By Marcelo Teixeira and Anna Flávia Rochas
SAO PAULO (Reuters) - Grappling with its worst energy crisis in more than a decade, Brazil is making its first big move to develop a local solar power industry that could help reduce its dependence on a battered hydro power system.
In October, Brazil will hold an auction to negotiate energy to be produced exclusively by solar farms, the first ever of the kind in the South American country.
Power companies have registered some 400 projects for the auction, but many remain wary of the outlook for solar power in Brazil and say they need more clarity on investment conditions and financing before signing any deals.
The auction could negotiate up to 10 gigawatts (GW), although industry sources estimate final volumes at a much smaller level, varying from 500 megawatts (MW) to 1 GW.
Sun-kissed Brazil has one of the highest solar radiation factors in the world and plenty of land for solar farms, plus large reserves of silicon, used to make solar panels.
Yet the country has almost no solar power generation, while its BRICS partner China, for example, added 12 gigawatts last year alone – enough to supply around 10 million homes.
The solar power industry sees room for a significant expansion in Brazil, but not without hurdles.
"Red tape is still a big problem, as well as the taxes," said Alberto Cutter, sales director for emerging markets at Jinko, a top producer of photovoltaic (PV) panels.
He complains about taxes at federal and state levels, which add complexity to the business and increase the cost to bring solar panels to Brazil by almost 50 percent.
"In Chile, for example, where the market is growing really fast, taxes are zero for solar equipment, similar to what we see in 95 percent of the countries we operate," he said.
Nelson Colaferro, chairman for lobby group Absolar, hopes the government will take into consideration the high costs resulting from taxes and the lack of scale when setting the maximum price in the auction.
He expects a ceiling of between 250 and 300 reais ($110-$132) per megawatt hour (MWh).
By comparison, a previous auction open to non-solar energy sources awarded contracts at an average price of 130 reais/MWh ($57), mostly to wind projects.
Companies such as Swiss ABB, a leading producer of inverters used to send solar power to the grid, will watch how the October auction pans out to decide whether to invest to increase capacity in Brazil.
"We are evaluating ... It will depend on the demand coming from the auction," said Bruno Monteiro, a manager for the solar segment on ABB's Brazilian operations.
Financing will be another key factor companies will be closely watching.
Brazil's government said it will offer public credit to investors, but the conditions have yet to be released.
Project owners fear the financing will come with requirements for use of locally produced equipment, which could increase costs.
Brazil aims to add 3.5 GW to the grid from solar power projects by 2018.
(Editing by Bernard Orr)