16/04/2015 back

Queiroz Galvão Energia will deliver 750 mw in wind power in five years

The company is completing the initial phase of its strategy for the sector and has an additional 400 MW for this year’s auctions.

13/Apr/2015 – By Lívia Neves, for the Brasil Energia website

Queiroz Galvão Energia will have completed the initial phase of its strategic plan for the wind power market by the end of 2016. In five years, the company – the arm of the Queiroz Galvão Group for investments in the electricity sector – will put 750 MW into service from the source. For this year, it has 400 MW ready to be negotiated either in auctions or in the free market.

A large part of the energy already negotiated by the company was actually sold in the free market. In this exclusive interview, the company’s CEO, Max Xavier Lins, talks about how to expand projects in this contracting environment. The executive also highlights an increase in equipment costs due to the exchange rate and the reduced number of manufacturers.

Last year, Queiroz Galvão Energia started operating three wind farm complexes in Ceará and is now ready to deliver three other wind farms in Rio Grande do Norte and Piauí. Will the company focus exclusively on the implementation of these plants or is it planning to negotiate new projects this year?

Operation in test mode started in Riachão (150 MW), Rio Grande do Norte, last March and will probably be completed by the end of April, with commercial operations starting in May. We have two other wind power complexes in Piauí, Caldeirão Grande I and II, totaling 400 MW. We expect to put the first one into service by the end of the year and the second one by December 2016. Our first three wind farms, Icaraí (65 MW), Taíba (60 MW) and Amontada (75 MW), on the coast of Ceará, were completed in 2014, in March, June and August.

With this, we will complete the initial phase of our planning which will give us a wind power capacity of 750 MW by December 2016. In other words, in five years we will add 750 MW, a huge challenge. Our portfolio is a mix of captive and free market [the Ceará plants were traded in the 2009 reserve energy auction and the other ones were contracted under the free market environment].

We have good projects in place now, with long-term wind speed measurements, certifications, and connection studies ready and waiting for commercial opportunities. We are quite focused on the implementation [of these plants], but we worked on those other developments at the same time, totaling 600 MW in the Northeast region.

What has been decided for this year’s auctions?

We have 400 MW ready for auctions and registered for this year’s tenders. They could also be traded in the free market, but this is part of a strategic decision.

How is the negotiation of projects in the free market going, particularly in terms of funding?

We see the free market very positively, as it can and should be a vector for expanding generation. We believe that this environment should be even more stimulated by the government. Obtaining funding is a challenge. Funding agencies prefer to back auction contracts. Nevertheless, they have been funding long-term contracts in the free environment, but they have more requirements, ask for more guaranties, longer periods of analysis.

It could help the expansion of the free market if funding agencies were faster to approve loans and could finance shorter-term contracts. Nowadays, they prefer to finance 20-year contracts, but this is unusual in the free market. Engineering economics should be developed to allow the funding of shorter-term, eight- to eleven-year contracts.

Wouldn’t this make energy in the free market more expensive?

It would if the engineering economics for amortization is the same. But there are creative engineering economics structures, for example with a portfolio where the investor agrees to replace contracts for new ones after eight years; having a guarantee fund... In short, creativity must be used.

We need to create formats that include the free market. And this can be a fast vector for expansion, especially now that the country is facing critical hydrology issues and many major expansion works are behind schedule either because they don’t have a transmission line or don’t have an environmental license. Adding wind power to the system takes much less time, we can build a wind farm in 14, 15 months.

We have been seeing increasingly higher price caps for wind power, this year the baseline has reached R$179 (in the alternative sources auction). What has been impacting project costs?

Several things. First of all, the machines, since many are linked to the dollar and the euro. So the exchange rate strongly influences equipment prices.

The second aspect is that we have a relatively small number of suppliers in Brazil. Few manufacturers conform to the rules of the main financing agent, Brazil's National Development Bank (BNDES). Where few manufacturers are available, competition is not so intense. The offer of suppliers that conform to the rules needs to increase if we want prices to go down due to the competition.

There is also the impact of inflation, which is now 8%. It affects the workforce, the services. It is a combination of factors that makes prices go up.

And to take part in auctions, you have to factor them all in. The fact that prices have gone up does not necessarily mean that the business has improved, the associated costs have also gone up, particularly equipment costs.

Where is there a margin to reduce costs?

This is every investor’s big effort. It must all be calculated since you start developing the area. New wind farms should b close to existing ones. This way you can share the same accesses, the same electrical connection, you can save the money you need for construction works. When you do this, you optimize maintenance costs, you don’t need to create many teams.

Conducting a single operation of the wind farms is also a solution. Here we created an integrated operations center, located in Fortaleza, from where we operate all our wind farms in the Northeast region as well as our hydroelectric power plants. This means optimization.

You should also look for the machines that are best suited to the characteristics of the site. There are many technologies that help you analyze and find the best machines and the best type of tower for the local winds. If you use machines that are not the best fit, you lose efficiency.

The wind farms of Ceará had high capacity factors last year and use Suzlon machines, which cannot be bought with funding from BNDES anymore. Queiroz Galvão Energia started using Alstom machines in its new projects. Is the capacity factor strongly influenced by the machines or is it more influenced by the project location?

Suzlon’s machines are available in the international market, but unfortunately do not conform to BNDES’s rules. It is a set of factors, and the machines are obviously a very important factor. Suzlon is a very good machine for that region’s wind, the results speak for themselves.

According to the National Electric System Operator, three wind farms in our Taíba complex and two in Icaraí were among the ten most productive in Brazil every month they were in operation. That is because they have a robust machine that is compatible with the region’s winds. And also because we have a preventive maintenance system that greatly increases machine availability.

But that doesn’t mean the same machine is the best for all types of wind. When we were building the Amontada complex, we verified that both Suzlon and Alstom machines met the characteristics of the local winds. And while Alstom met the rules, Suzlon unfortunately didn't anymore, so we chose the former. For each complex, we study all manufacturers to find the best type of machine and adequate tower height.

You mentioned that the number of manufacturers in Brazil is decreasing. Considering only the competition among these companies, is there a big difference between 2012 prices and today’s scenario?

At the start of 2012, we had approximately 11 makers that met the rules. After the change in BNDES’s rules, five of them remained at first. This number has been gradually increasing. I believe that over time more manufacturers will be included and this wider offer will eventually be good for the competition.

Free market projects seem to have more imported machines.

That’s right. Imagine that I am selling energy from a wind farm to a consumer in the free market environment and that this consumer is an exporter and is paid in dollars. We could have a contract in dollars. In that case, I could buy equipment from abroad in dollars and eliminate exchange rate risks.