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Brazil free power market investments expected to continue despite crisis

Bnamericas Published: Thursday, May 21, 2020
Brazil free power market investments expected to continue despite crisis

The coronavirus crisis is not expected to threaten investments in Brazil’s free power market, the CFO of local renewable energy generation firm Kroma Energia, Valério Veloso, told BNamericas.

“The most significant impact was felt mainly in the regulated market, but in the free market contracts are bilateral and negotiations are underway to reduce the impacts. There could be some isolated cash issues, but they should not compromise investments. Many of our consumers reduced demand, but this is affecting only the working capital,” Veloso explained.

Brazil has seen an acceleration in the migration of big consumers from the regulated market, where they are supplied by distributors, to the free market, where contracts are negotiated directly with generators. The main reasons for migration are the high electricity tariffs in the regulated market and the search for renewable power supply.

Data from power trading chamber CCEE shows that at the end of the first quarter the country had 7,453 consumers registered to operate in this market, representing a 23% rise year-on-year. The expectation is that the number will grow even further in the coming years, as a bill that reduces red tape in the sector has already been approved by the upper house and only needs to be passed by the lower house.

"We believe entrepreneurs that have not migrated to this market yet now have more knowledge and understand the benefits of planning costs and reducing expenses. We would like to see the government reducing barriers for this migration to help firms enhance savings and sustainability in their businesses,” the CFO added.   

According to Veloso, the outlook for the free market, post-coronavirus, is positive, with industries expected to capitalize on more relaxed rules to reduce costs and recover.

“Brazil’s free market is mature and we would like to supply smaller businesses, such as bakeries, helping them reduce costs and optimize electricity use. After that, we also want to supply residential clients," he said.    

Eyeing this expansion, Kroma Energia plans to invest 250mn reais (US$43.8mn) in 2020-22. Out of the total, 120mn reais will go to the construction of the 100 MW São Pedro and São Paulo solar complex, in Pernambuco state, which is due to start development works by November. Kroma holds a 50% stake in the project with Z2 Energia as a partner. Part of the plant‘s electricity was negotiated in the regulated market, where the project won an auction in 2018, and another part was sold through power purchase agreements to French firm Engie.   

The other 130mn reais will go to a new solar power project in Minas Gerais state that is due to start construction by 2022. The plant is still in the development phase but was already granted environmental licenses. The company will hold a 20% stake in the complex with two undisclosed international firms as partners.   

“Those are the projects that have been defined for development in the medium-term, but we continue analyzing the consequences that the COVID-19 pandemic could bring to the sector and study other possibilities for business expansion,” the CFO explained.   

In addition to the projects under development, Kroma also holds a 12.5% stake in the 162MW Apodi solar complex (picture) in Ceará state, which came online in 2018, in a partnership with Z2 Power, Pacto Energia, Equinor and Scatec Solar. The project was the first renewable power investment by Norwegian oil firm Equinor in Brazil.   

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