Solar failed to win any bids in two national renewable energy auctions held in Brazil last year, despite huge interest. But with fresh auctions planned later this year, Lucy Woods asks if the solar party is about get underway for Latin America’s largest untapped solar market
Catching up with its neighbours in Chile and Mexico, last year South America’s largest and most populous country finally opened its doors to solar.
In 2013, for the first time ever, Brazil’s national energy auctions invited applications for solar projects. But its newfound openness towards solar in the national energy tender auctions, the A-3 and A-5, was completely unsuccessful: zero solar tenders awarded.
Not that there was no interest: the first of these auctions, the renewables-only A-3 auction held November 2013, had 2.7GW of solar proposed; the following A-5 auction, open to all energy sources, held in December 2013, had a record-breaking 162 solar projects registered for the promising auction. Tenders for 115 energy projects, totalling 3,507MW were awarded. Again, zero of the tenders for solar.
Solar projects “just weren’t competitive in auctions A-3 and A-5”, Mauro Passos, president of the Ideal Institute, a private non-profit group promoting renewable energy in Brazil, tells Solar Business Focus. “Wind energy is a lot cheaper than photovoltaic. That’s why solar projects weren’t competitive.”
María Benintende industry analyst for Latin America, energy and environment for consultancy Frost & Sullivan explains that to the government of Brazil there are two main priorities: first, sufficient energy supply; second, for the supply to be as cheap as possible. As long as solar fails to achieve competitiveness with other energy sources, it’s unlikely to develop. “That was what happened last year,” Benintende says.
Not surprisingly the ceiling price set in the previous A-5 and A-3 tender auctions was “viable for wind, but challenging for solar projects”, reiterates Markus Vlasits, the Brazil country manager for the world’s largest solar panel manufacturer, and also sponsor for the 2014 Fifa World Cup being held in Brazil, Yingli Solar. “Given that solar and wind energy were placed in direct competition, it was difficult for solar projects to succeed.”
A ceiling price of BRL126 per MWh (US$56.93) was set in the A-3 auction, and by the end, the average price for wind was down to BRL124.43 MWh (US$56.02).
A price that would be economically viable for solar would be “something around” BR250 (US$112), says Thomas Schulthess, managing director of local wind and solar developer, Sowitec Brazil.
Just before the auctions, a consortium of Brazilian energy companies (the Brazilian Association of Independent Power Producers, Industry Association of Cogeneration COGEN, and the Brazilian Electrical and Electronics Industry Association) said a reasonable solar price is between BRL190 (US$85) to BRL200 (US$90) per MWh – far higher than the A-3 ceiling price.
The consortium also called for three solar-only governments auctions, with 500MW of tenders each. However, as far back as two years before, the government had already thought of solar-only auctions.
Solar’s importance and potential was noted by the Empresa de Pesquisa Energetica (EPE), the research arm of Brazil’s Ministry of Mines and Energy in 2012 when EPE conducted a report on the possibilities of using solar in Brazil.
The EPE estimated there was already 20MW of PV installed in the country, but mainly from remote off-grid generation. According to the report, off-grid generation is already cheaper than power from ten out of 63 grid electricity distributors in Brazil.
For the study the Agência Nacional de Energia Elétrica (national electric energy agency, ANEEL) selected 23.6MW to evaluate the technical and commercial feasibility of integrating solar into Brazil’s existing grid. EPE and ANEEL concluded years ago, utility-scale solar is not yet competitive, hinting at the need for exclusively solar auctions that was underlined clearly last year.
In response to solar’s failure in the A-3 and A-5, the north-eastern state of Pernambuco stepped in to host Brazil’s first solar-only auction in December 2013. Six solar projects won tenders: over 120MW of power purchase agreements (PPA) with prices ranging from BR190-240 (US$86-US$108) per MWh, with winning projects to be developed in 18 months.
But it is too early to call the Pernambuco auction a success, says GTM solar analyst, Adam James. “We are still waiting to see whether the Pernambuco auction will yield actual project development,” he says. “Despite the relatively high prices, the PPAs are “still potentially cutting margins too thin”, says James.
Sowitec Brazil successfully bid to build a 30MW solar project in the Pernambuco state auction, but Schulthess reckons national auctions could be better. “There are still a lot of unknown things that make it really difficult to realise the [Pernambuco] project,” says Schulthess.
Pernambuco has already announced another auction for October; the state of Minas Gerais is planning one this year too. Many other states will be watching and waiting for the outcome of Pernambuco to see if the state model can be replicated, or if it should just be left to the big leagues of national level auctions.
Meanwhile, the government announced that this year, in September and October, there will be two national energy auctions – and that in the October one, solar is to have its very own separate bidding section. “Finally,” says Passos, “the government has realised that a sunny country such as Brazil must consider […] solar.”
“Decision-makers and key stakeholders in Brazil are starting to take notice,” agrees Vlasits.
The EPE’s reverse energy auction, LER, is planned for 10 October, with a 5MW+ solar only category, and is “a masterpiece”, says Schulthess. “It is much more organised, it is an established system we know how it works,” he says.
Antonio Cammisecra, head of business development for Enel Green Power, which also won tenders in the Pernambuco auction, says the Brazilian government is setting a “steady regulatory framework” for solar with national auctions, making it “competitive with no need for other incentives”.
As the projects will be contracted separately, this implies that solar energy may not have competed head to head with other energy resources, as it did in previous A-5 and A-3, says Vlasits.
The tenders also provide a flexible three-year project time frame, so solar companies don’t have to wait to start operations. Power plants can be completed “more quickly than other types of generating facilities, especially hydropower and wind projects”, says Vlasits. “They can typically be built in close proximity to substations. Large connection lines do not need to be constructed, as is often the case for wind projects”.
Sowitec Brazil is planning to take part in LER; Schulthess says it’s all about the bottom line: “It is a matter of price, price makes everything; depending on where the price drops to is what will make [LER] interesting or not.”
Prices for the LER solar auction have not revealed solar prices yet. “We have to hope, it will be a solar-specific auction, so it should be adapted to solar and not to all energy sources, as in the past,” says Schulthess.
Schulthess says Sowitec is very aware of the competition, but given the blind pricing, Sowitec has no fixed goal or set number of megawatts to procure at the LER auction.
It’s hoped the government will be kind to solar as the country needs energy produced during its peak period, and solar “matches perfectly”, says Schulthess, whereas major competitor wind, “doesn’t really do this”.
The best strategy for LER to be successful and avoid last year’s bleak result for solar market is by setting a maximum price compatible with the market. “With this decision, it will be possible for investors to present their solar projects,” says Passos.
Drought in solar’s favour
Although no price has been confirmed, just the existence of a national solar auction shows ministers have certainly changed their tune from shrugging “solar cannot compete” just months ago. One reason government is finally taking action could be down to a severe drought that has wrought the country of its major energy source: hydro power.
Benintende explains that there is “general agreement that there was a favourable evolution for solar power in the last months” because the impact of the drought on the country’s hydropower plants and subsequent, intensive use of thermal power plants “increased energy bills enormously”
James also attributes the auction to a change in attitude from minister, which has seen the cost of energy being reprioritised second to the value of energy. “Solar acts as a hedge during drought, providing power even when there is a lack of rainfall,” says James.
“For instance, in an auction process, hydropower is usually the lowest cost option. However, in times of severe drought, the value of hydropower is severely diminished.” As a result, Brazil resorted to financial bailouts for hydro companies. “The cost of solar in an auction may be higher than hydro, but the value in times [of drought], is obviously without question”
As a typical solar power plant can be built in less than one year, “it is an excellent technology to quickly address the energy demand growth”, says Enel Green’s Cammisecra.
The progress Brazil has made to national solar auctions now translates into a potential tipping point. Companies will know by the auctions whether the market takes off or not. “I strongly believe that it will,” says Schulthess.
Brazil can count on its electricity demand growing by around 5% a year, according to energy regulator, ANEEL, with estimates of 4.6GW of newly installed generation required every year. Cammisecra this growth in demand and steady regulatory framework, coupled with high irradiation rates and the availability of suitable land, means “there is vast room for solar capacity expansion”.
With cheap distributed solar soaring in popularity, James reckons the total market size this year for Brazil, will be about 35MW, while Vlasits anticipates “an uptick in demand for solar in Brazil”.
Market analyst firm IHS recently upgraded its forecasts for Brazil, predicting that the October auction could see 500MW of PV offered for tender. Sowitec’s Schulthess says that everybody is hoping the EPE will contract 1GW of solar, which “will be a very nice market”.
Latin American outlook
On July 10, GTM Research published its Latin America PV Playbook. Solar Business Focus spoke to GTM analyst Adam James for his take on the fortunes of solar in the region’s other leading markets.
What are the main barriers in Chile’s solar market?
Chile’s solar market can be broken up geographically. Northern Chile benefits from spans of vast open desert with super solar radiation to match – from there, potential solar plots degenerate from the ideal characteristics of the north. But it is not just the rush to pick out the best spots for laying solar panels on the ground; it’s also where they will be connected. Chile is limited in its grid capability, and then its market ability. Due to limited grid connection and transmission, too much solar connecting at certain points would push power prices to unsustainable low levels.
What is finance like in Chile as there are no government subsidies?
Regarding finance, while banks in Chile have more than enough money available for solar, they are plagued with either a lack of bankable projects, or so many it’s better to sit back and wait for projects to under-bid each other – creating a race to the bottom.
There is also ample trepidation towards long-term financial agreements due to changing markets. One of the key utility solar customers in Chile is the country’s famous mining industry. Mines open and close according to the pricing of minerals; the volatility of such a large segment of the energy market makes long-term contracts unappealing.
This is resulting in completely new business models for solar developers, such as hybrid contracts split into fixed and merchant purchased power, which aren’t new to the energy market, but are brand new to solar.
How is the distributed solar market doing?
As the utility-scale market adapts and evolves, distributed solar is lagging. An eternally delayed net metering policy has stifled any distributed generation taking off.
How does Chile compare to other markets in Latin America?
Overall Chile has some of the largest and most impressive projects to watch – but it’s only for the short term. Preventing Chile from taking the top spot, after five years, the larg- scale market will decline, simply due to Chile’s size. Compared to other Latin American grids, Chile just doesn’t have the capacity or the demand.
What are the main barriers to their solar industry?
Mexico’s energy market is currently on edge for constitutional reforms. Solar projects are being delayed and held in suspense for law changes.
What is the energy reform that is taking place?
The changes aim to cut the strings on the country’s one publicly owned utility: Comisión Federal de Electricidad (Federal Electricity Commission, CFE). The market no longer waiting on the one utility to approve connections and opening up the market aims to enable more independent solar power projects, and to create a new market of independent wholesale producers. In turn, this will speed up interconnection and procurement, and by 2015, should encourage more direct sales, with fewer waiting lists.
What is the distributed market like in Mexico?
Challenging the distributed solar market in Mexico, and common to new markets, is a lack of regulation leaves solar struggling to obtain trustworthy standards and popularity, also the lack of finance infrastructure, and less well-established credit function has made solar leasing tricky in Mexico, though it has started to take root in recent months.
What is your prediction for Mexico over the coming years?
Due to a rising population and standards of living, and the subsequent rise in electricity demand, Mexico’s solar market is predicted to have rapid quarter on quarter growth, with long-term potential. GTM estimates that over 200MW will be installed in 2015, rising to 400-500MW in 2016-2018; long term, Mexico is the place to invest.
What are the current conditions of Argentina’s solar market?
Rising energy prices and high energy demand should lay the foundations for Argentina’s solar market – but no one will finance it.
Why will no one finance projects?
Sky high interest rates caused by Argentina’s sovereign debt has cut out foreign investment. Zero investor trust in repatriating and no assets have left Argentina’s promising solar market starved of capital. But despite this, some of the municipal and state entities have stepped up finance for solar.
What is the market potential in Argentina for the near future?
There is growth potential, but it’s all on local commercial, and municipal or state funding, no international money is placed in solar plants here.
What is Peru’s solar market like?
Already with 80MW built through auctions, Peru is the most mature solar market in Latin America: Peru is where solar investors feel confident. In the last quarter, Peru had the most installed PV of any country in Latin America, with another 20MW to be connected at the end of the year. Peru has got the solar auction formulae figured. Renewable specific auctions tailored so that solar is cleared and built – but only when it is included.
Is Peru a good place to invest long term?
Every year the market relies completely on whether or not solar will be included in the national auctions. When solar is included, it does well, investors get excited and further foreign investment is attracted, but when it doesn’t, there is no opportunity for solar.
What could the future hold for solar in Peru, and how does this compare with other countries in the region?
Left to the whims of the country’s energy plan, forecasting Peru’s solar market from year to year is impossible without knowing if solar is going to be included in the national auctions or not – but when it is, solar claims a certainty that is not granted in other Latin American countries just yet.
You don’t hear much about Bolivia, are there any utility developments yet?
Still in infancy, Bolivia has little potential for the big leagues just yet. Progressing from splintered off-grid development, some installers will transition onto the grid but slowly, keeping the market miniscule for the foreseeable future. A pilot 5MW utility solar project is underway, but with no domestic solar industry, resulting in everything being outsourced, compared to other opportunities in Latin America, international developers are not looking at Bolivia – better to invest in Brazil, Chile and Mexico.
What is forecasted for Bolivia in the next few years?
Bolivia could plan to have more than the 5MW projected: a solar tender inserted into the country’s energy procurement process to encourage larger sized solar projects would attract interest. If there was a price floor set on the bidding, to guarantee a return and mitigate market risks, Bolivia’s market would grow rapidly.