The Brazilian Electricity Regulatory Agency (ANEEL) announced a so-called reserve capacity auction to contract new power-generation capacity to hedge against unexpected drops in power supply.

Barcelona, Spain (July 8, 2014)— Brazil's plan to auction 3.5 gigawatts (GW) of photovoltaic (PV) capacity through 2018 comes as welcome news for the global solar industry as the ambitious plan is expected to catalyze solar growth in Latin America, according to a new report from IHS Technology (NYSE: IHS).

The Brazilian Electricity Regulatory Agency (ANEEL) announced a so-called reserve capacity auction to contract new power-generation capacity to hedge against unexpected drops in power supply. Such drops might include low hydroelectric power levels during drought years.

The next auction is slated for October, and will offer separate categories for different technologies. This approach will benefit the PV market compared to the regular new-capacity auctions, in which multiple renewable power technologies compete, a method that gives an advantage to wind.

Exactly how much capacity will be awarded has not yet been disclosed, but IHS expects about 500 megawatts (MW) to be available for PV projects in the first round. The ceiling price for the 20-year power purchase agreement (PPA) for bids is likely to be set at approximately RS250 per megawatt-hour (MWh), or $112 per MWh.

"Bids will be highly competitive," said Josefin Berg, senior analyst for solar demand at IHS. "We expect bid prices to fall to less than RS200 per MWh, in line with offers from previous Brazil auctions where solar failed to compete with wind."

In light of the new announcements, IHS has increased its installation forecast for the country, and predicts that the annual installed solar capacity for Brazil will rise to 1,023 MW in 2018, up from 167 MW in 2013, as shown in the attached figure.

These findings are available in the latest edition of the "Emerging PV Markets Tracker" report, from the Power & Energy service of IHS Technology.

Drought conditions push up power prices

Brazil is currently suffering a challenging year in power generation, as extreme drought conditions have threatened electricity supply and forced an increase of costly thermal power generation. As peak wholesale power prices top $400 per MWh, alternative sources of generation have become attractive in the short term.

"Markets like Brazil that combine high solar resources and elevated power prices create opportunities for PV," Berg added. "The main constraint in Brazil is the price uncertainty in long-term power, tied to meteorological factors; revenue levels cannot be guaranteed without a PPA."

Successful bidders in the reserve auction could seek to increase revenues by completing projects early to initially benefit from potentially elevated spot prices until the PPA of the auction comes into effect in 2017. Such early installations will contribute to near-term growth in PV demand in the country.

Tough competition expected

Competition for PV projects in the reserve capacity auction will be tough, IHS expects. As an indicator of the PV project pipeline in Brazil, about 6.1 GW worth of PV projects have registered for the new capacity auction scheduled for September 2014, even if few are likely to be able to bid below wind projects.

In the October reserve capacity auction, locally established utilities and independent power producers (IPP) are best positioned to offer sufficiently low bid prices to take home the bulk of awarded PV capacity. CPFL, the largest utility not owned by the government, has a PV pipeline of nearly 600 MW, while wind-focused IPP Renova Energia has claims to bids of a combined capacity amounting to 240 MW.

Of the international power producers already established in Brazil, GDF Suez has installed a 3.5 MW solar plant, and Enel was awarded 15 MW in the February Pernambuco PV tender.

Brazil rises to sixth place in IHS attractiveness ranking

Given the positive news for PV in Brazil, IHS has raised Brazil's attractiveness score to 41, out of a possible maximum of 100, in the IHS Emerging PV Markets Attractiveness Ranking, elevating the country from eighth to sixth place among the world's most attractive solar markets.

Overall, Brazil's installed PV capacity is anticipated to grow from 39 MW to 1.2 GW by the end of 2016, IHS expects The main share will be in utility-scale projects as awarded in national and regional auctions. As for commercial and residential PV, despite a net-metering scheme being in place, deployment remains limited by tax challenges and low visibility on retail power prices that do not reflect the real power generation costs. The future of regulatory support for PV on the one hand, and of retail power price levels on the other, will hinge on the outcome of Brazil's general elections in October this year.