The Brasil Innovation Lab for Climate Finance – a group of public and private investors and finance experts on land use and energy in Brazil – continues to make progress on three financial instruments which could catalyze large-scale investment in Brazil. Brasil Lab Members recently convened to review progress on […]Read More
Brazil has committed to increase the share of renewable energy (other than hydropower) in its power supply to at least 23% by 2030. Distributed generation (DG) sources – small, on-site, grid-connected systems – are excellent candidates for this endeavor, as the country shows solar irradiance levels that are over two times those of Germany and a pattern of unidirectional and constant winds. Recent Brazilian regulations (RNs 482 and 687) have provided a stable framework for distributed systems, allowing for a suitable investment environment.
However, the implementation of DG systems in Brazil has been constrained by high upfront costs and high interest rates. Moreover, the few credit lines that do exist finance, on average, only half of each project and for up to 10 years, while most DG systems are still producing after 25 years. Development banks such as BNDES provide attractive interest rates, but are very bureaucratic, demand excessive guarantees and have local content requirements which prevent project developers from purchasing from global manufacturers (which can be of higher quality than local manufacturers). Finally, Brazilian regulation defines a limited net-metering system in which DG generated energy cannot be sold to the grid, but only used to compensate an energy bill.
Agricultural and transport cooperatives are good candidates for the implementation of DG systems, especially after recent regulatory changes opened the possibility for the energy generated by a single unit of the cooperative to be shared with other units. This increases the potential size of generation systems, lowering their implementation and maintenance costs.
Transport logistics play a major role in Brazil’s carbon emissions, as 37% of total emissions are associated with fuel production and consumption of a transportation network based on diesel vehicles. However, the country produces electric engines, buses and trucks, so it is ready to progressively replace its transport fleet once there is enough energy.
Distributed Generation for Cooperatives (DGC) is a platform that will provide higher flexibility and less bureaucracy than local development banks, addressing 100% of each project’s needs for periods closer to the lifespan of DG systems (allowing for monthly payments that do not exceed the savings provided by the systems). A two-part lease contract will link monthly payments to system performance without overstepping regulatory boundaries.
The proponent of DGC, Renobrax, will use its track record in developing DG systems to reach out to cooperatives and assess their potential for project implementation. A pipeline of projects will be modelled to assure financial predictability to the instrument. Renobrax has preliminarily identified a target market of 127 cooperatives with approximately BRL 120 million in monthly energy costs in the Rio do Grande do Sul state alone, which would lead to 7.8 million tonnes of carbon emissions (tCO2e) mitigated along the lifespan of the DG systems. Considering all of Brazil’s agricultural and transport cooperatives, carbon emissions mitigated would be closer to 100 million tCO2e.
DGC will set up a special purpose vehicle (SPV) for each selected DG project. The SPV will borrow first from the Sponsor (Renobrax) to fund early development costs (1). After the initial de-risking of the project, the Sponsor is bought out by the DGC fund (2), which then invests the remainder of the capital needed for the project (3). Once the DG system is operational, energy savings start flowing into the cooperative’s cash flow (4). A portion of these savings (10-20%) stays with the cooperatives and the remainder is transformed into receivables of a lease contract (5). The lease contract is split into two portions: a ‘fixed’ portion, based on the expected output of the DG system and a ‘variable’ portion, based on the performance of the system above that expected output. The DGC fund will receive the ‘fixed’ portion as a return on its capital investment (6) and the Sponsor will receive the ‘variable’ portion as return for implementing and maintaining the system (7).
Pilot projects will include a scoping or set up phase where historic data will be collected, energy compensation models and projections will be generated, formulae for payments will be agreed upon with the Sponsor and cooperatives and return on investment will be estimated. Pilots would also require grants or potentially concessional loans and guarantees to fund upfront investment, until the model is proven for domestic private investors.
Cover image courtesy of Renobrax.