It’s Time to Embrace Brazil’s Green Economic Bounce

Latin America’s largest economy was already in a fragile state when the global pandemic added to its list of woes. However, despite being hit by a wave of corporate bankruptcies and soaring government debt, Brazil’s economy is predicted to shrink by only 5-6% in 2020, somewhat less of a contraction than many other economies expect.

With a GDP of $3.4 trillion and a population of more than 200 million, Brazil was identified by Goldman Sachs in 2001 as one of four BRIC nations that had the potential to reshape the world economy. Brazil’s economy lived up to its potential until the 2008 global financial crisis. Since then, internal turmoil and other factors saw its growth suffer in relation to China and India.

COMMENTARY

The question is, what next for the world’s eighth-largest economy? Despite the government’s lamentable environmental track record, the country is increasingly well positioned to benefit from a green economic bounce.

Clean energy opportunities

Post-pandemic, Brazil can boost its economy by enabling investment in green infrastructure. The country has an urgent need to replace some of its aging energy resources; there is a growing market for clean, predictably priced power; and there are growing signs that the government is shaping its reforms to encourage inward investment in renewable energy projects.

Increasing power outages are a constant reminder that Brazil’s energy landscape is a looming problem for the government. Aging infrastructure and reduced rainfall levels are accelerating the demise of Brazil’s hydropower resources. While energy demand is growing, the government recognizes that it cannot build a strong economy without reliable infrastructure, and for that it needs outside investment.

Prior to Covid-19, inflation in the country was running at just under 4%. While forecasts suggest that inflation will hold steady over the coming months, many businesses are concerned about potential energy price hikes. Buying energy ranks as one of the top expenses for most businesses, so being able to lock-in to long-term fixed-price energy deals is an attractive proposition at times of price instability. Solar energy can answer this need. Increasingly, businesses are looking to use power purchase agreements (PPAs) to buy renewable energy and benefit from predictable pricing over 10- or 15-year terms.

Liberalizing Clean Energy Markets

Brazil’s administration is pushing ahead with reforms to its economy. There are moves to liberalize and deregulate markets as well as to reduce bureaucracy. Indeed, the government has announced its tax reform plan, which is aimed at simplifying what is widely recognized as one of the world’s most complex tax systems.

IRENA and the Latin American Energy Organization (OLADE) announced they will boost ties to put the renewables-driven energy transformation at the heart of Latin America’s economic recovery following the COVID-19 outbreak. IRENA’s recent “Future of Solar Photovoltaic” report highlighted that the region’s solar energy capacity alone could grow by a factor of 40 by 2050 to more than 280 GW, thanks to an abundant resource endowment and strong enabling policies.

In a further pro-business boost to the solar market, Brazil’s administration has also scrapped import duties on foreign manufactured solar equipment, a move designed to encourage inward investment. Previously, solar modules were taxed at 12% and inverters at 14%.

For UK businesses investing in Brazil, one of the positive consequences of reducing the import taxes to zero is that it’s now feasible to specify systems where the financial value of UK-manufactured parts and professional fees comprise at least 20% of the total project cost. Under these circumstances, projects qualify for debt finance covered by sovereign guarantee, which can reduce the overall cost of finance.

Embracing the Energy Transition

With huge expanses of land in Piaui and high levels of insolation in the northeast of the country, Brazil’s geography is as well-suited to solar PV as it is to hydropower. In addition, the grid infrastructure is already in place in this region to accommodate growth in solar parks. With an abundance of sunshine and falling river levels, many see solar PV as the natural successor to hydroelectricity.

Introducing new policies to support the green bounce will create jobs in clean energy and boost the wider economy by providing Brazil’s businesses with reliable, inflation-proof power. The financial returns from high-yielding solar parks in Brazil are already an attractive proposition for investors. Strong supporting policies for green energy will ensure that key financial centers like the London in the UK will continue to back Brazil’s green energy resurgence.

—Jamie Macdonald-Murray is chairman of Lisarb Energy, one of Brazil’s fastest-growing solar companies.