Brazil mulls ‘reverse’ licence auctions

09 March 2017, Week 09, Issue 548

The Brazilian government is considering introducing so-called ‘reverse’ energy auctions that would enable companies to cancel licences to build renewables plants.

The move would give firms that are financially struggling in the face of low commodity prices the chance to opt out of agreed projects. The government hopes that the procedure will boost activity in the sector, which has been hit by Brazil’s ongoing recession.

The auctions would work by enabling those firms to bid for the right to cancel the licences, said Energy Minister Fernando Coelho Filho, and could begin with months. This would allow firms to avoid potential litigation with the government and others.

Companies’ bids would include an exit payment that would be lower than equivalent fines, according to a draft proposal seen by Reuters.

The auctions will be particularly useful for companies that have solar and wind projects that they are not able to finance, Filho said. Once the projects are formally cancelled, the government will then be able to pass them on to other companies.

Renewables companies in Brazil face penalties if they do not start the projects they have been awarded. Firms can be fined up to 15% of the project value if they cancel a project. In addition, they are not allowed to take part in future licensing rounds.

 

Delay or depart?

The recent slowdown of the Brazilian economy has hit power demand, reducing the need for newbuild power plants. Six solar power developers including Canadian Solar and Renova Energia wrote to the Brazilian government last April asking if they could delay the start-up of a number of solar projects by two years, citing poor market conditions.

The projects were expected to start feeding the grid in 2017. The firms said that Brazil’s currency slide, as well as a lack of local supplies, was putting pressure on project timetables. With little sign of any economic improvement in the country, power distribution companies are having difficulty paying for electricity that is not being sold. There are already concerns that the situation could result in some facilities being closed down.

Hope remains for some developers. Canadian Solar announced on March 6 that it had received US$20 million from the China and Portuguese-speaking Countries Co-operation and Development Fund (CPD Fund), allowing it to complete construction of its 191-MW Pirapora 1 solar project in Q3 2017 (although EDF’s acquisition of an 80% stake in the project in October 2016 was also a vital lifeline).

NewsBase finds it questionable whether the reverse auctions will be enough to solve current woes in the Brazilian renewables sector. The measure, though innovative, could be seen as temporarily plastering over the problem rather than finding a lasting solution. 

There could be some interest from large international players such as Enel Green Power, which already has significant renewables assets in the country, or among Chinese companies like China State Grid, which is keen to fill the gap left by Brazilian companies facing financial difficulties.

Yet there is the risk that the projects, once re-released to the market through the reverse auctions, will not find a new bidder, as companies will be deterred by Brazil’s economic downturn and the supply deficiencies.

The government perhaps needs to focus more on solving the fundamental barriers to progress first, including improving access to infrastructure and suppliers, so that companies that win projects can finish what they start.

Edited by

Andrew Dykes

Editor

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