Brazil's oldest wind farm, Mucuripe at Fortaleza in Ceará
All is not well in Brazil. The economy has shrunk dramatically amid an ongoing political scandal, unemployment has soared, inflation has shot up, while the local currency, the real, has lost 35% of its value in the past 12 months.
Yet despite this turmoil, the Brazilian wind industry is continuing its expansionist march forward — adding to the 50,000 supply-chain jobs created in the past six years as it prepares to install more than 10GW over the next five years.
On 1 January, Brazil’s local-content programme reached its zenith, with turbine makers now required to incorporate dozens of locally produced components and put them together in the country. These include assembling nacelles in Brazil; using blades and towers with at least 60% local content; and integrating pitch bearings and pitch controls made in Brazil.
Earning this so-called Finame approval for local content means developers can purchase accredited turbines using hugely discounted loans from the BNDES national development bank — rates that make imported machines uncompetitive in Brazil’s auction-based power-procurement system.
Six OEMs — Vestas, GE, Alstom, Gamesa, Enercon’s Brazilian arm Wobben, and local industrial giant WEG — have played the BNDES game, gradually increasing their turbines’ local content over the past four years. All are expected to get final approval in the coming months, with a combined output capacity of 3GW a year.
“Three had reached the top level before the deadline and now we are carrying out visits and analysing documentation of the other three,” Guilherme Gandra, head of the local-content program at the BNDES, told Recharge in mid-January. “We believe a great effort was taken to build out a totally new industry that now has to stabilise and consolidate itself in order for this supply chain to mature.”
Back in 2009, when the local-content programme was announced, the sector was hugely sceptical. There was no dedicated supply chain, a complex and expensive tax system, high labour and raw-material costs, while the finished product was expected to be 30% more expensive than those produced elsewhere.
But Brazil persevered, and increased the stringency of its demands from 2012, confident that the 2GW-a-year market would be attractive enough to keep the manufacturers interested.
Turbines have indeed turned out to cost about 30% more, but the industry has grown exponentially.
“By our estimates, about R$1bn [$245m] has been invested in Brazil’s wind industry, including investments made in the turbine makers and in the supply chain, of which BNDES has financed about R$300m,” says Gandra.
By his calculations, 25 of the 150 main component suppliers are foreign companies that either set up shop in Brazil or expanded existing facilities to supply the wind sector. These include Switzerland’s ABB, Sweden’s SKF, Denmark’s Svendborg Brakes and Germany’s ThyssenKrup.
Brazilian manufacturers have also moved into wind, most notably WEG, which is building its own 2MW turbines using a design licensed from US-based Northern Power Systems, and parts supplier Romi, which is now producing hubs and bed plates for five of the six OEMs.
“On balance, the local-content policy has increased the cost of wind power in Brazil,” says Brian Gaylord, chief Latin America analyst at MAKE Consulting. But he recognises that BNDES financing has helped offset some of those increased costs and allowed the industry to cope more effectively with the slide of the real.
Now that the turbine makers have reached their maximum local-content levels, the sector “has to gain scale, productivity and improve quality, which will lead to an expansion in the number of suppliers of components”, says Roberto Veiga, co-ordinator of the wind-power committee at the Brazilian association of heavy industry, Abimaq.
Increasing the competition among suppliers, breaking several companies’ virtual monopolies regarding some components, and expanding local content further will all help to reduce manufacturing costs and foreign currency risks.
And in an industry where the price of the equipment is so important to winning contracts, OEMs are already working hard to bring down costs.
Gamesa, for example, sponsored a workshop in São Paulo in January to attract new suppliers, while Vestas’ Brazil boss, Rogério Zampronha, tells Recharge: “We want to get as close to 100% local content as possible to reduce our exposure to foreign-exchange risk.”
The continuation of BNDES support and the yearly government auctions — with higher prices — are vital for OEMs and the supply chain to get a return on investment and to cut costs.
“The ceiling prices need to higher to open up room for the supply chain to get a return on all that has been invested,” says Veiga.
Auctions are also needed to ensure a steady stream of orders.
“We classified our investment in the wind sector as medium to low risk, expecting continuation of policies. It takes between five to ten years for us to get a return on investments with this kind of risk,” says Francisco Vita, Romi’s foundry and machines unit director.
Although the devaluing currency has made imports more expensive, it has also made exports cheaper for those abroad. The extra costs of manufacturing in Brazil are being significantly eroded by the falling real, and it may not be long before the weakening currency makes Brazilian-made turbines a similar price to those built elsewhere.
According to Veiga, if productivity can be increased and costs reduced further, locally made turbines will cost the same as European ones in three to four years’ time. At this point, exports will be feasible, especially to regional and African markets.
Élbia Silva Gannoum, executive president of the Brazilian wind-power industry, ABEEólica, says that her organisation has already started talking to the country’s export and investment agency, Apex, to develop an export programme for the industry.
“[The risk with local content] is that in the end, lobbies of incentivised industries capture these policies and use them a protectionist shield,” says Edmar de Almeida, an economics professor at the Federal University of Rio de Janeiro. “The government needs [to introduce] more sophisticated policies that turn local-content benefits into financing for exports, but Brazilian governments always have difficulties with this kind of long-term thinking.”
Half of the wind turbines spinning in Brazil contain Thyssenkrupp components
5 MINUTES with Sérgio Guerreiro of Thyssenkrupp
Brazil's wind industry is booming, spurred by annual auctions and the three-year local-content programme, which concluded in January.
The programme has attracted an estimated R$1bn ($257m) of investment from six turbine OEMs and their respective supply chains, including foreign companies that have recenly opened facilities or expanded existing production lines.
One of them is Germany's Thyssenkrupp, a traditional supplier of equipment in Brazil that recently expanded its production line for bearings to reach a capacity of 1GW a year for the wind sector.
Recharge spoke to Sérgio Guerreiro, head of the company's bearings division in Brazil.
What is the importance of the wind sector for Thyssenkrupp today, compared with a few years ago?
The wind-energy industry is bringing new opportunities to the companies operating in Brazil. The country already has 289 wind farms, mostly in the Northeast region, and half of the installed [turbines] have components produced by Thyssenkrupp. The company supplies bearings for blades, towers and turbine rotors... Thyssenkrupp also pioneered the early technical contributions to the country’s wind energy, supplying components for the first tower installed in Brazil. It's important to reinforce that Brazil has a favourable outlook that is supported by more than 700 projects currently in operation, construction or planning phases.
What investments did you make to meet the sector's needs?
In order to meet the growing demand of the Brazilian wind market, Thyssenkrupp has completed the expansion of its production capacity for new large-size special bearing produced in Diadema, in the state of São Paulo... The company invested R$35m in this new facility, which is part of the R$2bn investment planned for the country over the next five years according to the market development and economic conditions.
How long will it take for a return on this investment?
The return comes gradually, according to the energy-sector development in the country. In the case of the bearings unit of Thyssenkrupp, the plant capacity is already well used....
What are the main challenges in serving the wind sector?
The main challenge is to continue the development and investments in the national industry. In addition, it's important to ensure that Brazil has a diversified energy mix, able to support the growth of the wind sector.
Thyssenkrupp is a leading provider in large-size bearings and operates in this segment in Brazil since 1978. The regional co-operation and integration with other Thyssenkrupp local units is also a key growth driver to us. Besides that, the company is constantly investing in research and innovation to meet market demand. Today Thyssenkrupp operates the world’s biggest R&D centre for slewing bearings in Lippstadt [western Germany], using state-of-the-art technology to test and optimise forward-looking bearing designs under the toughest conditions.
Who are your customers?
Globally, Thyssenkrupp supplies almost all major wind turbine manufacturers with bearing products.
What are the main risks for the wind industry?
The company believes that all risks can be minimised with appropriate long-term planning for the sector, which means that the regulatory framework to stimulate the use of renewable-energy sources in Brazil should be continuously promoted. The development of this market requires a stable and sustainable regulatory environment.
Brazil is one of the group's priorities and we have a strong commitment to the country since 1837. We are aware of Brazil and its economy, so it will continue to focus on this market. The company employs... more than 12,000 employees in the steel, automotive, energy, infrastructure, mining, cement, construction, chemical, petrochemical and defence segments in all of the country’s regions.
'The transition to a low-carbon society creates business opportunities,' says Irene Rummelhoff
Norwegian offshore energy giant Statoil has launched a new venture capital fund with an eye on investing in renewables start-ups.
Statoil Energy Ventures (SEV) has earmarked up to NKr1.7bn ($200m) to spend over four to seven years to back technologies in offshore and onshore wind, solar, energy storage, transport, energy efficiency and smart grids.
It will be "one of the world’s largest corporate venture funds dedicated to renewable energy", says Irene Rummelhoff, Statoil’s executive vice-president for New Energy Solutions.
"The transition to a low-carbon society creates business opportunities, and Statoil aims to drive profitable growth within this space."
SEV managing director Gareth Burns adds: "We offer a strong financial muscle and are ready to invest in three strategic areas: supporting our current operations in renewables; positioning in renewable growth opportunities; and exploring new high-impact technologies and business models."
The new outfit will operate with a global mandate, initially based out of Statoil’s offices in London and Oslo, taking direct positions "primarily as a minority shareholder" with a focus on "growth-phase investments" in renewable energy.
SEV will operate alongside Statoil’s existing venture entity, Statoil Technology Invest, which handles early-phase investments in upstream oil & gas.
Statoil is currently putting its biggest renewables bet on offshore wind via projects including the 315MW Sheringham Shoal, 402MW Dudgeon and 7.2GW Dogger Bank developments off England, as well as the 30MW Buchan DeepHywind floating wind array off Scotland.
.Chinese energy policy through to 2020 is set to be spelled out in the country’s 13th Five-Year Plan (13FYP), which is due to be finalised at the National People’s Congress in Beijing on 14 March and implemented a few days later.
Draft documents of the 13FYP show that authorities are keen to correct past mistakes in the world’s largest renewables market and fine-tune existing development policies. And a shift in emphasis from pure installation capacity growth towards projects’ energy output and sustainability for utility-scale projects offershuge opportunities for foreign companies
Policymakers in the world’s biggest renewables market are expected to raise the PV installation target from 100GW to up to 200GW by 2020; improvements in the speed at which state subsidies are paid — a problem that, in many cases, has led to severe cash-flow problems for developers; and a major drive to increase offshore wind development.
“We expect the government to put less emphasis on the wind installation target in its 13FYP,” says Bloomberg New Energy Finance analyst Yiyi Zhou. “It will focus on solving problems [that have] plagued China’s wind industry, including severe grid curtailment, the subsidy payment issue, lengthy project permitting processes and a lack of offshore wind technology.”
The first policy change expected to kick in this year will be the start of annual reductions to the feed-in tariff (FIT) for onshore and offshore wind. The draft 13FYP submitted in October showed “severe” cuts, according to MAKE Consulting analyst Shane Sun. “I don’t think it’s going to be sustainable — there’s going to be a lot of opposition from IPPs [independent power producers]. There should be substantial changes to the final release [of the 13FYP].”
The big question is whether the government will launch a Renewable Portfolio Standard (RPS) by the end of 2016, which would shift the focus from installation growth to generation and consumption, Sun says.
“That should bring down curtailment, or at least reduce curtailment,” he argues. “It would help the cash flows of the entire industry significantly.”
Several provinces are now pushing RPS plans and these could be brought together in a national system in 2016. An RPS, coupled with ongoing efforts to reform the Chinese electricity sector, are a “good sign”, says Sun.
Beijing may also raise the combined onshore and offshore installation target for 2020 from 200GW to 250GW. “It’s probably a little too high,” Sun says. “We probably should exceed 200GW, but reaching 250GW will be a challenge.”
It is believed that the government will give offshore a “strong push” from 2016, with Sun noting that policymakers are discussing a new cumulative installation goal for 2020 of 12-12.5GW. Even a target as low as 10GW would contribute to “speedy” growth. Sun hopes annual offshore installation will reach 1GW in 2016, with “gradual improvements” every year after that, and “maybe significant growth around 2019-20, when we could see maybe 3-4GW per year just to meet the target”.
Onshore, Western turbine suppliers will have had a strong year in 2015 on the back of historically high installations, but Sun believes that “they’re not going to get any significant improvements in market share over the 13FYP period”.
The outlook is different offshore, where a growing need for Western technology and expertise could open up the market to foreign OEMs and developers. “We’re also beginning to see a lot of interest from Chinese IPPs to co-operate with some European heavyweights, in terms of offshore joint ventures, either in Europe or China,” Sun says. “Definitely there should be more opportunities for Western players if the supporting policies continue for offshore.”
That door will swing in both directions in 2016, as Zhou says Beijing “will encourage turbine manufacturers to become globally competitive and to actively explore cross-border business during the 13FYP [period], with the support of the domestic banks”.
Macquarie analyst Patrick Dai also believes the government may focus on selling renewable electricity to other countries in Asia. “Power expansion, power exports, renewables exports will surely be mentioned in the 13FYP,” he says.
The biggest change to the local solar industry from the 13FYP will be the increased 2020 installation target to up to 200GW, says IHS analyst Frank Xie. But a decision to finally give a definitive period for PV subsidies of 20 years, which was indicated in the draft 13FYP document in October, will be hugely significant, he explains.
“Previously there was no official document talking about the duration of subsidies,” he says.
The 13FYP is also expected to clarify that the Finance Ministry will pay the subsidies, while grid operators will have to pay for the solar-generated electricity (at the same rate as local coal-fired electricity).
“The policy is becoming more clear... that’s good news for the industry and people are curious how the government will allocate enough money,” Xie says. “The government realises this issue now and they’re trying to find a solution.”
It is worth noting, however, that the National Development and Reform Commission (NDRC) is considering cutting solar tariff rates by 2-4% per year through to 2020.
Residential and commercial PV will remain a government priority throughout the 13FYP period, but there are not expected to be any specific new policies to increase distributed-generation uptake.
Dai argues that growth will remain slow for several more years, due to a lack of viable business models for rooftop projects. Organic growth is likely to be the only way forward, as the government will never be able to jump-start the rooftop market in a top-down fashion, he says.
“China never closed its doors to foreign investors,” says Xie, noting that unclear regulations and an inability to compete on price complicated their involvement. “[But] the doors are now opening wider than ever for foreign investors in the Chinese market, because the policies are becoming more transparent.”
ONES TO WATCH is Recharge’s exclusive series of insights into the trends, policies, companies and individuals that will shape wind and solar in 2016.
It is one of the most important things to ever happen to the US wind and solar industries — and almost nobody saw it coming.
One week before Christmas, President Barack Obama signed into law a five-year extension of the two key federal tax incentives, launching the sectors into a new period of robust growth, sustained profitability and policy certainty.
“This is seismic and a major step forward,” says Greg Wetstone, president of theAmerican Council On Renewable Energy, the nation’s leading non-profit advocacy group for the sector, noting that the importance of stable, longer-term tax policy cannot be overstated. “We never had that. It’s critical.”
The investment tax credit (ITC) and the production tax credit (PTC) are essentially the main subsidies for the wind and solar industries — lowering the cost of energy, encouraging private investment and making financing easier. Since 1999, Congress has allowed the PTC to expire multiple times, then renewed it for short intervals, causing boom-bust cycles that have hurt wind development.
Utilities, independent power producers and corporations now have visibility into the early years of the next decade to develop, finance and realise projects, while the supply chain can more effectively plan its capital expenditures, whether for new plants and products or research and development initiatives, says Dan Shreve, partner at MAKE Consulting in Boston. “These short-term deadlines prevented major innovation-type projects such as new wind turbine designs for the US market,” he says.
Ty Daul, senior vice-president at SunPower, notes that a five-year ITC will allow “recovery of the capital and resource commitments that drive advancements”.
Equally important, passage of the extensions by a strong bipartisan majority is a reassurance for investors in an election year in which several Republican presidential candidates say they would work to kill most federal support for renewables.
That tactic would now appear to have little chance of success. “There is really no precedent for going back retroactively and changing tax law. I don’t think that is on the cards no matter who is in the White House,” says Wetstone.
With stable game rules, expect to see a lot more money coming into solar and wind from Wall Street, and investors in Asia, Canada and Europe through financing and equity investments. Both industries are maturing, have achieved a reasonable level of operational excellence, sell to creditworthy off-takers and generate good returns.
Boom time ahead
Now that tax credits are no longer a hostage to politics, consultants predict the US could add as much as 103GW of solar and wind by the end of 2020 — more than the combined 94GW installed over the past four decades. If that occurs, wind’s share of the nation’s power mix could double to 9% and more than triple for solar to about 3.5%.
“That’s significant. The criticism of solar has been, yes, it is growing at a record rate but is still below 1%. Now, you are going to see solar play a major role when you look at new generation over the next six years,” says Dan Whitten, chief spokesman for the Solar Energy Industries Association (SEIA).
Analyst GTM Research, for example, expects the 30% ITC will drive about $40bn in additional solar investment and25GW of extra PV capacity. By 2020, it says the industry will be in position to add 20GW annually, matching the target set by China.
“We’re excited about the prospects across the board both for developing projects as well as supplying equipment. We’re bullish on all fronts,” says John Huffaker, vice-president of development at OCI Solar Power, which has module assembly and tracker system factories in San Antonio, Texas.
The PTC will spur an extra 14-19GW of wind and induce as much as $35bn investment. The ITC for wind could provide a vital financial lifeline for three proposed pilot offshore projects and several early-stage commercial ventures by enabling developers to reduce upfront expense and power prices. That will make it easier to win regulatory approval for off-take deals and obtain project financing.
Achieving these lofty installation levels will require further reduction in both industries’ capital costs; improvement in module and turbine performance; better regional planning to diversify generation sources; more efficient steps to permit and site projects; and investment to expand and upgrade the nation’s ageing grid to handle more renewable energy.
As part of a compromise with the Republican-led Congress that cleared the passage of the $1.1trn spending bill — of which the tax credits were a small part — Obama reluctantly agreed to largely eliminate the PTC and ITC by 2022 and to end a 40-year crude-oil export ban.
Wind and solar now have a precious few years to reach grid parity with fossil-fuel power, and if they manage to do so, it will revolutionise the power industry — and most experts believe such a goal is well within reach.
Bloomberg New Energy Finance values the solar and wind credits at about $25bn over five years. Since 1918, oil and gas has received an average $4.86bn in annual federal tax breaks and subsidies in today’s dollars, according to venture capital firm DBL Investors.
Beyond volume, the extensions will also help steady the market over the coming half-decade, avoiding the boom-bust cycles that the wind industry has weathered because of uncertainty caused by short-term tax policies.
“The certainty of the PTC extension through 2019 allows me to develop a five-year business plan and look into the eyes of my board members with the confidence that it supported by a certain regulatory environment,” adds Gabriel Alonso, chief executive officer of EDP Renewables North America, a major wind developer. “It’s now easier for me to line up capital internally to build up my pipeline and aggressively pursue off-take agreements to construct new projects.”
The solar sector faced a similar scenario as developers rushed this year to complete projects before the ITC was due to decline to 10%. This put the supply chain under enormous pressure and led to inflated prices and shortages for certain components and services. Without the new five-year extension, Whitten says many of the industry’s 8,000 supplier companies faced possible financial ruin in 2017-18 as demand was set to plummet.
“Now, there is more natural demand and supply when it comes to building out your plans over the next few years,” says First Solar’s US president, George Antoun.
Whitten says with the new scenario of measured growth well into next decade, the SEIA is confident that suppliers can ramp up to meet demand. “It’s something they can definitely handle,” he claims.
With policy stability, foreign suppliers will flock to the high-growth US solar market as the European market continues to slow down and China faces an uncertain economic outlook.
“That puts the onus on us who are US-based equipment manufacturers to sharpen our pencils and remain competitive going forward,” says Huffaker.
With order books filling over multiple years, OEMs and their suppliers are moving quickly to negotiate longer-term deals on better terms for raw materials, services, logistics and labour. Cost savings will bolster profit margins across the industry.
Turbine makers GE, Vestas and Siemens are expected to continue dominating the US sector, although the longer time horizon afforded by the PTC will give Gamesa, Nordex and Senvion a chance to build market share, says Shreve.
Alonso says with the PTC extension, turbine suppliers in the US now have the right signals to invest in R&D to reduce the levelised cost of energy (LCoE).
“Turbine suppliers active in the US have received the right signals to invest in R&D to further develop their pipeline of new wind turbine models and look for optimizations in their industrial plans, all of which should help a continuous reduction in the cost of wind power,”he says.
Who benefits where
Solar executives see the ITC extension lifting the entire industry, with the utility PV segment providing the most new capacity nationwide. Developers that froze dozens of projects knowing they could not complete construction this year now have plenty of time to revive them. Big winners will be those with sizeable project pipelines such as Canadian Solar, First Solar, NextEra Energy Resources, Sempra Generation, SunEdison and SunPower.
“We are going to see more midsize utility-scale projects in the 10-40MW range, instead of 100-200MW,” says Thomas Koerner, president of Canadian Solar USA, which, together with subsidiary Recurrent Energy, has 1.03GW of late-stage projects in the country.
Not only is it easier and quicker to build, finance and obtain regulatory approvals for smaller facilities, which lowers costs, they are a better fit for the populous Midwest, Northeast and Southeast, where there is less land available for development and demand for solar is surging.
Projects over 100MW will be largely limited to the arid Southwest, many on federal lands, and in high-growth Texas, where they can be cost-competitive with traditional generation.
Koerner also sees the commercial and industrial PV sector as one of the strongest markets in the years ahead as costs come down amid ITC certainty. This will further encourage companies, municipalities and other non-utility buyers to sign more power-purchase agreements (PPAs).
Huffaker agrees, but sees major growth here from distributed generation (DG).
“DG was taking off anyway. I think it is gaining a great deal of momentum from the ITC extension just because you have better margins.”
Antoun does not expect the ITC extension to impact PPA pricing much, as driving prices down will depend on market fundamentals and technology.
For wind, the PTC renewal will facilitate development in California, the Midwest, New England, the Plains states and south Texas. If transmission build-out occurs, this could allow access to the best resource in eastern Montana, northern Texas and southern Wyoming.
Developers see PPA prices beginning to stabilise and even appreciate a bit later this decade now that they have more time to negotiate and shop around for buyers. As the PTC loses value, deals below the $20/MWh seen in Texas and several Plains states will not be economically viable going forward.
If developers cannot compensate for declining value and eventual elimination of the PTC through technology, better resource, cheaper financing, O&M, or other factors, they will have no choice but to start to elevate PPA prices, Shreve says.