On 3 October 2016, the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social or “BNDES”) approved new financing terms for the electricity sector, revealing a push towards renewable energy, with a focus on increasing investments in solar energy and moving away from fossil fuels and big hydro.

Since 1952, BNDES has been central to the country’s industrial and infrastructure development, offering typically long term financing products to projects that should contribute to Brazil’s economic and social development. BNDES has been heavily involved in the expansion of Brazil’s energy sector, with disbursements growing more than six fold over the past 10 years.

The new terms for BNDES financing, which will enter into force in the October and December capacity auctions, will increase BNDES’s participation in the financing of solar projects from 70% to 80% of the projects’ total investment. Financing for most other energy sources, including wind, small hydro, biomass and combined heat and power projects (“CHP), remains capped at 70%. The loans will benefit from the subsidised Long Term Interest Rates (Taxa de Juros de Longo Prazo orTJLP), currently set at a 7.5% per year.

In a further sign of BNDES’s changing priorities, it will also reduce its participation in the financings of large hydroelectric projects to a maximum of 50% (from the previous 70% cap), and has removed all financial support for power projects using coal and fuel oil.

In relation to distribution infrastructure, financing will still be available for up to 50% of the project, however only half of the financed amount will benefit from the TJLP (down from 70% previously). In practical terms this means that borrowers will face slightly more expensive borrowing as the higher market interests rates will now apply to a larger proportion of the financed amount.

The financing cost for transmission infrastructure will also increase as BNDES moves to wholly market based rates, with a longer 20 year amortisation period. According to BNDES, this will incentivise the issuance of 10 year infrastructure debentures, increasing private sector participation and reducing the need for BNDES-backed short term financing instruments. BNDES also indicated that it could subscribe for up to 50% such debentures, provided that the total value of BNDES financing would not exceed 80% of the total investments.

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BNDES’s financing incentives have contributed to the incredible success of, particularly, wind energy that has seen installed capacity raised from a mere 200 MW in 2006 to over 9 GW in 2016 (with an additional 7 GW already under construction). The new focus on solar energy can be seen as a positive step towards achieving a stable, diverse and clean energy mix.BNDES’s new financing terms, as well as Brazil’s recent ratification of the Paris Climate Agreement, pave the way for renewable energy sources and distributed generation to assume an increasingly important role in the country’s energy matrix. Although over 80% of Brazil’s electricity supply is already generated from hydro, which is a clean energy source, the lack of diversity in the country’s energy mix was put under intense scrutiny following the severe droughts that have occurred over recent years.