27/08/2015

China's flagging economy complicates Brazil's PV market

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Recharge News

The growing uncertainty over China's economy has cast a pall over Brazil's upcoming solar auction, putting pressure on the government to clarify and streamline its plans for the sector. 

Demand for solar energy is increasing in Brazil, as domestic power rates rise. Solar developers have a strong appetite for utility-scale projects in the sunny country, with some 20GW under development.

Yet industry sources say that not all of the pieces are in place to guarantee a healthy market development – and China’s recent economic problems represent another headwind.

China’s recent economic troubles have sparked a renewed round of devaluation of the Brazilian real against the US dollar, increasing the cost of importing panels into the country. Higher panels prices could dent the returns from projects that will be contracted at tomorrow’s auction.

Just a month ago, Brazil’s nascent solar industry celebrated the “realistic” $R349/MWh cap price on solar projects in Friday’s auction – a 33% rise on the R$262/MWh ceiling in place during last October’s solar auction.

As a result, solar developers and manufacturers alike were looking forward to Brazil contracting a record amount of capacity in tomorrow’ auction, surpassing the 890MW contracted last year. Some 12GW have been shortlisted in Friday’s auction.

But the real has fallen significantly over the last month, and is now at its lowest point against many foreign currencies in more than a decade. And the economic problems in China – a major importer of Brazilian iron ore and agricultural products – appear far from over.

The weakened real “will be a challenge” for bidders in the auction, says Rodrigo Sauaia, the normally upbeat executive director of the Brazilian Solar Power Association (ABSOLAR).

Among other challenges for the sector are rising finance costs from Brazil's National Development Bank (BNDES), amid deep government budget cuts, and Brazil’s lack of local solar manufacturing.

Between 70%-80% of the total cost of a solar project in Brazil goes toward components.

With the real falling, everyone in Brazil’s solar sector is looking for ways to reduce risk.

CPFL Renováveis, for example, has not yet decided whether it will bid for contracts for its 500MW solar pipeline.

“PPAs awarded in [the local currency the] real are devaluing almost overnight, and it is incredibly challenging to justify capital expenditures from foreign companies in this financial climate,” says Adam James, senior solar analyst at US-based GTM Research.

James is upbeat about Brazil’s solar market in the long run, however. He predicts that by 2020 Brazil will have 5.7GW of solar capacity installed, more than 1GW of it built by the end of 2017, which is the deadline for projects contracted in 2014 and 2015.

Absolar’s Sauaia, who expects more than 1GW to contracted in the two auctions this year, is also a long-term optimist.

“The appetite demonstrated by investors is being answered by the support from the government, which announced it would contract 2GW to 3GW through 2018, and from the BNDES which says it is willing to finance solar PV projects with the lowest rates in the local market, as well as new modules assembly plants in the country,” Sauaia says.

Locally produced modules are considered key for developers to guarantee a return on investment. In addition to guaranteeing access to cheap finance from the BNDES, they also reduce exposure to the foreign exchange risk that comes with importing panels.

Nevertheless, PV manufacturers have been slow to embark on Brazil's five-year, stringent local content program.

Brazil has a tiny module capacity today, and no cell capacity.

So far, only China's BYD has firmly announced plans to build a 400MW module assembly unit.

Pure Energy intends to build a 40MW module assembly plant, while this week local start-up Globo Brasil inaugurated a 180MW plant – the country’s first.

Other large global solar manufacturers, including SunEdison, Canadian Solar, Yingli and Jinko Solar, are present in Brazil, with commercial offices importing equipment for a growing rooftop market.

SunEdison last year said it was studying plans for a 140MW module plant in Brazil. But no tier-one solar manufacturers have yet made firm commitments in the country.

Meanwhile, with developers needing to finish the first round of utility-scale projects by 2017, the government is running out of time to iron the wrinkles out of a complex and regionalized tax system, while addressing contradictions like low import tariffs for modules but high duties on the raw materials and components that go into modules.

Making matters worse, fiscal control measures seem to be hampering efforts to support the solar industry from within the government itself.

“The government is late with its [solar] industrial policy,” says Sauaia.

“The mines and energy ministry has done its job by indicating that enough solar will be contracted each year,” he says. “But we need to convince the finance and budget ministries that [industry] revenue will only rise with incentives in place.

“At the moment, they collect almost nothing from the solar industry because it doesn't exist. But in the future – even with low taxes or exemptions [for solar] – a fully-fledged industry will increase tax revenues, including from job creation.”

In such a climate of uncertainty, solar developers can be expected to keep their bids as closer to the R$349 ceiling as possible.

The kinds of companies that can be expected to bid either have strong balance sheets, see an advantage in being a first mover in a big market, or have a larger portfolio of which solar is only a small part, says GTM’s James.

For Brazil’s government, which saw solar as a way to quickly replace expensive and polluting thermal plants and drought-depleted reservoirs, China's downturn could not have come at worst time.
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