Wednesday, 31 August 2016

Brazilian supply chain: leave wind rules unchanged, By Alexandre Spatuzza, Recharge News, August 31 2016

Roberto Veiga, head of the wind energy work-group at the Brazilian Association of Heavy Machinery Makers (Abimaq), at right
Roberto Veiga, head of the wind energy work-group at the Brazilian Association of Heavy Machinery Makers (Abimaq), at right
“We know of other countries that have similar local content policies, but nothing like Brazil's. We started six, seven years ago, but it was too fast to become competitive [on a global scale],” he said during the Brazil Wind Power Thought Leaders Roundtable in Rio on August 30.
As one of the two sponsors of the Thought Leaders Roundtable, alongside Danish turbine maker Vestas, Abimaq has been developing programmes to increase competitiveness in the industry since the BNDES began its local content programme in 2012.
The local content programme has been successful, Abimaq says, but must be completed before Brazil can start thinking about exporting turbines.
“BNDES started this to get technology, not to build power plants,” he said.
Brazil’s complex and stringent local content rules require projects to use up to 70% locally made content, and goes down into the details of which nuts and bolts need to be made here.
The programme has resulted in more than R$1bn ($310m) being invested in upgrading Brazilian foundries, electric components, concrete tower and blade industries, building up a chain of more than 1,000 firms and 50,000 workers as local companies began supplying the six turbine makers now set up in the country.
The turbine suppliers – which include Nordex/Acciona, GE, Gamesa, Enercon and Brazil's WEG - are now said to have capacity to assemble over 3GW a year after complying with the three-year local content programme that ended in January 2016.
“A few years ago we had only one bearings manufacturer supplying the industry, now we have four,” says Veiga.
The programme’s formula for success was simple. The government established competitive tenders for 2GW of new wind capacity a year on average. The BNDES would then offer below-market financing for project developers that chose to use equipment complying with the local-content rules.
But Brazil’s new interim government declares itself to be more ‘market-friendly’, and is preparing major changes for the role the BNDES plays. The government assumed power in April when President Dilma Rousseff was suspended to undergo final impeachment proceedings in the Senate.
Amid Brazil’s ongoing economic crisis, BNDES' interest rates were hiked several basis points in its regular quarterly readjustments and it has reduced the amount of financing for infrastructure projects from around 70% of the project's capex to 50% or less.
Now the interim government – which is widely expected by political analysts to be confirmed at a final impeachment vote in the Senate in coming days – is signalling it will revise the yearly power tenders and that the BNDES will have to speed up programmes already place to make room for more expensive private or even international financing for power projects.
That raises doubts about future demand and the continuation of acquiring locally assembled machines at prices compatible with the prices seen in the tenders.
While BNDES’ final lending rates for the power industry adds up to around 11%-12% a year, private bank financing for the sector comes at costs 500 basis points higher or more, even as competition in the tenders has brought down the price of new wind power to around R$80/MWh.
With 9GW already contracted and still to be built by 2019 in Brazil, the country’s wind industry faces a cliff of contracts after reaching 10GW this year. Of the projects still to be constructed, the industry estimates that 3GW of turbines still need to be ordered from OEMs.
“You are lucky, guys,” Veiga told the Thought Leaders audience made up of top executives from government and local industry. “We have two and half year of contracts, while other industries only have three months of contracts. That’s why everybody wants in to the wind industry”.
Veiga delivered a clear message: the wind industry needs to face up to its challenges, but changes in financing and yearly contracting need to take into account the on-going program to increase competitiveness and reduce costs – which make Brazilian-made machines 30% to 40% more expensive than similar turbines made in other countries.
High labour costs, costly logistics and expensive raw materials contribute to the higher costs.
But Veiga points out that now is the time to continue reducing costs since the supply chain is also starting to face problems, and for that, contracts for new turbines need to keep coming.
“Some of our associated companies are looking at firing people so you have the opportunity to push down prices now … if the supply chain has demand, it has the capacity to invest, it is interested in investing and it has the technology [to increase competitiveness]. We need to show that the local content programme is a success and we need to go to the BNDES and the energy ministry to ask them to keep the rules”.

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