Brazil is a sleeping solar giant. As the country’s solar market begins to stir, what are the main changes that need to occur for Brazil to join China, the United States, and Japan as one of the top solar markets in the world?
Strong fundamentals, but…
Brazil has impressive strengths. The country boasts a population of 200 million people, 570,000 gigawatt-hours of consumption per year, average retail electricity rates in the double digits, and 70 gigawatts of new generation needed by 2024. There is already a robust auction process for procurement and a bilateral market, and net metering is in place. Several states have passed tax exemptions for solar, and the government has committed to 1 to 2 gigawatts of utility-scale solar per year. As Gabriel Ferreira of local PV company SolarVolt Energia notes, utility-scale procurement will bring more international developers and a supply chain to the country, creating traction that will benefit the distributed generation market.
Even some of the country’s weaknesses actually support the case for solar: while Brazil was recently downgraded due to serious economic concerns, and the electricity sector took a beating last year as drought exposed the dark side of hydro-dependence, accelerating the solar industry could spur economic development and hedge against future volatility in electricity prices.
So why isn't Brazil already a solar juggernaut?
Net metering: Necessary but not sufficient
Net metering has been in place since 2013, but the market has been very slow to develop. In the Latin America PV Playbook, we estimate that a little over 33 megawatts have been installed to date, with two-thirds of that under net metering. On the surface, this may seem surprising, with residential rates averaging $0.17 per kilowatt-hour, commercial rates at $0.15 per kilowatt-hour, rates increasing 42 percent in 2015, and further increases expected. In addition, investing in solar has a serious economic driver as a hedge against inflation, which is currently at 9.53 percent. With 6-kilowatt systems costing around $1.40 to $1.50 per watt, the paybacks under these retail rates could be tremendous.
There are a few contributing factors to the delay in market growth. First, net metering is for individual use only; third-party direct sale is not permitted. Some solar companies have explored alternative contracts structured around renting and energy management, but the lack of explicitly permitted direct sale is definitely a barrier to really scaling the market. Another issue is the cap on system sizes, which must correspond to peak load on-site or demand. This has the de facto effect of incentivizing self-consumption rather than maximizing production and export, particularly with regards to commercial customers.
What needs to happen for the market to grow? Third-party ownership needs to be legally codified in the regulatory structure. Additionally, system-size caps could be removed, and resolved instead at the billing level with bills zeroing out on a monthly or quarterly basis to help offset consumer bills without directly encouraging export. As SolarCity SVP Marco Krapels has noted, "We’ve got our eyes on Brazil—its insolation, electricity rates and demand place it among the most promising solar markets in the world. A few simple, low-cost regulatory changes, such as allowance for third party ownership and expansion of Net Energy Metering, could jumpstart the local distributed solar market and create tens of thousands of new jobs in the process."
Taxes: Improving, but more work is needed
Taxes increase the cost of installed solar in the country by up to 40 percent compared to Brazil’s neighbors. With the market still highly dependent on cash sales, already price-sensitive customers are often scared off. Early adopters are often the individuals and businesses that view sustainability as a moral investment in their future, although not necessarily as an economic one. This obviously limits the total available market quite a bit.
Taxes are levied at several points in the PV value chain. PV equipment faces federal import taxes, state industrial production tax, and state value-added taxes. Gross electricity consumption is also taxed at the state level. Generators also pay transmission and distribution taxes when selling on the free market.
This has created challenges for every approach to market for PV. Large-scale plants have to pay the taxes on equipment and then taxes on transmission and distribution (although projects of less than 30 megawatts have a discount on the latter). Distributed generation faces higher costs due to the taxes on equipment, as well as longer payback times because net metering does not offset the taxes applied to gross electricity consumption.
What needs to happen for the market to grow? Several states have already passed exemptions on the value-added tax on electricity, accelerating payback times. This needs to happen in most of the country. Solar generators of any size could be exempt from the transmission or distribution tax, or see heavier discounts. Finally, solar equipment -- especially modules and inverters – could be exempted from the hefty federal and state taxes.
Cost of capital
Lending rates in Brazil are in the double digits. For capital inside the country, interbank lending rates are at 14.3 percent. What's more, the weakening of the Brazilian real against the U.S. dollar means that bringing in external capital requires expensive currency hedges.
The Brazilian National Development Bank has offered low-cost financing to utility-scale developers, but this is contingent on the use of local content. Local module production in particular is likely to be very expensive compared to imported equipment, and far more expensive than tax-free imported equipment.
The other issue is credit ratings. Although commercial clients often have a strong track record with local banks, the credit-scoring system for individuals is still relatively new. This makes finding financeable offtakers in the residential market more difficult.
What needs to happen for the market to grow? Federal and state development banks need to offer low-cost financing to a wider range of players and eliminate the local content requirement. Lending to small and medium-sized enterprises, or to intermediaries that can in turn fund individual systems, would greatly increase access to capital. While the currency risk issue is not likely to be solved overnight, the government could explore dollar-denominated power-purchase agreements and currency hedging systems, such as the one proposed in India, to help attract international developers into the market. Continued support for measuring consumer credit through partnerships with local banks would help get financiers more comfortable with making large capital injections into the residential market.
Adam James is a Senior Analyst leading global downstream market coverage for GTM Research, with a specialty in Latin American markets. Interesting in seeing more of GTM Research's work on Latin America? Don’t miss the Latin America PV Playbook, and registration is now open for Solar Summit: Mexico, GTM’s first international conference. You can hear more from Adam on Twitter (@Adam_S_James) and stay up to date with the Latin America Solar Newsletter.