Solar to re-energise the economy

Figure 1. Developing the ecosystem around solar energy will boost Brazil’s economy.

Jamie MacDonald-Murray, Lisarb Energy, UK, justifies why solar energy is strategic to Brazil’s sustainable recovery, and why diversification of the country’s energy mix is an important action.

Latin America’s largest economy was already in a fragile state when the global pandemic added to its list of woes. However, despite being hit by a wave of corporate bankruptcies and soaring government debt, the latest data shows that the economy is growing at a faster rate now than when the pandemic struck at the end of 2019. Some economists are now revising their growth forecasts upward.

However, there are still many risk factors that could hold Brazil’s economy back, including rising unemployment and inflation. The price of some essential goods, including food and energy, is increasing.

Investment is widely recognised as a recipe to reawaken economic growth and, post-pandemic, Brazil can boost its economy by enabling investment in green energy infrastructure. In short, enabling the growth of solar will boost jobs and help to limit the cost of energy. While energy demand is growing, the government recognises that it cannot build a strong economy without investing in reliable infrastructure, and for that it needs outside help.

Brazil must transition away from hydro

Brazil is the world’s second largest producer of hydroelectric power, but it still has an energy problem. While hydropower accounted for 70% of the country’s electricity generation in 2018, its primary source of renewable power is becoming less effective than it once was. Brazil needs to urgently diversify its energy mix to counter the power outages that are becoming a feature of daily life.

Many of Brazil’s hydro plants in the Amazon River basin are run-of-the-river, where electricity output is susceptible to rainfall levels and hydrological variation. As a result, droughts

and reduced rainfall levels are threatening security of supply. In an attempt to mitigate power outages, gas-fired thermoelectric plants have been built as dispatchable back-up.

Another issue is that due to their reliance on specific geographical features, the hydro plants are fundamentally in the wrong place. While many of Brazil’s hydroelectric plants are located in the north of the country, most demand is on the south-east coast. Large distances between sources of supply and demand regions create reliability challenges.

Furthermore, many of Brazil’s older hydroelectric power stations, constructed in the 1960s and 1970s, now need major investment to modernise. And plans to add generation capacity by building new mega dams have been severely criticised by environmentalists, as they can submerge landmasses and threaten river ecosystems, water quality, and biodiversity.

Liberalising clean energy markets

Brazil’s administration is pushing ahead with economic reforms. There are moves to liberalise and deregulate markets as well as to reduce bureaucracy. Indeed, the government has announced its tax reform plan, which is aimed at simplifying what is widely recognised as one of the world’s most complex tax systems.

The International Renewable Energy Agency (IRENA) and the Latin American Energy Organization (OLADE) announced they will boost ties to put the renewables-driven energy transformation at the heart of Latin America’s economic recovery following the COVID-19 outbreak. IRENA’s recent ‘Future of Solar Photovoltaic’ report highlighted that the region’s solar energy capacity alone could grow by a factor of 40 by 2050 to more than 280 GW, as a result of an abundant resource endowment and strong enabling policies. ABSOLAR, Brazil’s solar photovoltaic (PV) trade body, forecasts that by 2050 solar PV will contribute 125 GW of generation capacity, or 38% of the country’s energy needs.

In a further pro-business boost to the solar market, Brazil’s administration has also scrapped import duties on foreign manufactured solar equipment – a move designed to encourage inward investment. Previously, solar modules were taxed at 12% and inverters at 14%.

For UK businesses investing in Brazil, the removal of import duty makes it feasible to specify systems where the financial value of UK-manufactured parts and professional fees comprise at least 20% of the total project cost. Under these circumstances, projects qualify for debt finance covered by sovereign guarantee, which can reduce the overall cost of finance.

Embracing the energy transition

With huge expanses of land in the north east, high levels of insolation, and lower levels of rainfall, Brazil’s geography is now better suited to solar PV than hydropower. In addition, the grid infrastructure is already in place in this region to accommodate growth in solar parks. With an abundance of sunshine and falling river levels, many see solar PV as the natural successor to hydroelectricity.

Introducing new policies to support the green bounce will create jobs in clean energy and boost the wider economy by providing Brazil’s businesses with reliable, inflation-proof power. The financial returns from high-yielding solar parks in Brazil are already an attractive proposition for investors. Strong supporting policies for green energy will ensure that key financial centres like the City of London, UK, and New York, US, will continue to back Brazil’s green energy resurgence.

Business is driving demand for reliable, clean energy

Figure 2. Brazil is the world’s second largest producer of hydroelectric power. Preserving cash is the key to survival for every business, and when revenue is harder to come by, that means careful expense management. For many businesses, buying energy typically ranks among their top three costs, alongside wages and office expenses.

Aside from inflation, there are other pressures affecting the cost of energy in Brazil. First, energy demand is increasing. Domestically, consumers are buying more electrical appliances than ever before, and the use of air conditioning has increased dramatically. Sales of AC units tripled between 2005 and 2017 while electricity consumption has risen by 237% in the same period. These issues add up to increased pricing volatility in power markets, which creates uncertainty for businesses as they struggle to manage their expenses. Businesses want long-term, fixed-price energy contracts that can save them money as well as enable more accurate budgeting for expenditure. To regain control of their energy supplies, some companies have even invested in purchasing their own solar plants for electricity production so that they can avoid having to buy energy from utilities at market rates. However, the majority of businesses cannot afford to develop their own solar power plants. For them, power purchase agreements (PPAs) can deliver the clean, affordable, predictably priced power that they need.

PPAs address pricing volatility and ESG concerns

PPAs are energy supply contracts that guarantee production and fixed prices, with no variation in tariffs. An energy customer agrees to buy an amount of energy from the developer, which is generated by a renewable asset. Typically, the contracts are for a period of 15 - 25 years.

The developer funds the plant and allocates the energy production to energy consuming units agreed by the customer. The customer – also known as the offtaker – in turn guarantees the purchase of the energy across the agreed period.

There are multiple benefits for businesses that buy their energy through PPAs.

Over the life of the agreement, energy procured through a PPA is cheaper than buying it on the wholesale market. Due to the falling cost of solar modules, solar PPAs can deliver one of the cheapest sources of electricity. Currently, businesses are eligible for tax rebates for producing their own energy and additional rebates for using renewable energy as part of their supply. What offtakers also value in PPAs is that they can accurately forecast their future energy costs because the tariffs are fixed.

As well as the economic benefits, switching to renewable energy is increasingly important for businesses that have set net-zero goals for decarbonisation.

The offtaker’s finance team should know that there is no capital investment required on behalf of the business; the balance sheet will improve as operating costs come down with no increase in debt. There should be no fluctuation of energy costs and once signed, PPAs are not subject to changes in government policy.

Regular power outages are a constant reminder that Brazil’s energy landscape is a looming problem. Buying solar power through a PPA gives businesses back their security of supply. Increasingly, businesses are also motivated to procure clean energy by environmental, social, and governance (ESG) concerns.

For operators of solar parks like Lisarb Energy, signing up offtakers using PPAs before a project starts ensures that there is a commitment to buy the energy produced, which enables finance to be raised to develop the project.

Re-energising the economy

Developing the ecosystem around solar energy will boost Brazil’s economy by addressing some of the key issues the country faces as it emerges from the pandemic.

The solar industry is already creating new jobs; ABSOLAR forecasts 147 000 new jobs will be created in solar during 2021 alone. Developing solar projects will reduce the cost of electricity for the population, increase business competitiveness by reducing their costs and providing access to reliable sources of power, as well as boosting government income. The growth of PPAs is encouraging investment in renewable energy projects by providing revenue certainty for projects in the absence of government subsidies.

To sum up, solar energy is strategic to Brazil’s sustainable recovery; ensuring the industry’s success will re-energise the country’s economy.

We can tailor to your requirements, produce 1 - 12 page formats, print colour or mono, and more

+44 (0)1252 718999 reprints@energyglobal.com