Brazil's latest wind energy auction, held last December, produced some of the lowest prices for wind power generation outside of China: The A-5 auction awarded 10 wind projects with a capacity of 282 MW for a price of R$87.94/MWh (U.S.$43.30/MWh).
"Both prices and demand were down significantly from the same auction held in December 2011 and for similar auctions in 2009," explains Jonathan Lane, head of consulting for power and utilities at research and consulting firm GlobalData. "Developers that are awarded power purchase agreements (PPAs) in the A-5 auctions need to begin generation within five years, and A-3 winners within three years.
"To put this price into context, the average 2012 wholesale electricity price in the USA’s Northeast Power Pool was $42.20/MWh, pricing Brazilian wind generation on a par with shale-gas-fired U.S. generation,” he adds.
However, the question arises: Can Brazil maintain its low wind energy prices and allow the country’s wind energy developers to profit from their projects, when its national financial policies favor local turbine manufacturing over cheaper Chinese imports?
According to Lane, the answer is likely no - unless developers manage to drive down prices significantly compared to international norms.
Most international wind energy developers would require an internal rate of return (IRR) of 10% to 11% in order to develop a project. The key factors in achieving this return are the wind yield of the site - which will determine the plant’s load factor, its generation and revenues - and the capital costs associated with the projects, including the turbine, tower, civil works, planning and consenting, grid connection and other costs.
“Vestas reported an average price of 1 million euros ($1.34 million) per megawatt in Q3 2012, which would produce a typical IRR in Brazil of 0% at a 30% load factor,” Lane explains. “To achieve a 10% IRR, the turbine and tower would have to be nearly free to charge.
“For an exceptional project with a load factor of 40%, turbine prices - including tower and warranty - would have to reach $800,000/MW, assuming the balance-of-plant costs remain fixed and grid connection is free, to achieve an IRR of 6%,” he continues. “This implies a 40% fall on Q3 2012 Vestas prices, where turbine prices were already severely affected by subsidy cuts and overcapacity in the wind turbine industry.”
However, if developers could source turbines from Chinese manufacturers, they would be excluded from the financing available from the Brazilian Development Bank, which requires 40% local manufacturing. Therefore, Brazil lacks the ability to simultaneously boost its wind energy generation and encourage local manufacturing.
Although there are examples of wind projects in Brazil using imported equipment from China and Chinese financing, it cannot be expected that this will become the norm, according to GlobalData.
Although the firm’s analysis excludes revenue that would be made available by the United Nations’ Clean Development Mechanism, certified emission reductions prices have fallen below one euro per metric ton of greenhouse-gas emissions offset and are unlikely to provide significant financial support in the short to medium term.
“Compare this to the situation in another emerging wind market - Turkey - and one can see how the economics in Brazil do not quite add up,” Lane says. “Turkey has a feed-in tariff of $79/MWh available for projects that have 40% local manufacturing, which will deliver an IRR of 11% [at] current turbine prices.”
Another useful comparison is South Africa’s Department of Energy, which has run two auctions for wind energy since 2011 and has plans for a third.
“In Window 1 of the renewable IPP program, PPAs were announced for 634 MW of onshore generation at a price of R1,143/MWh ($127.1/MWh) in December 2011,” Lane adds. “Window 2’s preferred bidders were selected in May 2012, where 563 MW were approved at an average price of R897/MWh ($99.7/MWh). Local content was also an important part of the [request for proposal] requirements, with Window 2’s projects delivering 36.7% local content.”