, But At A Price
We believe that the Brazilian government is looking to develop its wind turbine manufacturing sector, but note that the regulations put in place have both positive and negative effects on the sector. The main mechanism used by the government to develop the renewables sector is the Programme of Incentives for Alternative Electricity Sources (PROINFA), which was enacted in 2002. The PROINFA, through the Brazilian Development Bank (BNDES), provides cheap financing to renewable energy project developers in the country. This is because access to private financing remains extremely expensive in Brazil. However, the PROINFA requires project developers to use equipment with a minimum local content of 40%, even if equipment is imported. This requirement rises to 60% over the next three to five years.
The domestic turbine manufacturing sector in Brazil has benefitted from these regulations. In order to submit equipment tenders for Brazilian projects, international manufacturers have to either open manufacturing presences in the country, or purchase components from Brazilian upstream producers. This has resulted in an increase in the number of wind turbine factories in the country from two to seven since 2008 (according to the Brazilian Wind Energy Association). Additionally, a number of upstream component manufacturers have entered the market in order to help international manufacturers achieve the minimum local content.
However, some wind energy developers and operators are suffering as a result of these regulations. Financing for an estimated 2GW of projects was frozen in July 2012, as they failed to meet the 40% local content requirement. This could cause a number of projects to be cancelled or to incur additional costs.