Brazilian wind rises above the chaos, By Alexandre Spatuzza, Recharge News, February 05 2016
Brazil's oldest wind farm, Mucuripe at Fortaleza in Ceará
All is not well in Brazil. The economy has shrunk dramatically amid an ongoing political scandal, unemployment has soared, inflation has shot up, while the local currency, the real, has lost 35% of its value in the past 12 months.
Yet despite this turmoil, the Brazilian wind industry is continuing its expansionist march forward — adding to the 50,000 supply-chain jobs created in the past six years as it prepares to install more than 10GW over the next five years.
On 1 January, Brazil’s local-content programme reached its zenith, with turbine makers now required to incorporate dozens of locally produced components and put them together in the country. These include assembling nacelles in Brazil; using blades and towers with at least 60% local content; and integrating pitch bearings and pitch controls made in Brazil.
Earning this so-called Finame approval for local content means developers can purchase accredited turbines using hugely discounted loans from the BNDES national development bank — rates that make imported machines uncompetitive in Brazil’s auction-based power-procurement system.
Six OEMs — Vestas, GE, Alstom, Gamesa, Enercon’s Brazilian arm Wobben, and local industrial giant WEG — have played the BNDES game, gradually increasing their turbines’ local content over the past four years. All are expected to get final approval in the coming months, with a combined output capacity of 3GW a year.
“Three had reached the top level before the deadline and now we are carrying out visits and analysing documentation of the other three,” Guilherme Gandra, head of the local-content program at the BNDES, told Recharge in mid-January. “We believe a great effort was taken to build out a totally new industry that now has to stabilise and consolidate itself in order for this supply chain to mature.”
Back in 2009, when the local-content programme was announced, the sector was hugely sceptical. There was no dedicated supply chain, a complex and expensive tax system, high labour and raw-material costs, while the finished product was expected to be 30% more expensive than those produced elsewhere.
But Brazil persevered, and increased the stringency of its demands from 2012, confident that the 2GW-a-year market would be attractive enough to keep the manufacturers interested.
Turbines have indeed turned out to cost about 30% more, but the industry has grown exponentially.
“By our estimates, about R$1bn [$245m] has been invested in Brazil’s wind industry, including investments made in the turbine makers and in the supply chain, of which BNDES has financed about R$300m,” says Gandra.
By his calculations, 25 of the 150 main component suppliers are foreign companies that either set up shop in Brazil or expanded existing facilities to supply the wind sector. These include Switzerland’s ABB, Sweden’s SKF, Denmark’s Svendborg Brakes and Germany’s ThyssenKrup.
Brazilian manufacturers have also moved into wind, most notably WEG, which is building its own 2MW turbines using a design licensed from US-based Northern Power Systems, and parts supplier Romi, which is now producing hubs and bed plates for five of the six OEMs.
“On balance, the local-content policy has increased the cost of wind power in Brazil,” says Brian Gaylord, chief Latin America analyst at MAKE Consulting. But he recognises that BNDES financing has helped offset some of those increased costs and allowed the industry to cope more effectively with the slide of the real.
Now that the turbine makers have reached their maximum local-content levels, the sector “has to gain scale, productivity and improve quality, which will lead to an expansion in the number of suppliers of components”, says Roberto Veiga, co-ordinator of the wind-power committee at the Brazilian association of heavy industry, Abimaq.
Increasing the competition among suppliers, breaking several companies’ virtual monopolies regarding some components, and expanding local content further will all help to reduce manufacturing costs and foreign currency risks.
And in an industry where the price of the equipment is so important to winning contracts, OEMs are already working hard to bring down costs.
Gamesa, for example, sponsored a workshop in São Paulo in January to attract new suppliers, while Vestas’ Brazil boss, Rogério Zampronha, tells Recharge: “We want to get as close to 100% local content as possible to reduce our exposure to foreign-exchange risk.”
The continuation of BNDES support and the yearly government auctions — with higher prices — are vital for OEMs and the supply chain to get a return on investment and to cut costs.
“The ceiling prices need to higher to open up room for the supply chain to get a return on all that has been invested,” says Veiga.
Auctions are also needed to ensure a steady stream of orders.
“We classified our investment in the wind sector as medium to low risk, expecting continuation of policies. It takes between five to ten years for us to get a return on investments with this kind of risk,” says Francisco Vita, Romi’s foundry and machines unit director.
Although the devaluing currency has made imports more expensive, it has also made exports cheaper for those abroad. The extra costs of manufacturing in Brazil are being significantly eroded by the falling real, and it may not be long before the weakening currency makes Brazilian-made turbines a similar price to those built elsewhere.
According to Veiga, if productivity can be increased and costs reduced further, locally made turbines will cost the same as European ones in three to four years’ time. At this point, exports will be feasible, especially to regional and African markets.
Élbia Silva Gannoum, executive president of the Brazilian wind-power industry, ABEEólica, says that her organisation has already started talking to the country’s export and investment agency, Apex, to develop an export programme for the industry.
“[The risk with local content] is that in the end, lobbies of incentivised industries capture these policies and use them a protectionist shield,” says Edmar de Almeida, an economics professor at the Federal University of Rio de Janeiro. “The government needs [to introduce] more sophisticated policies that turn local-content benefits into financing for exports, but Brazilian governments always have difficulties with this kind of long-term thinking.”