Brazil Changing Power Auction Rules to Boost Bids Amid Recession

  • New government trying to restore credibility, end recession
  • Financing costs could rise on shifts in BNDES policy

Brazil’s new government plans to change the way the country auctions power contracts in an attempt to lure more bidders, even as demand remains sluggish amid the worst recession in a century.

Luiz Augusto Barroso, who in July took over as head of Brazil’s Energy Research Agency, known as EPE, said the government will change rules for approving bidders to attract more solid companies, and is planning new rules to increase competitiveness and reduce risks.

"Is it right that investors take foreign exchange risks alone, for example? Consumers could share the risk in Brazil through power purchase agreements in dollars," he said in an interview in Rio de Janeiro this week.

Michel Temer, who was confirmed as president on Wednesday following the impeachment of Dilma Rousseff, has vowed to restore credibility and adopt a more market-driven approach. The nation’s two-year recession has raised concerns about demand and slowed down the pace of power auctions. Brazil has three planned for this year, compared with seven in 2015.

"We have the dream team in the government," Elbia Gannoum, president of Brazilian Wind Energy Association Abeeolica, said at an event in Rio de Janeiro. "But we have some major problems to face."

10 gigawatts of wind

Financing is a source of concern for renewable energy, Gannoum said. Brazil has 10 gigawatts of installed wind power capacity, according to Abeeolica. Last year it was Brazil’s fastest-growing source of electricity. National development bank BNDES is largely responsible for that expansion, lending 2.18 billion reais ($671 million) for wind projects in the first seven months of the year, 30 percent more than in the same span of 2015.

Now, the government plans to reduce the wind industry’s dependence on BNDES by getting private lenders to fill in the gap, according to Ligia Chagas, head of the department of alternative energy at the bank. The move will increase financing costs, according to Carla Cardilo, financial superintendent at CPFL Renovaveis.

BNDES will release its new financing policy in the next two weeks, Chagas said.

Surge in costs

Many power producers in the country saw their debt loads swell after a drought pushed hydroelectric-dam water levels to record lows in 2015, forcing companies to rely on more expensive thermoelectric power. The surge in costs came after Rousseff mandated average energy-price cuts of 20 percent to curb inflation in 2012.

The new administration will focus on less interventionist actions and seek more realistic prices for all energy sources, Barroso said.

"That fact that we are going to a market driven economy is not bad at all," Jean-Claude Fernand Robert, General Electric Co’s head of wind in Latin America, said. "But how the transition will be made is is critical. We have to clearly understand where BNDES wants to get and what is the new government’s auctions philosophy."

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