Special Story: The market clears the way for multibillion investments as a result of regulatory progress
Story published by Broadcast+, Agência Estado’s platform, with the participation of partner Livia Sanches Sancio
Rio, August 26, 2022 - While the world sees wind turbines proliferate at sea, especially in China and Europe, which together share more than 95% of facilities, Brazil lays the groundwork for offshore wind farms. These units should only start operating with relevant output in the country by the end of the decade. In an interview with Broadcast, industry executives and power specialists point to Brazil’s untimeliness, but claim that the natural potential — abundant wind and wide shallow seashore — in addition to the robust offshore experience from oil & gas tend to shorten the development of the industry in the country. For now, it is essential to regulate and assign ownership of areas on the high seas to companies, a process that some claim has advanced “slowly but decisively.”
The last big news regarding offshore wind in Brazil was the approval of bill 576/2021 in the Federal Senate. The bill, which lays solid foundations for the rules of the activity in the country, is now going to the Chamber of Deputies, where it should face challenges at least until mid-Q1 next year. Not due to the subject, but to the time period, which includes the elections, possible transition of government, and Parliament recess.
Until then, the industry has a presidential decree to be regulated by the Ministry of Mines and Energy (MME). Sources say that the government plans to issue an ordinance on the topic November this year, within the deadline of December 15. This would allow area assignment auctions to be held as early as 2023, even before the enactment of a law. However, the executives interviewed by Broadcast are at odds on this matter. Monique Gonçalves, Shell Brasil’s regulatory affairs manager, says that it is feasible for an auction to be held in July 2023. But Gil Maranhão, Officer of Communication, Corporate Social Responsibility, and Carbon at Engie Brasil, expects this to take place around mid-2024.
Shell registered with Ibama six offshore wind projects in Brazil with a total capacity of 17 GW. Engie, which shares with EDP the offshore wind joint venture Ocean Winds, has five projects for the country, totaling 15 GW. This is just a fraction of the 66 projects reported to Ibama up to the beginning of January, which add up to 169 GW, a volume close to the installed capacity of the Brazilian electricity matrix, but only serves as an indication of market interest, as it is unlikely to be fully implemented, whether due to restricted demand or due to transmission challenges.
None of these projects has an environmental license, which is a basic requirement. Companies and Ibama are waiting for ownership of the offshore areas to be formally defined before beginning assessments and analyses, respectively. The wait is reasonable: according to Maranhão, the cycle of feasibility assessments for a single offshore wind project can take two years and cost USD 50 million.
For Elbia Gannoum, CEO of the Brazilian Association of Wind Energy (Abeeólica), it is unlikely for a bill to be approved by the Congress in less than a year. “It’s not pessimism, just pragmatism. Nothing else comes out of that Congress this year, unless it is very urgent for (President Jair) Bolsonaro,” she says. Therefore, the fastest path for the industry is to move forward, supported by the MME ordinance. “It is possible to hold the auction under a certain rule and then absorb the changes of a superseding act,” Gannoum explains.
Decree x Act
In addition to time, there is also interest in the industry to further the assignment of areas under the decree, which provides for lower costs with payments to the Federal, State and Local Governments than is addressed in the current wording of Bill No. 576/2021. Gannoum also believes that the late addition of fees to contracts under an act would be expected by the industry.
The decree does not mention transfers, but some financial aid to the Federal Government should be included in the ordinance. The final version of the Bill refers to the highest offer in contract signing bonuses as the main criterion for the dispute over areas. The Bill also provides for a flat fee on the area usage at 1.5% on top of gross revenue and 1% directed to the science and technology fund. The initial percentage was 5%, which was lowered by the senators. From now on, companies will request to pay only 1% of net revenue.
For Ana Karina Souza, energy partner at Machado Meyer Advogados, who advises companies in the industry, it is important for the business environment that this type of flat fee remains low. “There is an unfounded understanding that offshore generation can be compared to that of oil & gas, which has much higher profitability and can absorb higher charges. The only similarity is that both activities take place on the high seas,” says Ana Karina.
Maurício Tolmasquim, former CEO of the Energy Research Company (EPE) and professor at the Federal University of Rio de Janeiro, agrees with the sentiment and adds that burdening the industry at its inception can scare away interested parties, especially in a market that can look for other segments with relative ease.
Convergence
Despite the differences, the Bill is getting more and more similar to the decree with each update, which is seen as a good thing, because it allows for greater legal certainty in the very short term. For Tolmasquim, a key point was the separation of the process of assignment of areas from auctions for procuring energy from the regulated environment. This is because procuring in an auction depends on domestic demand and planning. It could hinder projects aimed at the free market or other fronts, such as the production of green hydrogen.
Livia Sancio, lawyer and partner at Salomão Kaiuca, Abrahão, Raposo e Cotta Advogados, asserts that the market has welcomed the regulatory efforts. “Even in the case of the decree, according to Ibama data, there has been a considerable increase in the number of projects undergoing licensing since last year, implying increased confidence in the industry. The approval of a bill boosts this sentiment,” she says. As a matter of fact, the number of projects tripled and the total planned capacity jumped from 55 GW to 169 GW over the period.
Regarding the assignment of areas, both instruments — decree and act — are on the way to establishing planned concession models, with auctions organized by the government, or independent concession, a quicker process, in which a player shows interest in a given area and the granting authority allows competitors to place their bids, if any, during a specific timeframe. If there is more than one interested party, a bidding process is initiated with criteria close to those of the federal auction.
According to Ana Karina, from Machado Meyer, the trend is for most assignments to be done via competitive bidding, considering how the projects reported to Ibama overlap with each other. A Broadcast survey shows that at least 31 of the 66 projects registered with Ibama totally or partially overlap, implying chances of being auctioned to the highest signature bonus. But the executives interviewed downplay it, saying that little of what was registered will be carried out owing to how intense the industry’s capital is.
High Cost
In addition to the initial expenses with assessments and remittances to the Federal Government, the Capex of wind farms today is in the billions. Ocean Winds (Engie and EDP) estimates that each gigawatt of installed capacity can cost from BRL 13 bn to BRL 16 bn nowadays, an amount that may be even higher in Brazil owing to the absence of a chain of suppliers, which would force import of equipment.
Camila Brandão, Shell’s renewable technology manager, estimates that a plant by the British-Dutch company in Brazil could easily require an investment between BRL 5 billion and BRL 7 billion. Brandão explains that the materials to be used on the Brazilian shore may have a lower density than those used in regions like the North Sea, which would reduce costs. Shell’s offshore experience is also taken into account, as it would add customizable solutions to operations.
The massive forecasted amounts are due to the capacity of projects, of at least 1 GW, but with an average between 2 GW and 3 GW. That is the scale required for the industry to be profitable today, which drives up installation costs. However, Tolmasquim points out that the amounts however tend to drop in the future with the advancement of technology and gains in scale, as has happened with onshore wind and solar energy.
Those 66 projects listed at Ibama are divided into three main regions: the coasts of Rio Grande do Sul and Santa Catarina; the States of Rio de Janeiro and Espírito Santo; and the Northeast Region, between Rio Grande do Norte, Piauí, Ceará, and Maranhão. Almost half of the projects (31) are concentrated in the Northeast Region, 18 of which are located in the sea of the State of Ceará, where companies are attracted by the infrastructure of the port of Pecém and major power consumers. The same happens with the Port of Açu in the State of Rio de Janeiro, which makes Rio and Espírito Santo attractive locations for the industry. According to Brandão from Shell, the State of Rio Grande do Norte, is the country’s main “hotspot” owing to its coastal conditions, which are shallower, with strong, constant winds, and little variation in direction.