‚ÄúThe problem with local content requirements for us is that we are faced with two conflicting imperatives: one, to deliver the largest quantity of carbon-free electrons at the lowest possible price; and two, to create local jobs and industries. We are constantly being accused of ‚Äòliving on subsidies‚Äô, even though renewable energy subsidies pale in comparison to the annual US$550 billion paid to subsidise fossil fuel energy.‚Äù
Steve Sawyer, Secretary General of Global Wind Energy Council (GWEC), will be a keynote speaker at Brazil Wind Energy Conference 2013. Cleantech Investor caught up with Steve ahead of the event to discuss the Brazilian wind energy market ‚Äì and to get his thoughts on the wind industry generally.
Q. You have been observing the emergence of wind markets around the world for many years. How has the industry changed over the years as it has matured? Have the newer markets (especially those in Latin America) learnt from the best practices (and the mistakes) of others?
A. Just the fact of now being an established global industry means that the perception, and hence the treatment received, relationship with authorities, etc., has changed and matured. It‚Äôs more of a straightforward business proposition, although there are always new challenges in new markets.
I think the key actors in newer markets tend to study the established markets very intently; and they learn a lot on the technical side. But the political and regulatory reality is quite different in each country, as are the prevailing macroeconomic conditions, electricity market conditions and somewhere between 50 and 150 years of a national electricity system with all of its particular characteristics.
As I get older, I‚Äôm not sure that humans learn from other people‚Äôs mistakes‚Ä¶they generally have to make them themselves!
Q. The Brazilian wind market has grown rapidly over the last few years, with contracts being awarded through the reverse auction system. Other markets have attempted auctions in the past with only limited success. What ‚Äì in your view ‚Äì have been the key features contributing to the success of the Brazilian auction system? And do you believe this is a sustainable system?
A. The key reasons for the success of the Brazilian auction system are:
- A pretty high bar to clear before entering the auction, keeping out the speculators;
- A guaranteed 20 year PPA;
- A binding contract to supply the power ‚Äì if you are in to bid, you‚Äôd better be serious;
- Brazil‚Äôs superb wind regime;
- The availability of BNDES financing;
The fact that the rest of the global market was in a downturn when things were hotting up in Brazil meant that everyone was willing to do what it took to get in on the ground floor.
I do believe that the system is sustainable ‚Äì with some tweaking. As wind penetrates the system more and more, there needs to be coordinated grid planning to go along with it, and regionally based planning as well as national. The market can only take you so far.
Q. What is your opinion of the recent changes to the auction system in Brazil to replace the P90 criteria with the P50 criteria? Was this a sensible move by EPE? And what will the implications be for the project developers participating in the auctions?
A. While it changes the metrics and will initially probably raise prices a bit, I don‚Äôt think it will have much of an impact in the long run. The industry is already paying much more attention to resource assessment and performance, O&M regimes, etc., which has always been necessary given the tight margins‚Ä¶they‚Äôll just have to be a bit more careful.
Q. Local content has become a hot topic in the wind industry since the ruling against the Ontario local content rules (LCR) by the WTO last year (which is being appealed by the Canadian Government). The GWEC Global Wind Report 2012 points to ‚Äúthe demonstrable and inherent inefficiency of the local content requirement rules in a world where supply chains are globalised and manufacturers are seeking to restrict cost escalations for competing with highly subsidised conventional power generation‚Äù. What are your personal views on local content in the wind industry?
A. Just last week, Canada lost its appeal at the WTO. The problem with local content requirements for us is that we are faced with two conflicting imperatives: one, to deliver the largest quantity of carbon-free electrons at the lowest possible price; and two, to create local jobs and industries. We are constantly being accused of ‚Äòliving on subsidies‚Äô, even though renewable energy subsidies pale in comparison to the annual US$550 billion paid to subsidise fossil fuel energy. We have brought our costs down substantially, but local content requirements generally drive costs up, interfere with the development of an efficient global supply chain, and often create non-competitive situations in countries where you might only have one or two manufacturers able to supply a critical component needed to meet local content requirements.
Of course, we do not deny the local political imperative to create jobs, but we don‚Äôt believe that strict local content requirements are the best way to do it; and where they are imperative for whatever reason, at least they should be as flexible as possible and driven by the market rather than by bureaucrats picking out pieces of a technology they want to see produced locally to advertise on their political masters‚Äô website.
Q. The GWEC Global Wind Report 2012 describes Brazil as having a ‚Äúde facto local content requirement‚Äù ‚Äì which has resulted in ‚Äúa rapid expansion of the local supply chain‚Äù. Given that the Brazilian wind manufacturing base is now ‚Äúcapable of producing more than 2GW of wind power equipment per year and supplying the domestic market alone with 1,000 turbines, 1,000 towers and 3,000 blades‚Äù, to what extent do you think that this Brazilian style ‚Äòlocal content‚Äô policy can be described as successful?
A. Personally, I believe that the potential size of the Brazilian market and its tremendous wind resources would have created substantial local content and value simply through the market; but that can‚Äôt be tested now.
The policy has been successful in the sense that it has drawn a lot of investment from international players, and that prices have (until now) remained quite low. It is successful in the sense that nobody (yet) has challenged it at the WTO.
However, it has exacerbated the situation with oversupply in the industry globally, and is not contributing to the healthy and sustainable development of the global industry.
Q. The GWEC Global Wind Report 2012 suggests that there is a possibility that the Brazilian BNDES ‚ÄúLCR rules‚Äù may ‚Äúdrive up prices‚Äù and may ‚Äúultimately be challenged internationally‚Äù. Could you elaborate on both? Bearing in mind that the Ontario LCR was found to have violated international trade agreements, what form might an international challenge to the Brazilian rules take (bearing in mind that the system in Brazil is a ‚Äòde facto‚Äô LCR)?
A. The latest round of LCR rules will almost inevitably drive up prices, as it will be more expensive to acquire and/or manufacture some things locally, certainly in the first instance. Brazil is not a low cost manufacturing country and the market would need to grow substantially.
Q. Referring to markets such as China, the GWEC report acknowledges a role for local content, for example ‚Äúwhen the proportion of required domestic content has been gradually phased in‚Äù. In your opinion, does Brazil fit the criteria for a market (to paraphrase Lewis and Wiser quoted in the GWEC report) where local content has a role (i.e. does it have sufficient potential? is the market sufficiently stable? and is the progressive introduction at the correct pace?).
A. Brazil‚Äôs market is certainly large enough, but I would say the market is not (yet) very stable, and I think the latest BNDES rules would be considered ‚Äòtoo fast‚Äô.
Q. To what extent can the Brazilian wind energy market be compared to the markets in other ‚ÄòBRIC‚Äô nations such as China or India? And what are the contrasts between Brazil and these other markets?
¬†A. India‚Äôs market started 20+ years ago, and China‚Äôs nearly ten, so Brazil is still at the very beginning, in comparison. I would say that Brazil‚Äôs market has more similarities to China than India, simply because of the central role that the national Government has played in establishing both the market and the industry, where in India it is much more governed by individual state policies.
Also, both China and India use feed-in tariffs of one sort or another, and the auctions in China haven‚Äôt really worked very well, but have been a rather blatant instrument to foster the development of national companies. But all three are large, rapidly growing economies with an insatiable need for power, some sort of a commitment to the environment, and without (until very recently, in the case of Brazil) major fossil fuel resources, except of course for China‚Äôs coal which is of course choking the country both literally and in terms of infrastructure and the economy.
Q. The GWEC report points out that Brazil, with 1,077MW of new capacity installed last year, has now joined ‚Äúthe small club of wind energy markets with annual installations of over 1GW globally‚Äù and that it ‚Äúis likely to reach the 5GW milestone and to move from the current 16th position to become the 10th biggest‚Äù this year. However, it also observes that ‚Äúsustained development requires a new regulatory framework, which would provide certainty in terms of development volumes in the medium and long term, legal security in the processing of projects, and a support system, which would further enhance competitiveness.‚Äù Could you elaborate on these comments?
A. Basically, all I would really want to add to what I‚Äôve said above is the notion that there needs to be more coordinated planning between the expansion of wind power and the extension and strengthening of the grid.
Q. The wind industry is expanding into new markets all the time ‚Äì including some which might on the surface appear unlikely, such as Saudi Arabia, which we understand you visited recently. Why are oil rich nations such as Saudi Arabia investing in wind? Which markets does GWEC consider to be the most interesting in terms of growth potential longer term? (Is Brazil amongst the markets with high growth potential? Which of the Latin American/Caribbean markets are currently interesting?)
A. Brazil is certainly one of the markets with the largest potential, others are Mongolia, and of course Russia, which may come out with new regulations which could kick-start that country‚Äôs renewable revolution as early as next week.
Saudi Arabia is an interesting case in many ways ‚Äì but the basic premise is quite simple. Saudis‚Äô domestic consumption is now more than 30% of their total production, and rising fast. Petrol and electricity are subsidised so heavily that they‚Äôre basically free. If domestic consumption continues to rise at the tremendous rate that it is at present, in a decade there will be very little income left from the sale of oil, and shortly after that it will become a net energy importing country. For a country whose wealth has been generated virtually entirely on oil exports, you can see why this doesn‚Äôt work.
So, a few years ago they established the King Khaled Center for Atomic and Renewable Energy, and although they want to build nukes for geo-strategic reasons (I‚Äôm never sure whether they‚Äôre more worried about Israel or Iran), the timelines involved mean that nuclear is not going to contribute much towards solving their problems. But there is a plan to roll out in excess of 50GW of renewable power in the next 15 years or so, and if it starts well, then it could go even faster. At the same time they need to diversify their economy and keep good jobs in the country to make full use of their workforce and not lose much of their talent overseas, as is the case at present. Renewable development (majority solar, but a healthy chunk of wind as well) can contribute to all of those goals.
Steve Sawyer will join local and international experts to debate the future prospects of wind energy in Brazil at Brazil Wind Energy Conference (BWEC) 2013, on 27 - 28 May.