Brazil’s requirement that wind-turbine suppliers buy locally is increasing costs for providers from Vestas Wind Systems A/S to Suzlon Energy Ltd., who say the rule will probably drive away some companies.
Turbine makers must buy or make all of their main parts domestically for their customers to be eligible for cheap loans from state bank BNDES. To comply with regulations announced in December, some companies will have to build factories that may cost more than $100 million.
The turbine companies are reconsidering investments after flocking to Brazil, poised to be the world’s fifth-largest market for wind energy this year, after U.S. and European government subsidies were withdrawn or revised. More than half of the 13 suppliers that were operating in Brazil may opt out as margins are squeezed, said Suzlon and developer Renova Energia SA.
“Money is hard to come by -- you need a solid case to justify what you’re doing here,” Paulo Fernando Gaspar Soares, chief executive officer of Vestas’s Brazil unit, said in an interview in Sao Paulo. “There may be cases in which companies make the decision not to come over here.”
Shares of Vestas, the world’s second-largest turbine maker, rose 0.9 percent to 46.65 euros today. The company has declined 27 percent in the past year. Suzlon, India’s biggest turbine company, was unchanged at 14.95 rupees after slumping 47 percent in the past year.
The stricter rules may drive up the price of turbines by as much as 20 percent as makers are forced to choose local parts over cheaper imports, said Renato Volponi, country manager for EDP Renovaveis SA, a Spanish developer of wind farms.
EDP is “having trouble talking with companies because they don’t know if they will stay or not,” he said in an interview about negotiations with turbine suppliers.
The market is already over-supplied. Wind-farm developers every year demand turbines able to produce as much as 2,000 megawatts of power, said Mathias Becker, president of Sao Paulo-based Renova. That’s less than half the 5,000 megawatts in capacity that companies showing interest in Brazil would be able to supply if they all built factories, Soares said.
Suppliers “will try to test demand to see if it makes sense to build a factory here.” Becker said in an interview. “How long could that take? About two years I think for companies to realize if it’s worth it. Some will go, some will stay.”
It costs a total of about $96 million to build factories to produce towers, blades and nacelles, the car-sized units that house the gears, electronics and gearboxes, according to Bloomberg New Energy Finance estimates.
A facility to produce hubs, which connect to the blades, may cost as much as 15 million reais, according to Brazil’s wind-energy trade group Associacao Brasileira de Energia Eolica.
Argentina’s Industrias Metalurgicas Pescarmona SA, or Impsa, is the biggest supplier of turbines in Brazil with a 21 percent market share, according to data compiled by New Energy Finance. Fairfield, Connecticut-based General Electric Co. is the world’s biggest supplier and the second in Brazil with 17 percent of the market, followed by Denmark’s Vestas with a 15 percent stake.
“Brazil’s local content requirements are a challenge for the wind industry to meet,” Vestas Chief Operating Officer Jean-Marc Lechene said in an e-mailed statement. The company is studying how to comply with the new rules.
President Dilma Rousseff’s government is promoting wind and other renewable energy projects in a bid to diversify away from hydroelectric plants, which account for 66 percent of the nation’s installed capacity. Brazil aims to more than double its capacity to generate wind power this year by harnessing the same weather system that brought Portuguese and Spanish sailors to the continent in the 1500s.
Brazil will be the fifth-biggest market for wind turbines by installations this year after China, the U.S., Germany and India, New Energy Finance forecasts.
Of the 13 turbine makers that were operating in Brazil until recently, Germany’s Fuhrlaender AG filed for insolvency and three others have lost interest, said Arthur Lavieri, former CEO of Suzlon’s Brazil unit and now a member of the Pune, India-based company’s supervisory board. He declined to name the companies that have already scrapped plans.
“Many manufacturers just don’t have the cash for new facilities in Brazil,” Eduardo Tabbush, an analyst at New Energy Finance’s London office, said in a telephone interview. “Those that have the cash may not see the point because competition is already fierce.”
BNDES declined to comment on the possibility of suppliers leaving the country due to the more stringent rules when contacted by Bloomberg News.
Brazil probably won’t see a “mass exodus” of turbine suppliers because it’s one of the few countries in the world where demand for wind energy is growing, Jose Luis Menghini, vice president of Impsa, said by telephone from Sao Paulo. Impsa plans to continue complying with BNDES’s rules.
“Imagine how high demand will be when GDP rises,” he said. “Every day there’s another inauguration of another factory here.”
Suzlon and Acciona SA still need to invest in local machinery to comply with BNDES’s previous local-content requirement to fulfill some existing contracts. If they can’t meet the rules, developers buying the equipment will be blocked from tapping BNDES credit lines with interest rates as much as 50 percent below the market rate.
Suzlon intends to comply with the new rules, Lavieri said. Gamesa Corp. Tecnologica SA wants to play an “important” role in Brazil, a press official said in an e-mail.
Acciona has a “long-term commitment” to Brazil, Rafael Mateo, director general of Acciona Energia, a unit of the Madrid-based renewable-energy company, said in an e-mail.
Fuhrlaender and General Electric didn’t reply to telephone calls and e-mails seeking comment.
Renova’s Becker estimates that only five companies will survive the shakeup, while Suzlon’s Lavieri is betting as few as four will be left standing.
“All of us turbine makers are asking the question: Which one of us will survive?” Lavieri said at a recent wind-energy conference. “Certainly, it won’t be all 13 of us who were prepared to supply the market last year.”