New infrastructure is aimed at meeting hiring of renewable power, but a number of uncertainties may reduce discounts
06/26/2023
The power transmission lines auction scheduled for Friday (30) is expected to attract investments of R$15.7 billion for nearly 6,200 kilometers of the so-called Linhões. Despite the interest of large companies, the volume of the projects, the high cost of capital, the demand for equipment, and the lack of construction companies suggest that it will be a more conservative bidding with lower discounts.
The infrastructure will serve six states amid expected contracting of high amounts of power coming from renewable generation projects, including wind and solar farms.
There is no doubt that all nine lots will be auctioned, but industry analysts say discounts are unlikely to reach 50% this time as in many previous auctions.
Filipe Bonaldo, managing partner of the consulting firm Alvarez & Marsal, predicts discounts of around 40%. He sees obstacles including the higher cost of capital now due to high interest rates and the slowdown in debenture issuance after retailer Americanas and power utility Light requested a court-supervised reorganization, which made debt pricing higher.
Mr. Bonaldo added that the large projects gathered in the same competition may reduce the attractiveness for investors, since they are multi-billion projects that require groups of investors to take much debt. He believes that players will take one or two lots at most, and competition is expected to be lower as a result.
In addition, the lack of contractors who deliver finished construction works add more uncertainties. Many contractors went bankrupt after being entangled in the Car Wash anti-corruption task force, which left Brazil’s heavy construction sector in tatters.
Businessman José Antunes Sobrinho spent years rebuilding Engevix, now Nova Engevix (a subsidiary of Nova Participações), after facing investigations and arrests that nearly bankrupted the company. Mr. Antunes recalls that he warned in 2015 that Car Wash would cause Brazil to face a lack of companies specializing in these construction works, as many of them failed or went out of business.
“We warned that companies would implode. Large investors in infrastructure lost momentum and Brazil did not replace these companies,” he said. “In these and following auctions, we will have a lot of construction work for few such contractors. Transmission works have peculiarities. Foundations, places with difficult access, civil works, and many companies are not interested. Some lots will require more than one contractor,” he said.
On the part of the companies, the desire to win a lot is great, since the transmission segment is considered the safest of the power industry, it is very regulated, and the winner will have a 30-year contract with revenues adjusted by Brazil’s official inflation index (IPCA).
Companies like Engie and EDP have cash and are expected to come in strong, but the market is focused on Eletrobras. How the company will fare in the auction may be the answer to its recent privatization, since the thesis of privatizing the company was encouraged to increase its competitiveness and investment capacity.
Isa Cteep is coming to the auction optimistic. It has won large projects recently and has a portfolio in execution of R$10 billion. CEO Alberto Chammas said the company has room for more leverage. He acknowledges that the size of the lots can create difficulties for companies, as each lot would be enough to consume a company’s entire budget.
“We come from a context of big auctions. Of the nine lots in this auction, eight are very large. The megaprojects are challenging because of their size, the risks are relevant because of environmental permits, higher interest rates, difficulty in accessing capital, and much more expensive equipment. It will be a more conservative auction,” he said.
Mr. Chammas raises another issue: environmental permit. Many lots pass through quilombola communities of escaped slave descendants and Atlantic Forest fragments, which can delay the progress of projects. Another doubt is related with the supply chain to meet the demand, since there is a context of delayed deliveries. Another reason for energy regulator ANEEL to extend the deadlines for the larger lots to 66 months from 60 is the average increase in the time required to obtain permits and construction times.
Glauco Freitas, chief marketing and sales officer at Hitachi Energy, believes that the decision to group projects in large lots is the right one, because it attracts seasoned companies. On the other hand, Mr. Freitas recalls that there is a boom in power transmission projects in the world, and Brazil is competing for the attention of manufacturers in these projects. For this reason, he said, investors have already signed pre-contracts to guarantee price and delivery terms.
“For this auction, we are talking about more than 200 500 kilovolts (kV) reactors. That is more than one year of my production. And it [the auction] is competing with factories full [of orders]. It is a volume that has never been ordered all at once, but the Brazilian industry has the competence and the capacity to produce them,” he said. “The challenge then is to bring the reality of Brazilian manufacturers in line with the reality of the Brazilian contractors and the reality of investors.”
*Por Robson Rodrigues — São Paulo
Source: Valor International