At present, wind energy, solar power and other alternative energy sources make up around 22 % of the Brazilian energy matrix. In fact, the share of renewable energies in overall energy generation has grown considerably in recent years in Brazil and will quite likely continue so in the years to come.
A large part of this development roots in a combination of lower component costs and higher energy prices. Today, the Brazilian solar energy supply chain, which was developing under fairly restrictive financing conditions, covers approximately $1.9 billion worth of goods and services.
Mainly due to Brazil's favorable regulatory framework for solar energy, local companies and prosumers have invested heavily ever since 2012. As a result, and with a number of 94’200 generating units in operation, decentralized power generation (up to 5MW) has already exceeded 1 GW.
The country is slowly shifting towards a more liberal economy and thus should finally get past high government spending and subsidized credit. Consequently, there is a great chance that interest rates could finally remain low - without adversely affecting the inflation target.
What about the current financing landscape for solar projects in Brazil? – an overview of relevant institutions and their lines of funding:
BNDES, the Brazilian development bank, has implemented new financing options that include non-recourse elements. A measure that not only boosts the country's private PPA and trading, but also supports the development of alternatives to conventional project financing.
The longest financing contract granted by BNDES has a term of 20 years. The maximum leverage is 80% and limited to 100% of the eligible components. In individual cases, i.e. if specific parts are not available locally, imports can be taken into account. In actual fact, the interest rate structure equals the sum of the long-term interest rate (which was 6.52 % at the end of 2018), the Bank's spread (e.g. 0.9 %) and the client’s risk. The shortest grace period is 6 months from commissioning.
As the country's largest long-term financing partner, the Bank is currently aiming to change its role from a subsidized lender to an advisory governmental agency. It does so by structuring lending and financing strategies and opening the way for other investment banks.
With regards to foreign companies, the Inter-American Development Bank (IDB) has several lines of funding. Namely, with two local development agencies in the states of Goias and Espirito Santo as well as with BRDE, the development bank of the southern states.
There are also some local banks in Brazil that offer solar project financing upon request. However, it usually comes with more conservative terms.
Public Financing Institutions
Banco do Brasil and Caixa Econômica Federal - two major players - offer credit lines for private customers as well as small businesses. While the former makes up about 74% of total demand for energy projects in Brazil, small businesses account for around 17%. Interest rates are determined according to target group, with a maximum interest rate for credits being at 11.6 % p.a. The contract term is between 6 and 10 years and applies to a financing of 80% of the project costs.
In addition, Banco do Brasil offers a financial product for which customers pay monthly instalments and thus automatically take part in a lottery aiming at obtaining the full amount financed ("Consorcio"). Although there is no interest, participants pay fees of up to 20% for each instalment.
Banco do Nordeste do Brasil (BNB) is the largest financial institution in the north-eastern states. As for its responsibilities, the implementation of public policy strategies is one. In addition, the Bank also grants and manages funds for energy projects, including those related to agriculture. While the BNDES has long concentrated on wind projects, the BNB is a reference for the financing of large solar plants in Brazil.
Private Financing Institutions
Only few private banks offer alternative financing solutions and if so, they usually do not actively promote that type of credit line. Despite the fact that full (i.e. 100%) project financing is possible, contract terms are shorter (5 years) and interest rates are higher.
The Brazilian regulatory authorities are working hard to create a liberal and more competitive market that is less dependent on the state. In fact, private financial institutions are expected to be able to compete with public banks by means of lower interest rates (currently 6%), a reduction in subsidies and an intensification of trade in the unregulated market.
The impact would be far-reaching: not only could the potential of the unregulated electricity market be greatly expanded, but the increased liquidity would also make the market more attractive for foreign institutional investors.
Rachel Andalaft is the founder of REA Consult and consultant for sustainable investments. Being located in Europe and Brazil, REA Consult offers management and consulting services for institutional investors. www.rea-consult.com
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