Market Insight

Brazil International Renewable Energy Congress – Financing in the spotlight

November 13, 2017

Maria Chea Maria Chea Analyst, Solar

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A team of IHS Markit solar analysts attended Brazil International Renewable Energy Congress (BIREC) in Rio de Janeiro. The following are some key takeaways on the Brazilian solar market from the event.

The Central Bank will change the National Bank for Economic and Social Development’s (BNDES) rates on its long-term loans in order to end the bank’s subsidized lending, improve the country’s money supply, and encourage alternative project financing for energy projects.

The recession Brazil went through in 2015 slowed down BNDES financing to infrastructure projects, for which BNDES was considered the only realistic source of funding. The central bank is now trying to lessen the dependency of infrastructure projects on BNDES and improve monetary policy, by creating a versatile financing environment. To this end, earlier this year, the central bank decided to implement a new long-term lending rate for BNDES. Next year, the Taza de Longo Prazo (TLP) will replace BNDES’ long-term rate, the Taxa de Juros de Longo Prazo (TJLP). The new TLP rate will slowly remove government subsidies on long-term loans to better match the central bank’s SELIC rate. Currently BNDES’s rate is 7%, whereas SELIC rate is 9.25%

By eliminating the subsidized rate, the central bank anticipates that private banks will step up to offer alternative long-term financing, and boost investments in infrastructure projects including utility-scale PV plants. Critics of the rate change argue that Brazil’s high interest rates make BNDES loans necessary. Supporters of the measure instead point out that high interest rates stem from the central bank’s monetary policy to stave off inflation, which is a result of the large flow of subsidized money in the country, thus causing a vicious interest rate cycle. At BIREC, both developers and investors seemed to be supportive of the change in rates and are optimistic the new policy will open the door for international financial institutions to be able to provide financing for both solar and wind projects.

Banco do Nordeste do Brazil (BNB) steps up financing for renewable energy projects. 

In the past, BNB has not been on the forefront of solar investments due to the government channeling most of the money to BNDES. However, BNB is now increasing its participation in financing renewable energy projects. Recently, BNB announced it will invest nearly US$409 million to finance projects by Enel Green Power, CPFL Renovaveis, and Apodi Energia. Moreover, the bank has a credit line, FNE Sol, aimed at financing solar power generation. BNB is also looking to partner with private banks and international financial institutions to offer financing to renewable energy projects.   

Private and multilateral development banks are looking to partner with BNDES to provide investors with a wider range of project financing tools.

After the rate changes, BNDES expects to share its role of financing large infrastructure projects with international finance institutions (IFIs) like Proparco and the IFC, whose rates could be competitive. To do so, these institutions, as well as other financiers, would like the government to address construction risk. This risk is currently not assumed by BNDES or BNB, and is a great woe for investors. Solar developers hope that Brazil’s development banks will take on this risk in the future, even if the risk remains small for PV projects. In the meantime, bridge loans, project guarantees, bonds, and short-term financing schemes, like mini perms, are all mechanisms that private and multilateral development banks are implementing in order to move solar projects forward. Private banks and international financial institutions also want to work with BNDES and BNB in order to strengthen project finance in the country. Conference participants expect that the added participation from external financing entities and added project finance mechanisms will allow for more successful PV growth in the country.

The high cost of capital in the country is still a deterrent for investors as the country deals with economic, foreign exchange, political, administrative, and financing risks. Several actors are trying to improve the country’s capital markets to mitigate some of these risks.

Despite the numerous risks energy projects face in the country, investors see the large potential Brazil has for renewable energy projects and are coming up with solutions to better hedge against these risks. Solutions like the green bonds were largely discussed during the conference as a tool for investors due to their transparency and accountability. This year, green bond issuance in the county has exceeded US$3 billion and is expected to keep growing. Companies like Swiss Re are trying to enter the market by offering their reinsurance services to manage weather-related volume risks; where there is a risk of a fall in volume of electricity produced due to the intermittent nature of solar and wind.

Institutions like OPIC are trying to find ways to hedge against currency risk in the country. Some investors have called for a pegging to the dollar with the view that it would solve foreign investment issues, however there seemed to be a consensus that something like this is unlikely to happen. Currency risk continues to be one of the greatest obstacles for project financing in the country.

Administrative risks also contribute to the high cost of capital. Developers and IPPs such as Enel Green Power and Eren Brazil have faced connection delays of more than a year, because of bureaucratic issues. The Brazilian Electricity Regulatory Agency (ANEEL) and the Ministry of Mines and Energy (MME) claim to be trying to improve the administrative bottlenecks to boost investor and project developer confidence.

Investors have a positive outlook for the country’s distributed generation (DG) segment, although better financing and regulation is needed to strengthen the sector.

Participants at the conference noted that DG applications are growing steadily on the back of favorable net metering policies and a reduction in system costs. IHS Markit forecasts Brazil will complete over 200 MW of photovoltaic DG installations in 2018. The low barriers to entry in the DG segment have spurred the number of competitors, including the rise of inexperienced players who do not meet certain quality standards. Companies are not obliged to be transparent about their operations, causing information asymmetry in the sector. The lack of transparency is a deterrent to receiving financing.

Participants noted the aversion from Brazilian citizens for long-term loans when it comes to solar installations. Better rates, more financing options, and subsides are all solutions they want ANEEL and banks to implement in this segment. Companies like CPFL Energia, Enel, Engie, and AES Tiete have all created new companies that focus solely on PV DG installations and home kits.  


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