An extract from The Renewable Energy Law Review, 3rd Edition
Renewable energy project developmenti Project finance transaction structures
Because of the complexity of renewable energy projects, their high structuring costs and long implementation periods, project finance is the preferred funding mechanism in Brazil. Most renewable energy projects are currently being developed in the context of energy auctions where regulated PPAs represent the main source of revenues. In light of that, the ability to secure long-term contracts that offer predictable cash flows makes renewable energy projects especially well-suited to project financing.
Diverse loan structures are commonly used for project finance in Brazil (some of them very similar to international practice, such as direct loans and syndicated loans, with administrative and security agents, intercreditor agreements and guarantee sharing agreements), including limited-recourse loans (i.e., loans secured by the project assets and paid entirely from the project cash flow), rather than from the general assets or creditworthiness of the project sponsors.
The ownership structures commonly used in Brazilian project financings for renewable energy projects usually involves equity investors (known as sponsors) and debt providers that advance loans to the project company, a special purpose vehicle incorporated for the exclusive purpose of owning and exploiting a certain project. BNDES, the Brazilian state-owned development bank, has always played a major role in the financing of large projects. In addition to BNDES, Banco do Nordeste do Brasil, state-owned banks and funds such as Banco do Brasil, Caixa Econômica Federal and FI-FGTS, as well as some Brazilian and international commercial and investment banks, have also been very active in the financing of projects in Brazil.
BNDES has already announced new financing strategies for the coming years, including the adoption of interest rates more in line with market standards. The main objective in doing that is to gradually reduce BNDES' role as the main provider of long-term financing for projects in Brazil, allowing commercial banks (national and foreign) and capital markets to step in. BNDES would hence over time assume a more supplementary role, acting as a catalyst to mobilise other sources of funds, much like international development banks are seen to do in other countries.
Indeed, project bonds are becoming increasingly popular in Brazil as a financing mechanism and, when issued in connection with the financing of power projects, they may benefit from tax incentives (see Section III.ii, above). The 'incentivised debentures' market has seen significant development in Brazil in recent years, especially for the renewables industry. Since 2012, the issuance of incentivised debentures amounted to approximately 87 billion reais (with 73.8 per cent of these related to the energy sector), with an average debt term of 10.5 years.
According to KPMG, these project bonds are tending to replace the role that BNDES had in financing renewable energy projects. In addition, in the context of the covid-19 pandemic, KPMG has stated that it expects private equity firms, pension funds and multilateral banks to continue to engage with the clean energy agenda and decarbonisation commitments, since the improvements in the environment due to widespread social confinement will correlate with a continuing need for renewables options to be included in the energy mix.ii Distributed and residential renewable energy
Since May, 2012, Brazil has implemented the regulatory framework for the operation of mini (up to 75kW) and micro (between 76kW and 5000kW) distributed generation from solar, wind, hydro, biomass or qualified cogeneration sources, along with a net metering scheme allowing end users to inject power into the grid and offset energy bill costs.
Following a slow start, and a revision of the legislation, the distributed generation market has grown exponentially. Brazil now has 79,022 distributed generation projects – comprising 78,125 solar, 157 thermoelectric, 83 mini hydro and 57 wind power projects, and 109,545 consumers making use of the distributed generation net metering scheme.
In contrast, for commercial-scale distributed generation projects with installed capacity of between 0.5MW and 5MW and that would be developed and delivered by energy companies such as Sowitec, Enel, etc. and sold or leased to a large consumer or group of consumers, the figures are not as impressive: 125 projects with an aggregate capacity of 167.5MW – comprising 59 mini hydro, 49 solar, 15 thermoelectric and 2 wind power projects, with the power being consumed by 12,152 consumers.
One factor that may have hindered the development of larger-scale projects is the fact that the regulatory framework for distributed generation is due for review (see Section VI, below).iii Non-project finance development
Renewable energy projects also attract private equity firms, pension funds, investment funds, insurance companies and family offices seeking higher yields, and these provide much-welcomed funding alternatives for the industry. The above-mentioned investments in Brazil by CPPIB are a good example of that trend.
Another notable trend is the reinvestment of merger and acquisition proceeds by existing participants in new projects. EDP Renováveis (EDPR) of the Portuguese group EDP recently sold its equity share in a 137MW operational wind farm project named Babilônia, located in Bahia state to a subsidiary of private equity investor Actis, for a total of 650 million reais. This sale is part of EDPR's capital recycling strategy, consisting of the sale of majority stakes in operational and development projects, allowing EDP to reinvest in accretive growth opportunities. Around the same time, BNDES approved funding of 1 billion reais for the construction and implementation of six 319,2MW wind farms and an associated substation by EDR, located in Rio Grande do Norte, confirming the trend for reinvesting proceeds in new projects.