Solar at $17.30/MWh in Brazil‘s auction: is it a world record?

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Brazil’s latest A-4 auction, held on June 27, in theory produced the lowest electricity price bid ever recorded for large scale solar power projects in an energy auction – an astonishing $0.0173/kWh. That result, however, has not had the same resonance as other records registered in Latin America and the Middle East and has raised concerns within the Brazilian solar sector.

Domestic PV association ABSOLAR said the auction produced average prices outside reference levels for solar power in Brazil and the organization also highlighted the lower volumes of contracted solar power secured by the procurement, compared to previous auctions.

The main reason for questioning the validity of the ‘world record’ is the fact the two PV projects concerned will sell at least half the power they generate to the Brazilian Free Electricity Market – the Mercado Livre de Energia Eléctrica – where electricity is traded among generators and offtakers free of the contracted rates set in the auction. That record low figure applies only to the proportion of energy generated by each project which is supplied to the Regulated Electricity Market – the Mercado Regulado de Energia Eléctrica.

The winning projects

One of the record-setting projects was the 40 MWac Jaibes solar facility planned for the state of Minas Gerais and owned by Chinese-Canadian solar module maker Canadian Solar, which offered a final bid of BRL73.60/MWh ($19.60). That price, however, will concern only half the generated power, with the balance sold under a long-term private power purchase agreement (PPA) to an unspecified client – probably at an higher price.

The second headline-grabbing project – the 163 MWac Milagres solar plant for the state of Ceará – was selected by virtue of a bid of BRL64.99/MWh ($17.30). That plant will sell only 30% of its output at the tariff agreed in the auction, the remainder will be sold on the Free Electricity Market.

Whilst beneficiaries which receive power at the low tariff will be satisfied – and the government will boast of its achievement – it is unclear whether the global solar industry will consider $17.30 ($0.0173/kWh) a genuine new landmark.

A combination of factors

According to Marcio Takata, CEO of Brazilian consultancy Greener, the low final prices were the result of a big rise in competitiveness observed in the auction, which saw the power generation volume of pre-selected projects rise from 20 GW in last year’s A-4 auction to 26 GW. At the same time, the amount of solar power generation capacity allocated fell significantly, from around 800 MWac to about 200 MWac.

The CEO of Greener, Marcio Takata.

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“These two factors combined were very important for the price reduction which led to such low bids,” Takata told pv magazine. Such bids were only sustainable because of the large proportion of generated power which could be sold on the free electricity market, added the CEO. “This is giving the project owners the opportunity to work with pricing levels that can guarantee the project bankability,” he said.

Takata added, the fact successful projects in the auction would secure grid connection priority also enabled the record low energy tariffs. “These facilities have a four-year term to begin commercial operations and now grid-connection priority is very important, while projects that are planned to operate exclusively in the Free [Electricity] Market are never given this certainty,” he said.

But the Greener CEO did not discount the importance of continuing rises in output from ever more efficient solar modules. “The evolution of the solar modules, but also of the PV supply chain, is enabling the installation of more [better performing] solar power plants with more efficient capex [capital expenditure costs],” he said. “The auction’s fierce competitiveness and the possibility of selling power outside of the auction’s PPA, however, must be considered the main reasons for the low bids of the procurement exercise.”

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When asked if the lowest bid could be considered a world record, Takata said the subject was controversial. “It is indeed the lowest price for solar ever recorded worldwide and the lowest price ever recorded in A-4 auctions here in Brazil,” he said. “But it must also be taken into account that the largest part of the plant’s generated energy will be sold to the Free Energy Market at higher prices, which means that the project’s average selling price of the produced energy will be significantly higher than the auction final price.”

As to whether the two solar projects selected in the auction would be bankable, Takata said much will depend on pricing in the Free Energy Market; the duration of contracts project owners will be able to secure; and the quality of the off-takers. “The rating of the buyer of the energy will be crucial to define risks and costs of financing,” he said.

ABSOLAR chief executive Rodrigo Lopes Sauaia

ABSOLAR

Another factor that may have contributed to the energy price fall was the possibility the two projects may not be entirely new developments.

“We have information that part of the contracted projects will be the expansion of existing projects,” said ABSOLAR chief executive Rodrigo Sauaia immediately after the auction. This has made possible that a more daring price in the competition was possible. In an earlier interview with pv magazine, Sauia had highlighted how developers in Brazil were attracted by the possibility of combining auction contracts with PPAs at higher prices on the free market. The CEO pointed out that combination had already been seen in the wind industry in Brazil. This is great for the financiers, they love that,” added Sauaia. They have a vision of how much return they will have for 20 years. And this helps to finance the project.

Developers get creative

According to Manan Parikh, a power and renewables analyst for market data company Wood Mackenzie, the fact the two landmark projects will sell 30% and 50% of their power through the A-4 contract would put capacity factor assumptions for each facility above 28%. When accounting for the fact that the total megawatt-hours figure offered is over a 20-year period – and incorporating a conservative present-day capacity factor of 23% – Jaiba and Milagres would be selling 66% and 40% of their output via the PPA, respectively, Parikh told pv magazine.

With efficiency increases and the use of bifacial modules it is entirely possible capacity factors by 2022/2023 could reach 28% in both projects, said the WoodMac analyst, given the solar resources in both states. This would mean that Jaiba sells only half of its output via the PPA while each Milagres section would contribute one-third of its capacity to the yearly PPA, he said.

When asked if $0.0173/kWh constitutes a world record, Parikh was equivocal. “Yes in the sense that it is the lowest contracted price we have seen through an organized procurement round like the A-4,” he hedged, “and no in the sense that not all of generation will be sold at this price.

The analyst pointed out Mexico’s record bid of $18.93/MWh – made in a 2017 auction – was also for a project which planned to sell part of its generated power outside the PPA awarded in the procurement exercise – the Pachamama PV scheme by Neoen.

Parikh said the bottom line is that the true value of such projects cannot be accurately quantified because it is tough to gauge developer intentions until the asset is operating and offtakers are revealed – something which does not always occur. “Even then, the pricing terms of a bilateral agreement may be kept confidential,” added Parikh.