Brazil braces for economic storm


September 4, 2015

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Brazil has slumped into recession. Unemployment is rising, inflation is close to 10%, and this week the government revealed that it expects to run a budget deficit in the next year. The country is now looking at ways to cut spending or raise taxes to fill the hole.

It is with this backdrop that wind professionals in the South American nation attended the Brazil Windpower 2015 conference in Rio de Janeiro this week. And, despite wider gloom, there is still optimism about Brazilian wind. The nation is on the cusp of becoming one of the world’s ten largest wind markets. It is currently eleventh with around 6GW of installed capacity, included 2.5GW added in 2014, and this could rise to 9GW by the end of 2015.

If developers build the projects they are expected to then we could see an extra 13GW by the end of this decade, including 500MW of projects that won consent at a government auction last month. The next Brazilian capacity auction is due to happen in November.

But this optimism may be short-lived.

Investors with an interest in this market would be well advised to take advantage of these auctions soon. If the economic gloom in the country takes hold then the government could look to cut subsidy support for renewables. It is a response that we have seen in other recent recessions, in countries such as Spain and Greece.

The other side of this is that investors need to exercise caution. There is no hint yet that the Brazilian government could make the same damaging retrospective cuts to subsidies that the Spanish government did, but businesses must be aware of the danger.

At present, however, Brazilian energy minister Eduardo Braga is talking positively about wind. He has called on manufacturers to produce bigger turbines in Brazil; and also wants developers to look at the potential to develop offshore wind farms in its waters.

But Braga also accepted that firms still faced logistical problems.

The key problems include delays linking new wind farms to the grid; challenges operating and maintaining projects, which is in part due to a substandard supply chain; and issues with transporting turbine parts. Each of these alone would be enough to give a developer a headache, but taken together they represent a serious battle.

In our view, it would be worth Braga focusing on those problems before encouraging firms to over-extend themselves. We see little sense in building wind farms off Brazil’s coast if there are already big obstacles to connecting and maintaining onshore projects. If a major recession takes hold then the government would likely see offshore wind as a costly option and enthusiasm would dampen.

Meanwhile, if manufacturers produced larger turbines then it would exacerbate problems with transport, at a time when the government has less money to spend on the roads.

One opportunity in Brazil that should remain even in a recession is in the maintenance market, which industry experts have said could grow from being worth $150m annually now to over $500m within the next decade. Lenders are keen to back low-risk projects, which means that developers need good O&M contractors to manage their wind farms.

This opportunity should grow even in a recession as lenders get more risk-averse. It is a bright spot in a country where the economic storm clouds are brewing.

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