Panorama:
Brazil is a unique country to live in. From its receptive people to its abundant natural resources, the country enjoys tremendous growth and diversity opportunities. One aspect that makes Brazil even more singular is the composition of its energy matrix. Despite an above-average dependence on petroleum and its derivatives, almost 45% of its energy comes from renewable sources (exhibit 1, 2). Its relative use of coal and natural gas is minor, while the relative use of sugar cane derivatives and hydraulics is multiple times above-average (BEN, 2021).
Exhibit 1: Brazilian energy matrix in 2019
Exhibit 2: World energy matrix in 2018
The countries' electricity usage depends predominantly on hydraulic, and 83% of all its electricity generated comes from renewable sources (Exhibit 3). Solar still plays a minor role, representing only 1% of all electricity generated in the country, but has grown significantly in recent years (Exhibit 4). In 2015 Brazil generated only 59 GWh of solar electricity, while in 2019, it generated 6,655 GWh, a 112 fold increase (IEA, 2021).
Exhibit 3: Brazilian electricity matrix in 2019
Exhibit 4: Brazilian solar electricity generation in GWh
In 2018 the world used 3.3 MWh of electricity per capita while Brazil used only 2.6 MWh. Compared with developed nations, Brazil's per capita electricity usage is still substantially inferior. An increase in energy usage should be expected in the near term if catching up is anticipated (IEA, 2021).
Brazil's electricity consumption in 2020 totaled 513,754 GWh in 2019, putting the country in 6th position worldwide. China, which is the country that consumes the most electricity yearly, used 7,255,500 GWh, almost 14 times as much as Brazil did. Regarding each sector's electricity consumption in Brazil, the industrial sector consumes 38% of all energy generated, while residential, commercial, and public services consume around 27% each, agriculture 6%, and transport less than 1%, as seen in table 1 (IEA, 2021).
Table 1: Consumption of electricity in Brazil by sector in Megawatts per hour.
Brazil is blessed with one of the greatest hydropower potentials in the world. At one point, electricity generation from hydroelectric was responsible for almost two-thirds of the countries production of electricity. Only around one-third of Brazilian hydroelectric potential is fully exploited. The greatest undeveloped hydroelectric generation potential is in northern Brazil, but new projects face resistance due to socio-environmental concerns (Deloitte, 2018).
The resistance to new hydroelectric construction combined with the government's financial restraints due to the ongoing crisis will probably push towards a quicker than expected solar power adoption. Increased efficiency and private implementation as costs become more accessible will also be driving forces for a swift adoption of this technology in the upcoming years.
Solar:
Humans have been exploring ways to harness energy from the sun since the beginning of mankind. Using mirrors to redirect and concentrate solar energy was the most common form of exploiting this resource until the 18th century. From there on, more intricate ideas arose as scientists searched for more effective ways to utilize the sun to generate usable energy.
The development of solar panel technology (photovoltaic panels) took several contributions from various scientists. It is still unsettled who exactly created the technology but most credit the French scientist Edmond Becquerel for the discovery of the photovoltaic (PV) effect – the ability to generate electricity from sunlight. In 1839 Becquerel successfully created an electrical current by submersing two gold and platinum plates in a conducting solution and exposing them to sunlight. This created a p-n junction (diode) through which, with the help of energy from the photons the sun emits, electrons in each atom jump to a higher energy state. Their excited state creates a conduction band in the p-n junction that allows electrons to move freely in a predetermined direction, thus generating an electrical current.
With Becquerel’s brilliant discovery, scientists worldwide started exploring ways to improve and utilize energy for general purposes. A series of patents were filed to secure the rights to the invention of “solar sensitive devices”, but it was not until 1954 that Bell Labs created a practical silicon photovoltaic cell. Bell Labs’ invention was the first solar cell made from silicon, the predominant material in solar panels to this day, to power an electric device for several hours.
Composition:
Solar panels are composed of relatively few and abundant materials. First of all, we have silicon solar cells (A), the component responsible for absorbing light. Silicon is the semiconductor material used in 95% of solar modules today and is the second most abundant element on the planet, after oxygen (NREL, 2016). The silicon solar cells are responsible for around 60% of the costs associated with solar panels' production. Connecting all-silicon panels is the cell stringing ribbon (B), a solder-coated oxygen-free high conductivity copper ribbon. Next, we have the junction box (C). The junction box keeps power flowing in one direction and prevents it from feeding back into the panel. If a part of the solar panel is shaded, that string will want to consume power, reversing electricity flow. Diodes inside the junction box prevent that from happening.
Exhibit 5: Overview of crystalline-silicon module components adapted from NREL 2016.
The backsheet (D) is a crucial polymeric material that adheres to the panel's backside to provide electrical insulation and protection against outside forces such as moisture and UV lights. Secondhand backsheets have been known to accelerate the degradation of panels significantly. The string connector ribbons (E) are nothing but a wider (5 mm against 2 mm) stringing ribbon which connects all string ribbons (B). Next, we have the edge seal (F) acting as a seal against moisture. Moisture is one of the solar panels' biggest enemies as it causes poor performance and premature fail, so a high-quality edge seal is essential. Then comes the aluminum frame (G). This frame is responsible for holding all components into place. The front glass (H) also acts as a seal to the panel while permitting the photons to reach the PV panels and chain the electric generating reaction. Last, we have the encapsulant (I), usually ethyl vinyl acetate (EVA). EVA comes in thin sheets inserted between the solar cells and the top surface and the rear surface to provide adhesion between the solar cells.
Understanding the components of a solar cell, it is vital to evaluate the evolution of costs associated with its production. In exhibit 5, we can see the process starts with polysilicon production, which must then be transformed into ingots then wafers. After that, Ingots and wafers are converted into individual cells, which will later assemble a module.
Analyzing the costs involved in each of these processes, we can see a significant reduction in every step. The biggest relative decrease in price happened in the first two processes (48% and 62%), while module assembly had the smallest drop (36%). The total price drop was from US$ 0.638 in 2014-15 to US$ 0.346 in Q1 2017 per Watt, a whopping 45% in two years.
Exhibit 6: Bottom-up manufacturing cost model results for the full crystalline-silicon module supply chain from 2014/15 to Q1 2017. The results shown are for manufacturing PERC and modules in Southeast Asia (NREL, 2017).
Costs associated with the effective installation of a PV panel go way beyond the panel. In exhibit 7, we can see the solar module accounts for only 12% of the value consumers pay, while several other “hard” and “soft” costs account for the other 88%. The only cost higher than the module is the supply chain cost, but all values get diluted due to the sheer number of variables involved.
Exhibit 7: Distribution of costs for implementing solar in the US (NREL, 2017).
Potential:
Various factors play a central role when analyzing the generation of solar energy in a country. First and foremost is the countries geographic position. This determines one of the most important factors in solar energy generation, the sun's incidence. The Brazilian potential for generating solar energy considering its geographic position is astonishing, mainly because of the latitude the country is situated in. Being divided by the equator ensures the country has constant and ample sunlight incidence during the whole year. According to the Brazilian Atlas of Solar Energy, the country receives, during the year, more than three thousand hours of sunlight a day, value correspondent from 4.5 to 6 .3 thousand Wh/m^2.
Exhibit 8: Comparison between the sun’s incidence in Brazil and Europe in Wh/m^2.
For comparison's sake, Germany, in its region with the highest solar potential, receives approximately 40% less sunlight than Brazil. Yet, Brazil only produces 6,655 GWh while Germany produces 47,517 GWh, almost 8 times more than the former. Climate also favors Brazil as the country does not see snowfall, a considerable nuisance in colder countries for the generation of solar energy. Where the sun's incidence is highest, the country has a desert-like biome (IBGE, 2021). This biome favors solar energy generation because of the very few clouds and improbable shadows (from threes, leaves, among others).
The distribution of the installed 6,655 GWh Brazil generates yearly in solar electricity has 39% going to homes, 38% going to a business, 13% to rural areas, and only 9% to industrial enterprises (Exhibit 9). Knowing the industrial sector uses almost 38% of all electricity generated in Brazil allows us to infer its adoption of solar is below expected. We have to recognize that the sole reliance on solar is not an alternative for many industries. However, its incorporation as an investment aiming to reduce costs with electricity is viable and valuable.
Exhibit 9: Consumption of solar by class.
With the dipping prices of PV panels and all other hardware involved in the generation of solar energy, soft costs take an increasing share of value. In 2010 soft costs represented around 50% value while in 2017, they represented almost 70% of the value, almost a three percentage points increase per year (exhibit 9). An increase in the proportion of soft costs benefits the growth potential of solar panels in Brazil because they leave a smaller portion of value subject to the exchange rate. The country is known to have a volatile exchange rate and has seen a 40% decrease in its currency’s value in dollars between 2010 and 2017 (Trading Economics). In the last year alone, with the downturn in interest rates, the currency has devalued almost 15%, a decisive factor for imported goods' cost.
Exhibit 10: Evolution of the costs of solar energy per watt in the US.
Speaking of interest rates, the downturn that took the Brazilian interest rate from over 14% in 2015 to its current rate of 1.90% vastly promotes solar panels' implementation. The viability of solar projects is exceptionally reliant on interest rates because of the project's long duration. Even if the long-term cost of utilizing solar energy is inferior to the grid's energy consumption, those values must be discounted by the interest rate and brought to present value through discounted cash flow (DCF) method. Since interest rates and present value are inversely proportional, the higher the interest rates, the lower the project's expected value (maybe even a negative expected value) and more extended payback time.
To offset the 15% devaluation of the Brazilian exchange rate, the government sanctioned a bill to remove all import taxes from solar panels. Until 2020 the equipment was subject to 14% in taxes upon arrival.
Today in Brazil, as a customer or company, there are at least 60 alternatives of possible financing. Those come from various sources, ranging from public institutions (National Bank of Economic Development – BNDES, among others) with subsidies to private financing from the various institutions available. The repayment term varies from 5 years up to 24 years, both with a fixed-rate amortization schedule. This allows excellent opportunity through the demand side, incentivizing companies to explore opportunities in the sector (ABSOLAR, 2021).
Taking a look at the supply side, 93 companies registered with FINAME and BNDES, which work with PV panels. Sixty-four of those sell "ready to go" solar kits, while the rest sell either the solar modules or other individual parts like the inverter, junction box, among others (ABSOLAR, 2021).
Effectively looking at costs for the generation of solar energy in Brazil, those have, following the global trend, fallen considerably in the last few years. In exhibit 11, we can see that the USD per MWh cost in 2013 was just over $100 and went down to around $20 in 2019. Despite the massive devaluation the Brazilian Real suffered during this period, costs still decreased by around 80% in dollar terms, emphasizing the increasing economic viability of implementing solar in Brazil (ABSOLAR, 2019).
Exhibit 11: Evolution of prices in USD per MWH
Now we must compare the cost of solar electricity when compared to electricity from the grid the ensure its economic viability. For this analysis, we will consider the state of São Paulo, the most populous state in Brazil, because it is also the second-biggest producer of solar energy in the country and has widely available information regarding costs. The tariff charged per KWh by CPFL Paulista for homes is R$0.85. According to the Energetic Research Company (EPE), the average electricity consumption for homes in the state of Sao Paulo was 172 Kwh/month. Through a simple multiplication, we can assume the average electricity bill in the state was R$ 146.20. A solar kit capable of generating 216 Kwh/month of energy costs R$ 6.200 reais (Neosolar). Using the DCF method and discounting at a 1.9% rate, this investment's payback time is 43 months and 26 days, or 3 years, 7 months, and 26 days. The net present value (NPV) for 10 years is R$8,429.73. To reinforce the importance of interest rates in long-duration projects, we will assume a 6% discount rate. In this scenario, the NPV for 10 years is R$ 4,190.32.
Conclusion
The generation of electricity through solar panels in Brazil is an up-and-coming market. The country has various factors favoring the widespread implementation of this technology. First, there is the incidence of sun and favorable climate. Both are essential for the widespread adoption of panels. The country still has a sectoral distribution of adoption, which is quite discrepant than one would expect. This is an important aspect that leads us to believe there is still a wide array of possibilities for implementation. We must also consider the global trend of prices. Soft costs are taking an increasingly large proportion of costs due to economies of scale in the production methods. This allows countries with an unstable currency, as Brazil, to be less affected by devaluations as soft costs take an increasingly large share of the price. The timing for widespread adoption is also favorable as hydroelectric, the country's primary energy source, faces socio-economic resistance. With interest rates at an all-time low, the macroeconomic scenario allows long-duration projects to become viable. Import taxes have always been problematic and prohibitive for many Brazilian sectors, but they are currently null for solar panels and related technology, favoring adoption. Customer and corporate financing are at their peak, with more than 60 options available. Most importantly, when considering all variables of the project, the implementation of solar panels in homes has a significantly positive net present value (NPV), ensuring economic viability for individuals.
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