Marcelo Sá (Head of LatAm Utilities at UBS) has released a report assessing the A-4 New Energy Auction held yesterday, April 4th. Below we present his analyses and thoughts related to projects internal rate of return (IRR), as well as his considerations about how this is likely to be perceived by the market.
We estimate returns are below cost of equity, based on assumptions disclosed
Today, CCEE hosted a very competitive A-4 auction, selling 298.7MWavg at an average price of R$124.75/MWh. Surprisingly, the average prices for both solar and wind energy were well below the already low prices at the last A-4 auction in December 2017 (see our 18 December note). At the auction, 76% of the volume sold came from solar energy, with an average price of R$118/MWh (vs. R$144/MWh at the previous A-4 auction), or US$36/MWh (a 62% discount to the maximum price). Wind energy accounted for 11% of the volume sold, with an average price of R$68/MWh (vs. R$98/MWh previously).
Based on the capex assumptions disclosed by the winners, we estimate negative NPV for both solar and wind projects (see Figure 1). We have not run a return sensitivity for biomass projects given a lack of information. For small hydro, we estimate accretive IRR of 10%. No listed company in our coverage universe won a project at the A-4 auction.
Solar and wind returns look low even with aggressive capex assumptions
The effective capex could be lower than the amounts disclosed, but the effective returns would still look low. We estimate 5% real IRR for the solar projects even if capex is 50% below the amount disclosed at the auction. For the wind projects, we estimate no return even if capex is 50% lower.
We are concerned about the return outlook for greenfields in Brazil
We are bearish on the generation segment, as we believe long-term energy prices are likely to be lower than consensus due to a lower marginal cost of expansion. Recent greenfield auctions have made us even more cautious on gencos, as the energy prices for wind and solar were very low.
See Report provided by UBS: