| SAO PAULO, March 3
SAO PAULO, March 3 With electricity demand in
Brazil slashed by the harshest recession in a century, the
government is evaluating an innovative kind of power auction -
to allow companies to bid for the right to cancel licenses to
Firms had rushed to bid for licenses to supply the power
needed to fuel growth as a commodities-fueled boom drove annual
economic growth above 7 percent in 2010 and cheap credit sparked
a consumer spending spree.
But a collapse in commodities prices tipped Brazil into a
recession that has shrunk economic output by more than 7 percent
since 2015, crippling demand for electricity and leaving an
excess of generating capacity.
The "reverse auction," which Energy Minister Fernando Coelho
Filho says could start within months, would provide an escape
for financially distressed firms holding licenses for power
projects, particularly in the solar and wind sectors, that they
are unable to build.
Without a formal cancellation, which includes heavy fines
for companies that failed their contractual responsibilities,
the government cannot pass on these projects to other firms.
The auction, which the Energy Ministry is in the process of
finalizing, would allow companies to bid to return their
licenses by making "exit payments" that would be lower than the
potential fines, according to a draft proposal.
It would also allow companies to avoid lengthy possible
litigation with the government and other parties, experts said.
With the prospect of a return to economic growth this year
in Latin America's largest economy, the government hopes the
reverse auction will allow some fresh investment to return to
"The idea is good. It's better than to keep fighting," said
Tiago Figueiró, a lawyer at Veirano Advogados, which specializes
in the Brazilian power sector. "This would be a quicker
solution," he said.
Several power firms are negotiating with Brazil's
electricity regulator Aneel for a way out of the situation,
trying to escape penalties for not delivering projects.
Aneel estimates that around 1.3 gigawatts of wind and solar
power projects have a very low possibility of entering
operation, representing around 12 percent of Brazil's generating
capacity for the sector.
Projects suffering from problems include those run by
Brazil's Renova Energia, Spain's Fotowatio and
Solatio, and Portugal's Tecneira.
Cancellation fines could go up to 15 percent of the project
value and companies would be prohibited from taking part in
future licensing rounds, putting a brake on the development of
the sector just as the economy starts growing.
Brazil's power consumption fell 2.1 percent in 2015 and 0.9
percent in 2016, the first two annual declines since the
2008-2009 financial crisis.
With demand weak, many firms holding licenses to build new
projects saw their plans run into trouble due to expensive
credit as the central bank hiked rates to a decade-high of 14.25
percent to tackle stubbornly high inflation.
Meanwhile, a slide in the real currency raised the cost of
imported equipment, just when the recession caused the collapse
of some local suppliers.
The government hopes the auction would clear the way for new
licensing rounds later. It was forced to cancel an auction for
new solar and wind generation in December due to lack of demand.
Despite the cancellation and existing oversupply, experts
say foreign and domestic investors in the sector are showing
signs of renewed appetite this year as Brazil prepares to return
"We are seeing a lot of interest from investors to enter the
sector or expand there," said Fabiano Luz de Brito, electricity
specialist at legal firm Mattos Filho.
"The reverse auction would allow us to fine tune the
The largest foreign investors in Brazil's electricity market
- France's Engie, China Three Gorges Corp and AES
Corp - have all publicly stated their interest recently
in investing in new renewable energy projects.
Some experts have expressed concern the reverse auction may
be akin to an amnesty for investors who have not performed,
which could provide an incentive for companies in the future to
fail to meet commitments.
The director general of Aneel, Romeu Rufino, said last month
it should be stressed the auction was not a "general and full
pardon" for investors.
Wind power accounts for roughly 7 percent of Brazil's total
installed generating capacity of 151 gigawatts. With some of the
world's largest rivers, Brazil generates some 60 percent of its
electricity from cheap and abundant hydroelectric power.
(Writing by Marcelo Teixeira and Daniel Flynn; Editing by Chris