IN DEPTH: Brazilian solar and the trouble with local content

14/09/15 | São Paulo

Recharge News

It is a curious situation. Brazil’s government is preparing to invest millions to increase the country’s solar capacity from a paltry 45MW today to an expected 7GW of utility-scale and 2.7GW of rooftop by 2024 — yet it has erected roadblocks that will make this hugely difficult. 

Brazil’s national development bank, BNDES, will offer cut-rate loans to solar developers building utility-scale projects that use a certain amount of locally produced content. With annual interest rates of 7.4-9.9% — roughly six percentage points lower than comparable private finance in the recession-hit country — this is financing that every developer would like to get its hands on.

But as part of these local-content requirements, developers will have to buy solar modules assembled in Brazil — and there are currently no module assembly plants in the country. The more-than-1GW of PV projects that have been tendered in regional and national solar auctions in the past two years need this BNDES funding to be commercially viable.

adriane_rodrigues.jpgYet these projects need to be on line by mid-2017, and, to some, it seems unlikely that any assembly plants will be operational by then.

Only two companies have announced concrete plans to build module assembly plants in Brazil: Chinese car maker BYD (400MW a year) and local start-up Pure Energy (40MW).

“BYD’s plans are very interesting and include vanguard equipment, but we have to see if the plans are going to be implemented,” says Carlos Evangelista, director at renewable-energy consultants and rooftop panel installer VIS Technology.

And of the major module makers with commercial offices in the country — including First Solar, Yingli, Jinko and Canadian Solar — only SunEdison has said it intends to build a factory in the country, but it has not yet announced firm plans to do so.

Many believe that Brazil cannot wait for local factories to be built. A prolonged drought has dramatically reduced the output of the nation’s huge hydropower network, which usually provides 70% of its energy. Brazil has so far avoided power cuts by firing up more than 2,000 expensive diesel- or gas-fired back-up power plants, which have raised consumers’ energy bills by about 20% since the start of this year and hugely increased Brazil’s greenhouse gas emissions. The current situation is unsustainable — in more ways than one.

Evangelista tells Recharge that he does not believe module makers will invest in the country until they can be more certain about future demand.

“The government should make firmer commitments to solar power through announced long-term targets for the technology. At the moment, all we have is indicative planning, which is just that, an indication that can be changed at any time.”

The investment climate in Brazil is hardly ideal either. The country is in recession; interest rates are rising; inflation is approaching 9%; consumer energy demand is low; and the value of the real has halved against the US dollar since 2011 and continues to fall. On top of this, a political scandal involved state-owned oil giant Petrobras could yet bring down the government, creating further uncertainty.

And there are other factors that make Brazil a less enticing place for investors. To start with, production costs in Brazil, especially for steel and glass, tend to be 20-30% more expensive than in much of the Western world — let alone China, which produces the bulk of the world’s solar panels.

“The cost of producing in Brazil is 23% higher than in the US,” says Nelson Falcão, energy business development director at electronics manufacturer Flextronics.

The tax system is hugely complicated and off-putting — the federal government demands at least five different levies on solar panel components, while the 27 states each have a different set of value-added taxes and incentives. There is also a lack of scale and know-how among the local PV supply chain, as well as bottlenecks in the certification of equipment — yet components account for a huge chunk of the local-content requirements.

The solar industry also argues that the government needs to increase cap prices at the national solar auctions in August and November by 40% to more than R$300 ($94) per MWh. Cap prices are due to be announced a few weeks before each tender.

The government is all too aware of these problems. In July, Congress approved huge tax exemptions — on imports, industrialised goods and corporate income tax — relating to some of the raw materials and electronics used in PV panels. These components are now included in the government’s semiconductor development programme, PADIS, which, in return for the tax breaks, requires companies to invest 5% of their revenue on R&D.

Absolar, the Brazilian solar power association, says this is a hugely significant move, as these combined tax breaks will make PV panels 40-60% cheaper.

SOLAR_PANEL.jpgThe government believes the sheer size of the solar market — 1GW of utility-scale tenders annually — and the country’s high irradiation levels, will solve all the industry’s problems, says Adriane Rodrigues, head of the BNDES’s energy sector accreditation department.

At the Brazil Solar Energy Conference in Rio de Janeiro in June, in a session chaired by Recharge, she said that every week she is talking to investors from Europe, China and the US that want to supply PV equipment in Brazil.

“I cannot reveal who we are talking to, but you will see soon solar PV equipment and components being accredited and new investments being announced,” Rodrigues says, adding that she had spoken to about 60 companies — 20 of which are module makers, at least one cell manufacturer, and the rest component suppliers.

Her confidence partly stems from the fact that she has overseen the implementation of the BNDES’s wind-power local-content programme, and helped devise the solar scheme.

“Those who were the biggest critics of the wind-sector local-content policies are now their biggest champions,” she says.

The solar local-content rules announced last year are based on the experiences gleaned from the wind scheme.

“We have made changes and adaptations to improve the local-content rules to avoid bottlenecks, so our work is not only restricted to module makers, we also analyse the subcomponent supply chain,” says Guilherme Gandra, head of the local-content accreditation department (which covers sectors beyond solar). “In general, there will be a prize for companies that opt to nationalise the most technologically advanced components earlier: the bigger the level of nationalisation, the higher the level of financing the BNDES.”

If companies can build “prize” components in Brazil, developers will be able to buy those panels with cut-price funding from the BNDES — and the government’s Climate Fund — to cover up to 80% of a project’s costs.

Those that meet only the non-prize criteria can receive up to 65% of the project’s costs.

The PV local-content rules may be more complex than those for wind, but in some ways they are more lenient. For a start, PV is a five-year programme (starting in mid-2014), compared to wind’s three, giving more time for manufacturers to get up to speed. Also, starting national-content levels are easier to meet, with required components such as aluminium frames and cables readily available.

According to Maria Luisa do Cravo, investments manager at the Brazil Export and Investment Agency, Apex, interest in setting up Brazilian solar factories is high, with many companies close to making final investment decisions. At the Intersolar Europe show in Munich in June, she helped line up meetings  between about 30 manufacturers and officials from the Brazilian and state governments and the BNDES.

“Once the paperwork is done, a module making factory takes six to ten months to be operational,” she says. “We’ve been talking to several companies, and investments in new factories will range from $25m to $150m”.

Rodrigo Sauaia, executive director of the Brazilian Solar Power Association, Absolar, says the local-content rules have generally been welcomed by the sector.

“Many of our associates are considering investing in Brazil,” he says, declining to mention names. Absolar, which was established in 2013, has 85 members, including Canadian Solar, First Solar, Meyer Burger, SunEdison, Sowitec, Enel, Renova, Pacific Hydro, WEG, Fronius and Yingli, as well as many solar panel installers.

“The planned auctions will guarantee demand, and state governments have all agreed to exempt taxes on rooftop solar,” says Sauaia. “On top of that, power prices have risen because of hydroelectric and financial problems, which makes rooftop solar feasible in many states.” Rooftop demand, which complements the planned utility-scale solar tenders, is considered essential to guarantee returns on investments in module assembly plants in Brazil.

Some believe that Brazil’s lack of PV component manufacturing is exaggerated. A 2011 study by Abinee, the Brazilian Association of Electronic and Electric Equipment Makers, showed that of the 14 large groups of components, 12 were already being made in Brazil.

The report also showed that Brazil has the fourth-largest reserve of silicon in the world (but as yet has no facilities to refine it to PV-grade quality).

“Industry will go where the opportunities are,” says Leonidas Bispo de Andrade, head of new business for PV products at US chemicals giant DuPont, which he says is preparing to supply locally sourced silicon, films and encapsulants.

The interest shown by investors in the forthcoming auctions is high — 12GW of PV projects have been registered for the first reserve auction at the end of August, with more than 20GW registered for the second one, scheduled for November. 

“The current uncertainties and poor economic environment may negatively affect investment decisions and delay investments, but investors in manufacturing look at the medium and long terms,” says do Cravo. “The problems faced now are only a snapshot of the moment, but they are looking at the whole movie.”