By Luciano Costa
SAO PAULO (Reuters) - A government plan to spur the construction of solar energy farms in Brazil is faltering because of high costs, strict rules requiring local components and low-priced competition from Chinese suppliers, say regulators and power sector executives.
Developers had been excited about solar power's potential in a continent-sized country with 200 million consumers and plentiful sunlight. But many have grown discouraged, and the government's three-year-old program is moving so slowly that the national development bank is taking another look at rules that require a minimum amount of locally made components in projects.
"Investors are disheartened," says Armando Abreu, director of Braselco, an energy consultancy in the northeastern city of Fortaleza. "Many of these projects, in my opinion and that of many others, probably won't get off the drawing board."
Even if the current program were successful, more than doubling the current supply of solar-generated power, it would still amount to only about 2 percent of Brazil's total electricity matrix. That would hardly revolutionize energy in Latin America's biggest country, powered mostly by hydroelectric dams.
So far, the government has held three licensing rounds for companies to build and operate solar generating facilities.
Out of 3 gigawatts in projects awarded, most in Brazil's arid northeast, only 19 of 111 solar parks started construction. According to an inspection report by electricity regulator ANEEL, 24 of the approved plants face "difficulties in the project's economic viability."
Meanwhile, only one new factory to build crucial local supplies for the projects has started production.
That solar panel factory began operating in December and is already struggling with the notoriously high taxes and production costs that have long crippled Brazilian manufacturers. Its panels are 40 percent more expensive than Chinese imports, according to executives at its operator, Canadian Solar Inc.
Then there is the question of financing. The national development bank is the only affordable long-term source for funding the sector. Brazil's historically high interest rates make long-term commercial loans for big energy projects prohibitive, and power sector officials say foreign lenders are wary of exchange-rate risks, especially during Brazil's worst recession on record.
Most solar developers that received licenses in the ongoing program expected funding from Brazil's development bank, known as BNDES. It finances most major infrastructure, power and industrial projects in Brazil with subsidized loans.
Under current rules, however, BNDES loans are only available to companies that commit to using locally produced equipment. Because so few local manufacturers exist, solar park developers have few options to satisfy those rules.
"Everybody was betting on BNDES financing," says João Victor Ferraz, an energy specialist at consulting firm E&Y. "Now they are all desperate."
Companies including Grupo Cobra, Fotowatio, Renova Energia SA and Rio Alto Energia are negotiating with the government to cancel their licenses and avoid fines for delays.
While local supplies are scarce, these companies argued in a 2016 letter to ANEEL that the devaluation in Brazil's currency, the real, has made imports too expensive.
None of the companies responded to Reuters requests for comment.
BNDES officials acknowledge the problems. Carla Primavera, who oversees financing for the Brazilian power sector, said BNDES hopes to attract other solar panel manufacturers.
She said the bank also is rethinking existing rules that will raise content requirements for photovoltaic systems to a minimum of 76 percent locally produced components in 2020 from 56 percent now.
"We are looking at possible changes, also taking into consideration future power demand," she said, without specifying potential changes.
Another complication: Brazil's energy consumption has actually dropped since the drive to develop the sector began. The government actually canceled a licensing round for solar and wind projects late last year, a move that drew criticism.
"It was a bad signal," said Abreu, the consultant in Fortaleza. "For equipment producers, there has to be a market. Investors will lack the confidence to build plants here."
And suppliers, undercut by Chinese producers, need to find ways to outmaneuver low-cost imports.
Canadian Solar, whose plant is based in the state of São Paulo, says it was trying to become more competitive. "We hope to bring down those costs in the mid-term," said Hugo Albuquerque, the company's sales director for South America.
(Reporting by Luciano Costa, Writing by Marcelo Teixeira, Editing by Paulo Prada and David Gregorio)