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Renewable Energy is rapidly surging in Brazil, promoted by competitive auctions and long term PPAs. However, Brazil’s ambitious deployment targets are pushing the finance market for alternatives and dynamism. Whilst the bond market emerges as the next best try, the future of financing options will have to be shaped by further innovation.
The Brazilian renewable energy market has grown by an average of 25% per year in the last decade. Solar and wind installed capacity reached about 9 GW as of March 2016. Even though this development was driven almost exclusively by wind power, there are no doubts about the role that solar will play for future growth: State run research company EPE estimates that solar capacity will reach 13 GW in 2025 and 133 GW in 2050 – up from 23 MW today.
Despite the surge in renewable deployment, utility solar is facing serious challenges within its supply chain, constrained by the country’s predominant source of financing, the Brazilian development bank BNDES. BNDES is Brazil’s main provider of long term financing. Since 2003 the bank has financed more than 90% of the total investment for wind power generation, according to estimates based on data from Brazilian energy agency ANEEL; being virtually the sole source of debt financing. It is not that other banks are not active, they are, but mainly focused on the supply chain and development. However, BNDES’ leadership has become a bottleneck. Today, Brazil has a contracted capacity of almost 9 GW of wind and 3 GW of PV, expected to come online within the next two to three years. Additionally, between 3 and 4 GW in solar and wind are expected to be contracted during annual auctions. Financing is critical and Brazilian institutions are eager to find alternatives to BDNES, as exposed in a joint event by CELA and InterSolar this year in Munich. Especially utility solar is striving to meet the bank’s local content rules and sees no immediate financing alternative for an option with cheaper imported modules. At this point, wind and solar suffers a market distortion alike: the fact that BNDES has taken on too long the role of the commercial sector, instead of moving on to slicing the risks and foster a stronger capital market.
An emerging alternative are the so called incentivized infrastructure bonds (Debenture de Infraestrutura). On the 27th of June, 2011 the congress passed the law number 12.431 simplifying the issuance and trade of bonds aiming to finance infrastructure projects. The modifications included, among others, tax benefits or tax exemption for foreign investors, and flexible mechanisms for monetary correction and amortization. Application of the law is subject to an approval by the Ministry of Mines and Energy. Since 2012 there have been 394 ministerial orders approving bond issuance for energy related projects, more than 77% of which are related to wind power projects. However, less than a quarter of all approvals were effectively emitted (see chart above).
Data consolidated by ANBIMA (portal.anbima.com.br/informacoes-tecnicas/estudos/financiamento-de-longo-prazo) shows that wind projects account to 56 approvals accounting to R$ 637 million (US$196 million) in emissions. Yet, this is a rather small number in comparison with the totality of the emissions including short term and other emissions falling out of the infrastructure bonds scheme.
Options for the future
While the Brazilian bond market is picking up pace and striving for liquidity, the sector keeps hoping for further alternative solutions. A recent CEBDS study (content no longer available) suggests solutions that – whilst known to the international market – would mean a welcomed modernization in the finance sector, bringing collateral benefits too. For instance, labelling Brazilian’s infrastructure bonds as green bonds. Besides improving access to public and private capital, it would have the bonus of improving compliance and reporting mechanisms in the utility sector. And, finally, the possibility to trade shares in form of Yieldcos would bring dynamism into refinancing and portfolio management practices.
Rachel is the founder of REA Consult, a management and consultancy company for sustainable investments based in Brazil and Germany. Rachel has international experience with the implementation of more than 1.4 GW of renewable assets.