The Brazilian solar market is on the cusp of maturity, if the result of the recent A-4 auction, which delivered a surprising drop in PV technology prices, is anything to go by.
The final average price for all of the solar projects selected in the auction came in at a surprising 118 BRL (US$35.2)/MWh. This is not only down 62.2% from the ceiling price of 312 BRL (US$93.4)/MWh set for PV in the auction, but it was also down 18.6% from the final average price registered for solar in the same auction of this kind – 145.78 BRL ($43.6)/MWh – which was held only three months earlier, in December.
Although the crossing of the $40 threshold could have been considered a likely outcome, that the final price was $5 lower, was not on the radar of even the most skilled Brazilian renewable energy market analyst.
“We indeed expected a price reduction but not that big and it was a positive surprise, as it puts Brazil within the countries sourcing solar for less than $40 MWh,” Luiz Augusto Barroso, head of the Brazilian government-run energy agency, EPE told pv magazine.
According to Barroso, this price level may continue, or even drop further in the next auction, if one follows the global trend. “This price level also provides a great contribution to reduce electricity tariffs, while we are also confident that investors are making money and that the bids do follow an economic rationale, reflecting a product of a commercial and financial engineering developed by the bidders,” he said.
Despite this positive performance, Barroso confirmed that solar PV will not be competing in Brazil’s A-6 energy auction, although its inclusion was previously being considered. “As I mentioned in our last interview, one of the reasons for not including PV, on the technical side, is the construction time and rapid innovation that is leading to string price reduction,” he stated.
“This doesn’t mean solar will get its space reduced in the matrix. It is actually the other way around: with such price level, it has become a sustainable source and the fact it does not participate in an A-6 auction this year mean that it will participate in another auction in the future that will demand technologies with shorter delivery time, excluding some sources with higher leading times to the process.”
Furthermore, Barroso claims that the current price levels reached by PV technology support the government’s recent move to change the contract type that is today offered to renewables: a two-way contract-for-differences, where the generator takes the market risk associated with the production variability, instead of the consumers, as used to be the case.
“Since the power producers know about sun and wind more than consumers, they are better prepared to manage the production risk, including the development of portfolios through hedging mechanisms. This change in the contract modality will come in the next A6 auction for wind and will eventually be extended to solar too in the next auctions,” Barroso explained.
Less surprised about the low prices was Marcio Takata, head of Brazilian consultancy, Greener. In a statement to pv magazine, he said that he was expecting a very competitive auction, taking into account the large number of PV projects competing in the auction, the combined capacity of which was around 20 GW.
“In addition to the high competition, the combination of different factors was important for such aggressive pricing: composition of more efficient capital structures, additional revenues ensured by the anticipation of the start of operation of the plants, synergies with the gain in scale of projects together with an accelerated learning curve of the sector were fundamental factors that led to more efficient projects from a technical and financial point of view,” Takata said.
He added that it is necessary to consider that some important variables with a direct impact on the profitability of the projects, such as exchange rates, interest rates and access to financing, are strongly influenced by the economic and political environment.
“Another point of attention is the price of photovoltaic modules, which despite the trend of cost reduction in the medium and long term is subject to the uncertainties and volatility of the international market. They are risk elements of the projects that I hope have been adequately priced,” he said.
President of the Brazilian solar association, Absolar, Rodrigo Sauaia, told pv magazine, “The final average price for solar was impressive and the price drop was stronger that anticipated.” He also believes the long-term price reduction trend of solar PV in Brazil is solid.
Market analysts anticipate that solar will become one of the cheapest electricity sources globally over the next decade, he said, adding, however, that how this will be reflected in Brazil “will depend on the government commitment to tapping the country’s immense solar resource and incorporating the technology as a social, economic and environmental growth driver.”
In its press release on the auction’s outcome, Absolar said the strong drop in prices was mainly attributable to three key factors: (i) the price reduction for PV components; (ii) the strong value increase of the Real against the dollar in the past year; and (iii) increasing competition among all market players.
“The Brazilian Ministry of Energy and Mines (MME) and the EPE have defined a scenario (PDE 2026) in which they challenged the solar photovoltaic sector to reduce its prices by approximately 40% by 2023. We have already reached this goal, demonstrating in practice the gain in competitiveness of the source, as we anticipated this price reduction in more than five years, to the benefit of the entire Brazilian society.
“Thus, it is the responsibility of the Federal Government to increase the annual contracting volumes of the source in the new version of the PDE planned for this year, going from 1 GW to 1.9 GW according to the guidelines of the PDE 2026,” said Sauaia.
Absolar also revealed that the assigned solar capacity will be deployed in the states of Ceará (390 MW), Piauí (179.9 MW) and Pernambuco (66.9 MW), all located in the northwestern part of the country, and in Minas Gerais (169.9 MW), in southwestern Brazil.
According to Reuters, the winning bidders for the solar projects were Chinese-Canadian solar manufacturer, Canadian Solar, which also operates a 400 MW solar module factory in Brazil, Spanish developer Elecnor, and two Brazilian companies, engineering services provider, SteelCons and power distributor, Kroma.
The growth in demand in Brazil’s electricity sector is directly proportional to the resumption of the country’s economic growth, said Maria Luisa Cravo Wittenberg, an investment manager at Apex-Brasil.
“The auction held yesterday is a milestone in this process, evidencing a growing demand for renewable energy sources,” she told pv magazine. “Now there is a clear opportunity to strengthen the search for partners in order to ensure the successful execution of these projects, which can result in ever more investments in the sector in the coming years. Investors can certainly keep counting on the support of Apex-Brasil to find strategic partnerships.”