Brazil Wind at Risk as Weak Economy Crimps Demand, GE Says

(Bloomberg) -- Demand for wind power is coming to a screeching halt in Brazil.

The country installed 2.75 gigawatts of turbines in 2015, making it the world's fourth-biggest market. So far this year there hasn't been a single new contract for power from wind farms sold at auctions, and General Electric Co., the top supplier, doesn't see much on the horizon.

The slowdown is the result of Brazil's economic downturn, according to Jerome Pecresse, chief executive officer at GE's renewable energy unit. Financing is drying up, customers aren't paying their bills and government energy auctions, usually the main driver for new wind projects, have been a disappointment.

“This year we've had no volumes allocated,” Pecresse said in an interview in Sao Paulo. “We have no visibility on future volumes to be contracted and there are very important delays in payments from customers.”

Brazil's wind industry is expected to win contracts this year to deliver power from about 500 megawatts of proposed power plants, according to estimates from Bloomberg New Energy Finance. And that's only if the government holds additional power auctions.

One event scheduled for July has been canceled, Energy Minister Fernando Coelho said Thursday. Brazil has an energy surplus and the government will focus on addressing the problems of distributors, which have signed contracts to purchase more power than they need. A second auction is set for October.

Not Enough

That's not enough. The country needs to add about 1.5 gigawatts a year to support the existing turbine factories and other suppliers, according to GE.

“We are very worried about the prospects for the wind market in Brazil,” Pecresse said. “There is a risk of the supply chain collapsing.”

GE turbines account for 40 percent of the country's installed wind capacity. Its presence in Brazil grew after it acquired France's Alstom SA last year.

The slumping economy has crimped demand for power. Energy consumption in the country declined 4.2 percent in the first quarter from a year earlier, with industrial use slumping 7.5 percent, according to the government's Energy Research Agency, known as EPE. According to Thymos Energy, a Sao Paulo-based consulting company, power distributors have about 10 percent more energy than they need.

That's driving down interest in new power-supply deals. There has been one energy auction this year, in April, and there were no bids for contracts with wind farms.

October Auction

“The reserve auction in October is critical for the sector,” said Jean-Claude Fernand Robert, GE's head of wind in Latin America. And after the government delayed the July event, “there are many uncertainties about this one also,” he said.

“There is a real risk that Brazil doesn't hold the auctions the industry expects this year,” Elbia Gannoum, president of Brazil's wind-power trade group Abeeolica, said Wednesday by phone. “There is surplus energy in the system. If we don't get 2 gigawatts, turbine factories' capacity can be unused.”

Brazil has seven turbine factories that can each produce about 400 megawatts of equipment a year. About $5 billion was invested in Brazil's wind industry last year, according to Abeeolica.

The poor economy has hampered clean-energy investment. The weak currency makes it more expensive to purchase imported machines parts, and Brazil's development bank, the country's most important lender for long-term financing, has tightened the spigot for some types of loans and raised its rates. Private banks have also become more restrictive.

Financing ‘Complicated'

“Getting financing during the current economic situation became very complicated,” said Robert. “It is not happening in the time required to support power projects, and it is putting a tremendous stress into the system.”

With orders slowing, GE has reduced its workforce and has idle capacity at plants in Brazil, Pecresse said. GE Renewable Energy has three manufacturing facilities in Brazil.

Turbine manufacturers in Brazil are offering discounts, but that doesn't address slowing demand, according to Luis Fernando Moran de Oliveira, head of investor relations at Weg SA, a Brazilian industrial company and turbine maker. The industry needs to see Brazil resume growth, he said in May.

“There is a lot of pressure on renewables in Brazil right now,” said Pecresse. “That's scary.”

To contact the reporter on this story: Vanessa Dezem in Sao Paulo at vdezem@bloomberg.net. To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Will Wade, Joe Richter