Market Report, "Brazil Power Report Q3 2016", published

From: Fast Market Research, Inc.
Published: Sun Jul 03 2016

We maintain that the Brazilian electricity market will offer opportunities to risk-tolerant project developers and power sector investors over the coming years, despite the country's deepening economic recession in 2016. The renewables and hydropower sectors will present the biggest potential to international investors, but we see opportunities also in power transmission and distribution. We also highlight, however, that lower power consumption, coupled with high financing and import costs will be significant risks to operating in the country in the short run.

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Brazil's economic crisis has started to reduce investment in new power projects and to threaten the implementation of those already planned, as a result of a contraction in power consumption and higher financing and import costs for project developers. These factors - coupled with an ongoing investigation on state-run utility Eletrobras, which could result in delays and asset impairments - have brought us to downgrade our forecast for growth in the natural gas, renewables and nuclear power sector this quarter.

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We expect weaker growth in Brazil's natural gas-fired power generation in 2016 and through 2025 as a result of both greater hydropower generation and market dynamics. In particular, in a context of lower power consumption - due to weaker economic growth - our projections for growth in hydropower and renewables generation indicate that Brazil will need to rely less on thermal power generation than we had previously expected. Supporting this view, only one gas-fired power project was contracted at Brazil's latest A-5 New Energy auction, held in April.

We maintain a relatively positive long-term outlook for Brazil's renewables sector, due to continued government support for the industry and resilient investor interest. However, this quarter we have seen the first negative impacts of the country's economic crisis on the wind and solar power sectors. No wind power projects were contracted in April at the A-5 energy auction, despite a large number of projects had been registered ahead of the tender. Moreover, also in April, Brazilian and international project developers accounting for the majority of the solar capacity contracted in 2014 asked to postpone the date in which their projects are supposed to start operations, from 2017 to 2019. The companies said that the slump in the Brazilian real and lack of local supplies have made the project development economically unfeasible.

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