Brazil Renewables Report Q4 2012

Includes 3 FREE quarterly updates

BMI View: A greater-than-expected slowdown in the Brazilian economy has led us to revise downwards our renewables forecast for 2012. However, our outlook for renewables in the long run remains positive, as we expect to see significant growth in electricity consumption, and diversification in the energy mix. We highlight the growth potential for wind energy in particular, owing to the country’s wind potential and domestic manufacturing market.

We forecast non-hydropower renewable generation to grow by 6.9% in Brazil in 2012. This represents a marked slowdown from our previous forecast of 8.4% in June 2012. This downward revision in our forecast is attributed to a rapid slowdown in the country’s economic growth. In July 2012, our Country Risks analysts downgraded our 2012 real GDP forecast from 3.9% to 2.4%due to structural economic imbalances in Brazil. This has prompted us to downgrade our full-year electricity consumption growth forecast from 4.5% to 2.5%.

Over the long term, we forecast non-hydropower renewable generation to grow an average of 8.6% per annum between 2012 and 2021. This will be driven by strong growth in electricity consumption, and by the government’s decision to diversify the country’s energy mix. Our expectations for long-run electricity consumption growth in Brazil are based on the demographic boom Brazil is currently experiencing. The country’s population is expected to grow from 191.5mn in 2010 to 205mn in 2020. Per-capita electricity consumption in Brazil is also relatively low at 2,400kWh (2011), as compared to 12,400kWh in the US.

Industrial activity is also likely to grow, and we see the possibility of steel, cement, and aluminum production doubling over the next decade. Here are the key trends and regulatory changes in the industry:

• In July 2012, our Country Risks analysts downgraded our 2012 real GDP forecast from 3.9% to 2.4%due to structural economic imbalances in Brazil. This has prompted us to downgrade our full-year electricity consumption growth forecast from 4.5% to 2.5%.
• Wind turbines from five international manufacturers failed to meet minimum local content requirements in a July 2012 audit. Projects using turbines from these companies - Vestas, Suzlon, Siemens, Fuhrlaender, and Acciona - have had their funding from the Brazilian Development Bank frozen. Developers will now have to change turbine suppliers, or wait for the issue to be resolved.
• Transmission infrastructure in the country continues to lag capacity improvements. Complaints have emerged from the wind industry as necessary transmission lines are behind schedule, efforts are being duplicated and licensing issues are slowing progress.