Solar Market Suffering ‘Hangover’ After Brazil Currency Slumps

Updated on

This was supposed to be the year that solar power took off in Brazil, until the plunging local currency slammed the brakes on the nascent industry.

The real has declined more than 20 percent since Oct. 31, when more than a gigawatt of solar farms won contracts in the country’s first-ever national solar auction.

With the slumping currency driving up import prices, developers are holding off on signing supply deals for photovoltaic panels. Manufacturers that were considering setting up shop in Brazil are having second thoughts. All of that is threatening President Dilma Rousseff’s goal of increasing the use of solar power more than 100-fold and creating a domestic solar industry.

“It is very challenging to start producing in Brazil now,” said Markus Vlasits, local country manager for Chinese solar manufacturer Yingli Green Energy Holding Co. “Certainly we will not enter the market to have losses.”

Yingli, the world’s second-biggest panel maker, has put on hold its plans to open an assembly facility in Brazil, he said.

Brazil has set a goal of having 3.5 gigawatts of solar capacity in operation by 2023, producing about 1.8 percent of the country’s electricity, up from less than 35 megawatts last year. Developers installed 10 megawatts there last year, compared to 6.3 gigawatts in the U.S. and 13 gigawatts in China, the top solar market, according to Bloomberg New Energy Finance.

‘Big Potential’

Brazil is promoting solar as part of an effort to diversify its energy supplies after the worst drought in eight decades cut output from hydroelectric dams that generate more than three-fourths of its electricity.

While Brazil’s solar market has “big potential,” Vlasits said the industry “is having a hangover moment, after the big auction party.”

Brazil’s energy auctions are a key part of the process for building new power plants. The government sets a ceiling price and developers bid down the price at which they are willing to sell power from planned projects. The lowest bids win long-term sales contracts, and developers can then line up financing, supply deals and construction.

Of the eight developers that won contracts in an Oct. 31 auction, only two have signaled how they plan to obtain the panels they’ll need for solar farms that must go into operation by October 2017.

$30 Million Plant

“Supply agreements throughout the sector should be happening by now,” said Pedro Pileggi, chief financial officer of Renova Energia SA. Renova landed deals to sell 107 megawatts of capacity from four solar farms in Bahia state in the auction. In November it announced a joint venture with the U.S. solar company SunEdison Inc., which is planning to build a $30 million panel plant in Brazil.

Rio Alto Energia, which won a contract to sell 30 megawatts of capacity in October and is seeking to arrange financing in U.S. dollars, doesn’t have a supply deal yet, said Sergio Reinas, a partner at the Sao Paulo-based company.

“With the current exchange-rate level, we have other financing sources that would be more viable,” he said by e-mail.

Bernardo Bezerra, a manager at the Rio de Janeiro-based energy consulting company PSR, estimates that higher import prices are shaving margins for solar farms to about 7 percent, from 12 percent when the companies submitted bids in the Oct. 31 auction.

‘Large Appetite’

Brazil has two more auctions for solar power planned this year, in August and November. Mauricio Tolmasquim, president of Brazil’s energy research agency EPE, said the government will consider multiple factors when it sets the ceiling prices, including exchange rates and the availability of financing through the country’s development bank.

Even before exchange rates slumped, the price for solar energy in Brazil was low. In the October auction, developers agreed to sell electricity at an average price of 215.12 reais ($71.77) a megawatt-hour -- the cheapest in the world for solar power, after Dubai, said Jenny Chase, lead solar analyst for New Energy Finance.

“The price got too low in the auction, the risks were already high,” said Ruy Lima, a partner at Elementos Empreendimentos Ltda. The developer bid to sell power from a 50-megawatt solar farm, and dropped out.

Participants in the first auction “showed a large appetite for risk, in an attempt to position themselves as the first to build a solar plant in Brazil,” Rodrigo Sauaia, executive director of the Brazilian Photovoltaic Solar Energy Association, said in a telephone interview from Sao Paulo. Now, “exchange rates are a warning notice for the solar sector.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE