Brazil’s faltering manufacturing ambition

Ambition was the standout characteristic of the Green Silicon project when it was announced back in 2013. The intention was to develop an integrated PV value chain on the border of Brazil and Paraguay, but it is that same ambition that has since brought its development to a halt. “It’s a complex project to implement – it requires major investment and two governments, two boards and two countries need to be convinced,” Maycon Vendrame, project leader at binational hydropower firm Itaipú, told pv magazine.

Initially, annual output was forecast at 1.7 GW, financed by an investment of around BRL 1 billion ($260 million) across the value chain, from polysilicon through to modules. Revenue was predicted to be around $61.5 million per year – at 2016 values – while the number of direct jobs created was forecast at 4,310.

According to Vendrame, the project is currently being reassessed by the plant’s new managers. In March, General Joaquim Silva e Luna was named Itaipú’s managing director for Brazil. The speech he gave when his appointment was made public strongly emphasized austerity. Meanwhile, several programs are subject to similar reassessments and expenditures are now being cut back. On the Paraguayan side, the makeup of Itaipú’s board has also changed, with José Alberto Alderete taking over in August 2018.

Green Silicon, however, has yet to be presented to the new directors. “It wasn’t canceled, because nothing was formalized. We’re waiting for priorities to be defined. The project’s next steps haven’t been set out yet,” explains Vendrame.

Whatever the case, Itaipú is not the only party responsible for the project, which is being developed in partnership with the State of Paraná’s Federation of Industry (FIEP) and the Hydroelectric Research and Development Group at the Itaipú Technology Park (PTI). The FIEP, which is in charge of attracting companies and investors to the Brazilian side, was unwilling to comment on the project.

The initial idea was that the Paraguayan government would open a call for foreign investment to finance the project. Paraguay, where electricity is on average 40% cheaper than in Brazil, would host the most energy-intensive operations, such as polysilicon and ingot production.

The other barrier is the calendar. The rationale for the project – set out in a study conducted by multiple branches of Germany’s Fraunhofer Institute – is based on the 2016 market status, which neither matches the reality today globally nor in Brazil. “It would need to be updated to bring it into line with global technology, more powerful panels and new manufacturing technologies,” says head of solar energy at PTI Marcos Kurata.

Brazilian context

Difficulties competing with panels made in China are one of the main factors holding back Green Silicon. Despite growing demand, Brazil has been unable to replicate the success of the nationalization policy it implemented for wind power.

Manufacturers with production lines in the country have found it hard to sell their output, especially modules. Essentially, the taxes on materials and production equipment are higher than they are on imported panels. At present, there are four module manufacturers with national accreditation from Banco Nacional de Desarrollo (BNDES): Balfar, BYD, Canadian Solar and Globo Brasil.

For Adalberto Maluf, new business development manager at BYD Brazil, the centralized generation market has become prohibitive. The executive criticizes the position of Banco Nacional del Nordeste (BNN), which is more flexible than BNDES when it comes to incentivizing the funding of large-scale projects.

The bank, which covers Brazil’s main high solar irradiation areas (as well as the northeast, likewise located in the northern part of the state of Minas Gerais), grants loans to purchase services and equipment for projects, allowing the import of solar panels that are cheaper than those produced locally.

In the past, BNDES took a tougher stance and required the entire system to work with local content, including – in addition to the module – the fixed mounting structures or trackers and all the electrical components. It began by partly supporting the projects, only financing domestically produced components and services. However, a change in its interest rates in 2018, which move closer to those available on the market, partly neutralized the bank’s attempt to increase its competitiveness with regards to funding solar projects. The long-term rate is 6.28% per annum (Brazil’s baseline rate – the Selic – stands at 6.5% per annum and is expected to fall by the end of the year). BNDES had previously offered a more competitive rate of 5.95% per annum, which helped justify purchases of domestic products.

Without incentives for the big operators, both Canadian Solar and BYD have focused their efforts on the distributed generation (up to 5 MW) market, which in 2019 looks set to account for most of Brazil’s new plants.

Demand dip

In addition, cancellation of an auction in 2016 caused a dip in demand for PV systems. Overall, 4.2 GW were contracted through bids on the regulated market, including 203 MW in the last auction, which was held in June. Of that volume, 2 GW of capacity is now in operation and contracts for almost 250 MW from the first auction canceled. Most of the projects are scheduled to be online by 2021. The control body at Brazil’s Electricity Regulatory Agency (ANEEL) expects 477 MW to be installed in the market in 2019.

Meanwhile, distributed generation will also continue to grow. In the first half of 2019, 363 MW were installed – mainly systems up to 5 MW. Brazilian consultancy Greener believes that in 2019 a further 728 MW will be brought online by commercial (301 MW) and residential (426 MW) users. Overall, PV will likely register over 1 GW of new capacity in 2019.

Import volume

The volume of solar cells imported into Brazil reflects the slowdown in domestic production. Expenditure grew 29% between 2017 and 2018, rising from $502.4 million to $645.8 million, according to the Ministry of Industry, Foreign Trade and Services. However, almost 90% of that amount – $578.9 million – was spent on solar cells already “assembled into modules or panels” – in other words, installation-ready equipment. That represents a 66% increase on 2017, when expenditure on finished products amounted to $349.6 million.

At the same time, purchases of imported “cells not assembled,” or inputs for local factories, plummeted 56% between 2017 and 2018. The overall value last year reached $66.8 million, compared to $152.7 million the year before.

Tax inequality

Brazil’s already-weakened industry recently suffered an additional setback. At the end of June, the Ministry of Economic Affairs published a new regulation that reduced the duty on imports of capital goods and IT/telecommunications equipment. In practice, most imported PV products – currently subject to a 12% tariff – would become exempt.

This is because the new regulations make it difficult to prove that products similar to imported ones can be sourced domestically (which is what justifies the import duty). The Ministry of Economic Affairs then said that, to be considered similar, makers of Brazilian solar panels should demonstrate that products have the same factory price, excluding taxes, and the same sale price as the imported ones, while also providing proof of supply of the equipment nationally for the last five years.

Country competitiveness

Brazil’s electrical and electronics industry association (Abinee), the country’s solar energy association (Absolar) and its distributed generation association have responded by presenting the government with a statement on the competitiveness of Brazil’s solar industry.

According to Absolar estimates, even without changes in import duties, the cost of domestic panels is already 30% higher than that of imported ones. “The outlook for modules is challenging, to say the least. It’s now difficult for manufacturers to compete and they can’t access attractive financing like they did in the past with the long-term rates offered by the BNDES,” explains Nelson Falcão, executive vice president of Absolar and director of Flex, which produces Canadian Solar panels in Brazil.

At present, imported photovoltaic modules are exempt from the Industrial Product Tax (IPI) and Merchandise and Service Circulations Tax (ICMS). They are also eligible for exemption from the Social Contributions on Gross Revenues (PIS/COFINS) under the Tax Reduction for Infrastructure Development (REIDI) framework, a special program for infrastructure projects.

Meanwhile, domestic manufacturers pay a series of purchase taxes – II, IPI, PIS/COFINS and ICMS – on raw materials. Their factories form part of the PADIS industrial competitiveness program, which requires them to invest 5% of their revenue in research, development and innovation conducted in Brazil. One option would be to include the sector’s raw materials in the program, which would exempt them from these duties.

Two former ministries that have since been absorbed by the Ministry of Economic Affairs (MEA) – the science ministry and the ministry of communications – issued favorable opinions on the proposal to update the PADIS annexes last year and include PV industry inputs. The updated legislation, however, was never published.

The associations lobbied senators to support the MEA in approving inclusion of inputs and machinery in PADIS. “It’ll be difficult [to level the playing field]. At best, we’ll keep the import duty a little longer,” says Falcão.

By the end of last year, Brazil boasted 2.3 GW of the 5.4 GW installed in South America, according to IRENA. Chile, the region’s next-biggest market, accounted for 2.14 GW. Extending the scope to Latin America, Mexico led the region at the end of 2018 with 2.54 GW.

James Ellis, head of research for Latin America at BloombergNEF, says it is possible to set up a solar value chain in the region, provided government support is available and demand is sufficiently visible far into the future. That said, competing with Chinese imports is extremely hard.

“Although Brazil has developed domestic production by making local content obligatory in the wind power sector, dynamics in the solar industry are very different. The main manufacturers of the more than 7 GW of modules supplied to projects either completed or under construction in Latin America are Chinese – JinkoSolar, Canadian Solar, BYD and JA Solar, to name just a few,” says Ellis.

At the same time, he adds that there are potential risks in adopting domestic content rules. The biggest of these is the increase in costs, a situation already familiar in Brazil’s wind power projects. Ambitious local content regulations can also result in less interest in auctions, higher prices in the bids that are successful, and delays in adopting all of the best technologies that are available.