Cancellation of the auction threatens investment in wind energy in Brazil

The Brazilian wind industry was taken by surprise on Wednesday the 14 December, when the news came in that the 2nd Reserve Energy Auction (2nd LER 2016) had been cancelled. Originally scheduled for 19 December, the auction was expected to include solar and wind energy. "At a time when the government is announcing a major package to stimulate investment, it makes no sense to discourage such a young industry which has been attracting huge investments over the recent years. An industry that requires no government package, as it has consistently grown, creating 41 000 jobs in 2015 and 30 000 in 2016. Our rather modest forecasts show that even if fewer than 1 GW had been contracted at the auction, it would have meant an additional investment of R$ 8 billion and some 15 000 new jobs" said Elbia Gannoum, CEO of ABEEólica. The Brazilian wind energy supply chain has invested more than R$ 65 billion in new wind-related projects. Already 80% of the equipment is made domestically, with six generator manufacturers, four blade makers and about 1,000 equipment suppliers in the country.

"Large international companies came to Brazil, built wind farms and created jobs. It is important to understand that in the wind industry, energy contracted today will generate contracts and jobs in the coming two years. Since less wind energy was contracted in 2015, some plant capacity was idle in 2017. With no wind energy contracted this year, plants will be practically at a stand-still in 2018. Large companies will not remain in Brazil if their plants are idle. The risk that the production chain will demobilize is large, and this would essentially be a mortal blow to such a young and promising industry, which currently generates the most competitive energy in the country, remembering that there are limits on projects for new large hydro plants. This decision is simply not consistent with other government objectives to ensure renewed investments to drive the economy", said the executive.

The government's decision to cancel the auction was based on the argument that there is excess energy, which ABEEólica refuses for the following reasons:

  • If we take a look at this "leftover" energy, we must also look at the price and quality.  If we look at thermal plants, for instance, the government's move today means that more competitive energy reserves will not be contracted, which may require using more expensive energy.
  • Auctions for reserve energy are part of the government's strategic planning, and when we look at the broader scenario this decision seems inconsistent. First, it is essential to consider the time it takes to produce energy. An energy auction will not solve tomorrow's demand, or even next week's. Efficient planning requires looking at the energy we will need in future. This is the underlying concept of energy security. Brazil must start enhancing energy security. Failure to carefully take this into account in the past has led to serious supply crisis and huge costs from switching to use thermal power plants.

Planning based on energy security is even more important today, when the government has an intense agenda to promote renewed growth, signaling new investments in infrastructure. Thus, the reserve auction to contract wind power is essential to make sure that we have the energy that we so desperately need for the economic recovery in the country. Furthermore, it is essential to analyze how the market as a whole is supplied, including the total risk and total cost of operation.

"We will go back to swinging between "too much and too little" energy because of lack of broader analysis and planning. Clearly if we look only at the GDP of the coming year, and if we are talking about an A-3 and A-5 auction, one might conclude that no auction is required right now. However, if we look at the macro scenario, including initiatives to attract investment and resume economic activity, positive signals to investors and planning based on energy security and competitive energy, canceling the reserve auction was a grave mistake", Elbia Gannoum added.

The government also argues that the reserve auction would place a burden on consumers in the form of the EER (Reserve Energy Charge). "This is nonsensical for the following reason: from a commercial point of view, contracting reserve energy results in a higher EER. However, the EER of a wind farm may be considered as an insurance, as it reduces the probability that higher-cost thermal plants will be switched on. In fact, in periods of unfavorable hydrology, the increase in rate from yellow or red flags can be quite a bit higher than the EER. Bear in mind that we are seeing the worse hydrology since the ONS started keeping records. Wind farms are essential to supply energy to the northeast, especially when we look at the low level of the Sobradinho reservoir" said the executive.


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