Publish in Perspectives - Wednesday, April 22, 2020
The Brazilian power industry will likely see reduced demand and an increase in delinquency rates and default. (Photo: Jose Lins/Eletrobtras Furnas)
How is Covid-19 shaking up Brazil’s power sector?
BY ENERGY ADVISOR
Brazil’s government announced it has indefinitely postponed all six of its power generation and transmission auctions initially scheduled for this year due to the economic fallout from the Covid-19 pandemic. At the same time, the government revised down projections for power demand in Brazil, from 0.3 percent growth to zero percent growth this year, and from 2.8 percent growth to 2.3 percent in 2021. What are the most significant consequences of the government’s decision to delay its 2020 energy auctions? In what ways is the Covid-19 outbreak affecting existing power contracts in Brazil, and will such projects be able to move forward as planned? How will the demand shock affect Brazil’s power sector, and the development of renewables in particular, in the short and long term?
Luiz Barroso, CEO of PSR Energy Consulting and Analytics and former head of Brazilian state energy research agency EPE: The two biggest impacts of Covid-19 on the Brazilian power industry will result from reduced demand and an increase in delinquency rates and default. In addition, the effects of the volatility in fuel prices and on the devaluation of the Brazilian currency will affect long-term energy prices, and these uncertainties justify the postponement of the electricity auctions, as it is difficult—and risky—for players to prepare their bids in such uncertain times. There is currently much speculation about the magnitude of these effects, which will be the main agents affected, and how and what will be the ways to resolve the issues. So far, electricity consumption has dropped about 15 percent on average. But the truth is that we don’t even know if we have reached the bottom of the crisis on economic impacts, or if it will be deeper, as social isolation measures persist and the majority of the industry just recently stopped their activities. The most immediate problem in the sector is the cash position of agents, especially distributors, which needs to be addressed quickly. A systemic approach with some level of coordination is essential.
The sector will have a (natural) conflict between proposed solutions that preserve companies, segments and/or the electricity sector itself. There will also be proposals that require different degrees of government interference in business environments. The situation is complex; the sector needs to find systemic solutions, consistent with the current overall business environment. However, fundamentals persist, with renewables and transmission leading the way in the investment opportunities, and mergers and acquisitions options will also emerge.
Camila Ramos, founder and managing director of CELA-Clean Energy Latin America: The auctions have been the most important source of demand for renewables in Brazil, contracting between 1.5 gigawatts (GW) and 4 GW of new solar and wind every year, through 20-year purchasing power agreements (PPAs) with utilities. The postponement of this year’s auctions is an important development, especially if they do not take place this year. An alternative is the free market, where power generators negotiate bilateral PPAs with consumers, a market that has been growing faster than the regulated market. However, due to the economic crisis that the Covid-19 outbreak is creating, power demand from commercial and industrial clients is expected to slow down, presenting limited opportunities for bilateral PPAs. On a positive note, financing should be available. Several of the utilities in Brazil have recently notified power generators that they might not be able to acquire all the energy they contracted in some regulated auctions, as dwindling power demand is already hurting their finances. If this happens, it could be a negative precedent in the regulated market, where contracts are respected. Nonetheless, regulated auction projects should be able to move forward, if maybe delayed. In the free market, where contracts are negotiated bilaterally, arbitration could take place between buyer and seller, and projects may be delayed, and some may not move forward. The impact on the renewables sector will depend on the depth and length of the crisis. However, the government has already announced measures such as relief payments of 2 billion reais to support utilities, which should alleviate the impact in the short term.
Madeleine Tan, partner at Eversheds Sutherland: The Brazilian government’s recent announcement to indefinitely postpone its power generation auctions is further evidence of the fallout from the Covid-19 pandemic. Although the auctions have been delayed and not canceled, the indefinite postponement puts into doubt the remaining auction dates planned for 2020 and 2021. This is a further blow to the distributed generation industry in Brazil, which was already facing investor uncertainties prior to Covid-19, resulting from proposed changes by Brazilian regulatory agency ANEEL to the regulation of distributed generation projects. The adverse consequences on investor confidence could be significant for the Brazil renewable energy market in the long term. Even though the supply chain in places such as China has started to ramp up, the domino effects of Covid-19 on other nations where the virus is starting to spread and citizens are facing quarantines, are slowing the demand side of the equation. In the short term, work on projects that have committed funding and investments will continue, but the concern will be in obtaining funding for new projects or expansion of current projects. If the shock of Covid-19 is prolonged, there may be a flight of foreign (and even domestic) investors away from power projects in Brazil, and the government may not be able to step in and fully assume the gap in funding that may result.
Natalie Unterstell, director of Talanoa.solutions in Brazil: The postponement of the auctions is a consequence of the Covid-19 outbreak. If carried out, the auctions could put into question the very credibility of the process, since the risk of offers proving to be economically unbalanced would be greater and, therefore, could create investment risks and have an effect on tariffs. The decision gives the government some time to plan a reaction. The greatest risks stem from the impacts of the economic crisis, such as reduced demand and potential defaults, in addition to the effects of the fuel markets and exchange rates. Worth mentioning is that the demand was no longer at the expected levels when the auctions were held in the last three years. It is still very difficult to reasonably estimate how demand will behave with the Covid-19 outbreak. Thus, the government will have to manage and avoid potential over-contracting. Near-future auctions to adjust demand at specific times with the contraction of existing energy might become necessary. Meanwhile, the ‘reduced demand’ will have been stored in reservoirs, improving the overall supply situation. In the long term, one can expect a consolidation movement in the Brazilian electricity sector, as uncertainties will have increased and entrepreneurs will have to work in a more difficult environment where suppliers, customers, banks and investors will demand more guarantees. Large companies will probably be more capable of providing that.