Precise measurements of wind speed carried out in Brazil in the early 1990’s revealed the existence of a large potential for windpower generation, currently estimated at 143,000 megawatts. This potential has remained essentially unexploited. There are only eight small windpower plants in operation in Brazil today with a combined installed capacity of 21.4 megawatts.

This situation is likely to change — and rapidly. Developers have announced plans for 73 new windpower plants, mainly in the northeastern states of Brazil. These plants, which are expected to add approximately 5,532 megawatts to the system, will be fairly large, with an average installed capacity of approximately 76 megawatts. Eighteen of these plants will have an installed capacity of more than 100 megawatts, the largest one being the Redonda windpower plant, in the state of Ceará, with 167 wind turbines and an installed capacity of 300.6 megawatts. These new wind-power plants are supposed to enter into commercial operation over the next five years, but the projects face challenges getting constructed and financed. So far, developers — mainly international groups such as the Spanish Iberdrola and the French Electricité de France –– have only obtained preliminary environmental licenses and other required authorizations.

Regulatory Framework

Windpower plants are subject to the same general rules that apply to hydroelectric and thermal plants. Wind projects are constructed and operated under 30-year authorizations issued by Agência Nacional de Energia Elétrica, or “ANEEL,” the Brazilian regulatory agency responsible for the power sector. These authorizations are issued on a first-come-first-served basis upon request of developers, without the need of complicated bidding processes or complex agreements between developers and Brazilian authorities. The authorizations are very simple documents that specify the basic terms and conditions for the project and its technical characteristics and location.

The Brazilian government adopted incentives for wind projects in December 2001. These incentives are available to all power producers using “alternative sources of energy,” an expression that includes not only windpower plants, but also biomass thermal power plants and very small hydroelectric power plants. The incentives can be found in Law No. 10,438.

There are two different sets of incentives. The first one, referred to as the “Incentive Program for Alternative Sources of Electric Energy” (in its Portuguese acronym,”PROINFA”) is available to all producers using alternative sources of energy that qualify as “autonomous independent power producers,” or “AIPPs.” The second set of incentives, which is not designated by any specific name, is intended to benefit producers, whether or not qualified as AIPPs, using alternative sources of energy.

Incentives: PROINFA

The first set of incentives is an assurance Eletrobrás will purchase all energy generated by the project under a 15-year power purchase agreement. Eletrobrás is a mixed-capital holding company controlled by the Brazilian federal government and is responsible, through its several subsidiaries, for almost 60% of all energy generated in the country.

Projects that qualify for such contracts are called AIPPs. To qualify, the owner must be an independent power producer that is unrelated to distribution, generation and transmission concessionaires in Brazil. In addition, an AIPP can only have the participation of a manufacturer of generating equipment if the local content of the generating equipment to be supplied to the AIPP is at least 50%.

There is one exception to the rule that only AIPPs qualify for 15-year contracts to sell their output to Eletrobrás. The federal government may authorize Eletrobrás to purchase energy from producers not qualified as AIPPs, provided that the amount of energy purchased from such other producers does not exceed, during the first phase of PROINFA, 50% of all energy that Eletrobrás is required to purchase under that phase, and during the second phase of PROINFA, 25% of such energy. In addition, all energy offered by AIPPs must be covered by purchase agreements with Eletrobrás, so that no AIPP will be adversely affected by purchases from other producers.

PROINFA is divided into two phases with slightly different characteristics.

First Phase

During the first phase of PROINFA, AIPPs may offer to Eletrobrás all energy that they generate. However, this only applies to projects that are in operation by December 30, 2006. Eletrobrás is required to buy electricity from such AIPPs, but the total amount to be purchased during the first phase of PROINFA cannot exceed 1,100 megawatts. This limit represents a third of all energy expected to be purchased by Eletrobrás from AIPPs relying on alternative sources of energy under the PROINFA.

Since the amount of energy purchased by Eletrobrás during the first phase will probably be smaller than the total installed capacity of windpower plants in operation during this period, Eletrobrás will have to decide from which AIPPs to purchase electricity based on a “public invitation process.” Eletrobrás will initially invite all interested AIPPs to enter into power puchase agreements, but will contract first with those that, in addition to the ANEEL authorization, already hold “environmental licenses for installation” (“licença ambiental de instalação”), and then only with those that hold preliminary environmental licenses (“licença prévia ambiental”). All power purchase agreements must be signed by April 25, 2004.

During the first phase of PROINFA, Eletrobrás will pay more for electricity from AIPPS than it pays for electricity generated from traditional sources. Although the actual purchase price must still be determined, project owners are guaranteed by statute that the price will correspond to the “economic value of the windpower,” and there will be a floor price equal to 80% of the national average tariff charged by distribution concessionaires to final consumers. As an illustration, from January through August 2002, the national average tariff charged to final consumers was, according to ANEEL, R$140.06 per mWh. Therefore, the 80% floor would correspond to R$112.05 per mWh. This amount is substantially higher than the so-called “normative value” — the limit for the electricity costs that can be passed through by distribution companies to their consumers and that has been recently established at R$72.35 per mWh. (Due to its characteristics, the normative value functions as a “reference value” for the price of electricity sold by generators to distribution companies under long-term power purchase agreements.)

Obviously, the “economic value” of the windpower to be established by the federal government will be essential for the success of PROINFA. In light of the still high generating cost of windpower plants, these types of plants in Brazil will not be viable if the electricity price under the Eletrobrás contracts is set at a level close to the normative value.

Second Phase

The second phase of PROINFA will begin as soon as Eletrobrás has acquired a total of 3,300 megawatts from producers relying on alternative sources of energy under the first phase (which include the 1,100 megawatts allocated to windpower plants, and the 2,200 megawatts allocated to producers using other sources of energy). During the second phase, Eletrobrás will be required to purchase from wind, biomass and small hydroelectric projects an amount of electricity so that such projects account for 10% of all electricity consumed in Brazil.

Although 15-year power purchase agreements will still be available during this second phase, the electricity price in such contracts will be different from contracts signed during the first phase. In the case of windpower plants, the electricity price to be paid by Eletrobrás will be equivalent to the “economic value of the competitive energy” (instead of the “economic value of the windpower”), which is defined as the weighted average generating cost of new hydroelectric power plants with over 30 megawatts of installed capacity, and of new natural gas-fired thermal power plants. The “economic value of the competitive energy” will be calculated by the federal government.

However, windpower producers will be entitled to receive a monthly subsidy called “additional credit” to compensate for the lower electricity price under their contracts with Eletrobrás. This subsidy will correspond to the difference between the “economic value of the windpower” (to be established by the federal government, but having a floor equal to 80% of the national average tariff charged to final consumers) and the actual energy price received under the power purchase agreement with Eletrobrás.

A central account — called the “CDE” — will be set up to pay the monthly subsidies. It will be funded with annual payments by concessionaires in the power sector under their concession agreements, fines imposed by ANEEL and, as of 2003, from annual quotas to be paid by all parties selling electricity directly to final consumers. The amounts on deposit in the central account will be managed by Eletrobrás.

Subsidies will be paid to wind projects only to the extent there is money in the account. Wind subsidies cannot exceed annually more than 30% of all amounts scheduled to be deposited into the central account during that year. Funds in the account are available for other uses. This could leave the account short of the amount required to fund the monthly wind subsidies fully.

More Incentives

A second set of incentives is available to all producers using alternative sources of energy, whether or not qualified as AIPPs, provided they sell their electricity directly to final consumers.

This set of incentives is very similar to the incentives during the second phase of PROINFA. Producers relying on alternative sources of energy will be entitled to a subsidy corresponding to the difference between the “economic value of the windpower” and the “economic value of the competitive energy.” The basic difference is that producers will not have the right to sell their energy to Eletrobrás under 15-year power purchase agreements.

In order to be entitled to the benefit, producers must sell their electricity to “final consumers,” which excludes sales to generating companies, distribution companies and energy traders, but includes sales to so-called “free consumers,”, large industrial users who consume at least 3 megawatts and who are free to choose their electricity suppliers.

These subsidies are also to be funded out of the same CDE account that was discussed earlier.

Conclusion

Brazil is seeking to have 10% of its electricity supply come from renewable sources. The two new incentives adopted last December should help it meet that goal. The new Lula administration is committed to implementing them. They have already led developers to announce plans for 73 new windpower projects.