Brazil Wind Energy Auction

It's been eight months since I first wrote you from Rio about Brazil's burgeoning wind energy market. Back then, investor fervor over wind power caught me off guard...

"Perhaps the biggest surprise so far has been the enthusiasm I see for wind energy investments here. 

The national wind energy resource potential is estimated at around 250GW, concentrated in the northeast, coastal south, and northwest of the major cities Rio, Sao Paulo and Belo Horizonte. As this "Wind Map of Brazil" from the Brazilian Center for Wind Energy shows:

There will be a major auction of wind energy permits in Brazil on November 25, and I've found that both local and international utilities like France's GDF/Suez are lining up to compete and get their bids low enough that the government accepts."

Well, after a delay of the auction from late November to December 14, 71 farms and 773 turbines were approved at an average price of 148 R$ (reais, the plural of the local currency the real), or about $85 per megawatt-hour, last Monday. 

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Why Brazil's Wind Energy Auction Matters

In November, when a massive power outage hit 60 million Brazilians in 800 cities across the sprawling nation, we covered the energy imperative that Brazil has ahead of it as the Olympics and World Cup come to the country.

The auction generated $5.4 billion worth of interest, and 339 projects were authorized to take part.

The total wind energy output from this month's successful bidders will be 1.8 gigawatts, and that will expand to 10 GW over the next decade through subsequent auctions. The goal is to push wind power to a 5% contribution portion of the national electricity supply.

Over 7.5 hours, hundreds of companies bid on 20-year concessions during which the government will pay above-market prices for power. As in England and other feed-in-tariff countries like Germany, Brazil wants to bring capacity up by paying more for solar, wind, and biomass than it does for hydropower and coal (thermal) power.

In the case of last week's online auction (sort of like an eBay for Brazil's wind energy future), average prices came in below expectations and just above hydro and thermal.

Brazilian wind energy producers are willing to take R$148/MWh, compared to the pre-auction estimate of 160 and upper limit of 189. A recent biomass energy auction balanced at R$154, and hydropower and coal both draw R$144.

So what does that mean?

Here are a couple of choice quotes from Reuters News:

"I consider this auction to be a success given the quantity and average price that we received," said Marcio Zimmerman, Deputy Minister of Mines and Energy. "Wind power is an excellent opportunity for Brazil."

"This auction showed that the price gap between wind and thermal (generation) is shrinking and today is quite small," said Mauricio Tomalsquim, chief of a Brazilian government energy think-tank.

That bit from Tomalsquim, of Brazil's Energy Research Corporation, is key. Around the world, the success of renewable energy depends on grid parity that means clean energy can be as cheap as coal.

The Importance of Information

Now, some reports early in the week of December 14 contended that Brazilian utilities like CPFL Energia (NYSE: CPL) dropped because of lower-than-expected demand in the auction.

In fact, it was partly mistaken reporting in the week leading up to the auction that caused CPFL to rise and then fall. Bloomberg reported on December 9 that Brazilian electricity distributors that own existing wind-power plants "may benefit from increased demand... after the government canceled an auction for energy licenses due to the predominance of thermal power plants."

I scoured the Portuguese-language press and found no basis for that report; it was misinformation, plain and simple. To boot, CPFL's U.S.-traded ADR shares are still well into positive territory over the past month.

With a share price that has nearly doubled in the past year and a dividend yield of 6.50%, CPFL is one of the top energy infrastructure plays on our radar for 2010.

Companies like India's Suzlon, our Spanish holding Iberdrola, Energias de Portugal Renovaveis (the Portuguese utility's clean energy arm, which trades over-the-counter as EDPFY), and Denmark's turbine king Vestas Wind Systems are already involved in Brazil's wind power market. Vestas kicked off its Brazilian involvement in 2008 with a 92-turbine deal.

All of the companies mentioned above are on our watch list. So are a few privately-held firms operating in Brazil's wind energy build-out: Spain's Acciona and Brazilian domestic wind energy titan Wobben Windpower (a subsidiary of Germany's privately-held turbine builder Enercon), are keen to add to their clean energy portfolio in South America's leading economy.

The effects of this December's auction will ripple far beyond Brazil...

Betting Big on Latin American Wind Power Beyond Brazil 

From start-ups to full-fledged Green Chip Stocks, this January I'll be checking out investing opportunities in Brazil's neighbor to the west: Peru. 

Peru's economy is only about 1/8 the size of Brazil's, but the country quietly received the seal of approval of Moody's Investor Service this December, as that ratings agency became the last to raise the country's credit rating to "investment grade." With the upgrade to Baa3, Moody's rewarded Peru and leaders in the capital Lima for fiscal and monetary policy successes that are drawing increased foreign direct investment (FDI) while cutting national debt. 

Santu Hulkkonen, director of a consortium called Cleantech Finland, announced in November at a biofuels and renewable energy conference in Lima that 10 Finnish energy companies will invest in Peru's wind power sector in 2010.

Just across the border from Brazil, there are clear synergies for wind power developers operating in both countries to take advantage of.

You'll get all the latest to make 2010 your most profitable year yet investing in clean energy.

Happy Holidays,

Sam Hopkins