How Brazil's drought could help bring power generation projects off the drawing board

Water scarcity and the consequent rise in electric power prices in hydro-dependent Brazil could help bring new generation projects off the drawing board.

After more than two years practically at the floor (around 60 reais or US$10.7 per MWh), the price of settlement of differences (PLD), which is the main reference in the free energy market, exceeded 270 reais/MWh on Tuesday, according to the chamber of electric power traders CCEE. 

The average PLD in August was above 100 reais/MWh in all subsystems (southeast/center-west, north, northeast and south). 

According to Hélio Lima, CEO of Migratio EnergiaMigratio Energia, the new scenario should make it possible to develop mainly small projects for the free market, which are at an advanced stage of approval and will be implemented relatively quickly. 

Migratio currently has a pipeline of six projects with between 1MW and 5MW, all based on renewable sources.

“We think the moment is more attractive,” said Lima. “The free market is the environment that induces the expansion of electricity generation capacity because, in a scenario where distributors are over supplied, there is little opportunity for auctions in the regulated environment.”  

Deborah Canongia, Norwegian solar company Scatec's VP of business development in Latin America, sees a significant change in the outlook compared to two years ago, when hydrological conditions were much more favorable. 

“This is also reflected when we start discussing with off-takers and we notice a change in their appetite to sign long-term contracts,” she told BNamericas.

Canongia said that with the very low prices, the interest of off-takers in signing long-term contracts was decreasing. 

With 2GW of projects under evaluation in the country, Scatec will soon start building a plant that has a long-term power purchase agreement (PPA) with Statkraft but with around 20-25% of its energy still uncontracted. 

“So, for this uncontracted portion, we work with long-term energy price estimates. And relevant changes, such as the onset of a water crisis, impact this vision and help the financial model,” Canongia said. 

But there are those who are less optimistic. 

João Sanches, CEO of Trinity Energias Renováveis, said the recent price hike is still not enough to boost generation projects that are on the backburner. 

“The long-term price rise was not so significant and was accompanied by the rise in the dollar, which makes the capex of possible new investments more expensive, so the profitability offered with the current assumptions is still not interesting,” he told BNamericas. 

Mayra Guimarães, regulation and market studies director at consultancy Thymos Energia, said that, in addition to prices, there are other variables that could contribute to boosting generation projects, such as the extension of the deadline for entry into operation with the benefits of provisional measure (MP) 1,212.

She said the expansion of the electric power matrix is being guided by self-production projects that depend much more on the long-term price curve, or forward curve, than monthly variations in the PLD.

“The forward curve has also been rising, since it is influenced by the PLD in the short term, but to a lesser extent,” Guimarães said. 

The recent increases in the PLD are associated with a critical water affluence situation that has been breaking records, but this is a one-off, says the consultant. 

“Structurally, we remain in a scenario of oversupply, which tends to reduce prices,” said Guimarães. 

Ingrid Santos, CEO of power trader Indra Energia, believes that despite the water scarcity, the resumption of projects is not foreseen due to the surplus capacity in the system. 

“The country's current challenge is to deal with the different behavior of intermittent sources and the challenges this brings to operations, especially at peak times. That's why the current scenario is one of contracting potency for the system, not energy,” she said. 

Potency is contracted, for example, through backup capacity auctions, in which thermal or hydroelectric plants sign flexible contracts and are only activated when necessary to assure supply. 

The federal government had planned to hold such an auction in August but it was postponed and no new date has been set.