Oct 31, 2011

Turbine producers like Sinovel are eyeing major demand in the Brazil market, but manufacturing locally may be the only way forward in emerging markets.

By Bob Moser in Sao Paulo

Chinese turbine manufacturers are aggressively pursuing expansion in key growth markets around the world. But their current price advantage over all rivals - the fruit of China′s conveniently low wages and state funding for the sector - may hit a wall in new markets like Brazil, where domestic supply policies are evening the playing field.

China′s Sinovel Wind Group Co., the world′s second largest wind turbine manufacturer, closed a deal in September to break into South America and the rapidly growing Brazilian wind market. Brazilian developer Desenvix SA will use 23 of Sinovel′s SL 1500/82 turbines to power its 34.5 MW Barra dos Coqueiros wind farm in the northeastern state of Sergipe.

The more telling news may be that Sinovel also announced it would be the latest turbine manufacturer to build a factory in Brazil. It follows a September announcement from German manufacturer Kenersys of plans to set up a Brazil factory this year. And in October, General Electric finalized an agreement with Brazil′s northeastern state of Bahia to build a turbine factory there, an investment of BRL45 million (US$25.2 million) that should churn out 200 turbines the first year and up to 700 in the second.

Turbines can make up as much as 75% of a wind farm′s costs, and Chinese turbines currently go for about US$1.12 million per MW in Brazil, 14% less than the global average price. Some 44 wind farms sold contracts at the latest long-term energy auctions in August at BRL99.58 per Mwh, the cheapest national rate ever for wind energy.

About a quarter of those projects still hadn′t lined up turbine suppliers in October, leaving Chinese manufacturers like Sinovel, Xinjiang Goldwind and others a chance to grab a larger portion of this nascent market. But to truly compete in Brazil they′ll need to be based locally, because the nation′s most influential lender is steering developers towards domestic suppliers.

Buy local, get backing

Brazil′s National Development Bank, BNDES, offers loan rates that are usually half of the best rate a Brazilian private bank can offer, and in turn has been the primary lender for close to 100% of all wind farm projects and related supply plants opened here in the last few years.

"When a wind farm developer is trying to put in the lowest bid at a public energy auction, he′s going to have to work through BNDES eventually to make this happen, no doubt," said Camila Galvão, attorney and specialist in energy market investment at Sao Paulo law firm Machado, Meyer, Sendacz & Opice.

With BNDES holding the only purse strings worth pursuing, wind power developers must march to its beat. The most influential mandate set by BNDES has been its loan requirement that at least 60% of equipment and services used to build a wind farm be domestically sourced.

Some BRL30 billion (US$16.8 billion) has been invested in wind energy projects in Brazil since 2009, and 5,785 MW in planned installation have been contracted through five public auctions during that time. The biggest jump in Brazil′s energy contributions over the next decade will come from windpower, which today supplies about 1% of the nation′s electricity, but should supply 7% or more by 2020, according to the Brazilian Wind Energy Association, ABEEolica.

"One of the biggest hurdles for these windpower developers is the financing, and BNDES is the best source of support for this market," said Rodrigo Viana, alternative energy analyst with Andrade & Canellas, Brazil′s largest independent consultancy for the energy industry.

"Depending on the turbine manufacturer, if you build a factory here you solve your main problem," Viana said. "But in the case of Chinese manufacturers, you′ll only resolve that problem (of competing locally) if you can manage the cost of manufacturing in Brazil to keep your product competitive."

Imports a no-go

In any case, the fact that Brazil has some of the world′s highest import tariffs on manufactured goods is a strong driver for foreign turbine makers to set up shop there. But with BNDES′ rules steering wind power developers towards domestic suppliers, imported turbines stand little chance of competing in Brazil in the future.

If Chinese turbine makers want to offer the best product possible in this market they should participate in developing a complete supply chain within Brazil, said Renato Amaral, co-founder and director of Renova Energia, and director of ABEEolica. Manufacturers should want to be here to tailor their turbines to Brazil′s unique wind capacity factors, he added.

Viana believes that imported Chinese turbines could still be the cheapest option for a Brazilian wind farm developer, even after a 14% turbine import tax is tacked on. But that bottom line advantage is compromised by the fact that most product guarantees and maintenance concerns could only be responded to from China, not to mention the fact that imported turbines wouldn′t help a developer qualify for a BNDES loan.

To respond to this article, please write to: Bob Moser

Or write to the Editor: Rikki Stancich

(http://social.windenergyupdate.com 31.10.2011)

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