• As of January, new distributed generation projects will have to pay for the use of infrastructure 
• Companies are trying to stock up projects approved under the old rules 
• Rates of return for greenfield projects are squeezed, leading to the acquisition of operating projects 

M&A in Brazil’s green power sector continues to be affected by a regulation-led gold rush for distributed generation (GD) projects benefited by incentives that started to be reduced as of January, said two industry representatives and a financial advisor in the space.  

Usually, when interest rates are high, which is the case of Brazil, assets become expensive from the buyer's point of view, said Sao Paulo-based Watt Capital Advisory founder and Managing Partner Eduardo Tobias. The bidder wants to pay less because he must discount the higher interest rate, and for the seller the price is low, so there are not as many transactions, he explained. Due to high interest rates, among other factors, M&A activity in Brazil started 2023 at a very low level and has been gradually improving, as previously reported. 

However, because of the progressive elimination of regulatory incentives for green power, the concern of the big players in the sector is to grow as quickly as possible, Tobias said. As of January, new GD projects will start to pay for their use of transmission and distribution infrastructure, and this payment will gradually be increased. “We are in a phase of regulatory transition, in which there is room to make viable distributed generation projects under the old compensation rule (GD1), in which the export of 1 kW generates a credit of 1kW,” Tobias said. “The companies’ biggest concern is to build as many projects as possible under the old rule,” Tobias said. “Soon the key will be turning, and new projects will be much less profitable, so everyone wants to stock up,” he explained. 

This rush is leading to a progressive increase in deals involving solar and wind energy assets, Tobias said. According to Marcio Trannin, vice president of the board of directors of Absolar, the association of solar power companies, there are a lot of assets being negotiated, especially in distributed generation (GD). “Centralized generation (GC) companies, distribution companies, and trading companies are all looking at GD, because we understand that the liberalization of the market that will take place is an excellent opportunity for consolidation of large players buying smaller ones and acquiring both assets and know-how from them,” Trannin said. 

“All players in the world who are interested in infrastructure, in energy, whether they are purely financial or strategic players in the electric energy sector or in the energy sector as a whole, see Brazil as a place to be present and begin their development,” Trannin said. “It is no surprise that we see several oil and gas companies entering Brazil through solar projects, or investment funds entering Brazil and diversifying their investments in renewable energy," he added. "There is a consensus in the market that renewable energy here is an investment with the expectation of a good return in the future.” 

Additionally, the rate of return is squeezed for GC greenfield projects, which have dropped in quantity as the financials do not close, Tobias said. “There are a lot of large companies with funds and expansion goals that have difficulty expanding as much as they would like because of the low rate of return for greenfield projects,” the advisor said. “Furthermore, there is the difficulty of getting offtakers, part of which is commercial, and part is the price of electricity, which is in fact very low for the seller,” Tobias added. 

A company has a goal to expand in green energy and sees that the return is bad for greenfield projects, Tobias said. “The investor says: bad return for bad return, I'm going to where I have no risk, to brownfield projects already in operation,” Tobias said. “You close the transaction, and the assets and the EBITDA are already added to your financial statement,” he added. By acquiring existing projects, the bidder doesn't need to wait, hire equipment, deal with cost overrun, make the deadline, discover that the potential was less than it was in the certification, among other potential problems, Tobias explained. “You have the history. You already know if the asset is having a curtailment problem and how it is performing. The uncertainty is much lower.” 

Brazil currently has more than 27 GW of wind and more than 10 GW of solar power, which should be peaking at about 13 GW, Tobias said. “You already have a menu. All or almost all these projects have power purchase agreements (PPAs), and a very large legacy of regulated PPA projects that, until recently, were all 20-year contracts,” he explained. In the last auction, in late 2022, 15-year contracts were introduced.  

Chinese and oil companies are among the largest consolidators in the sector, said Elbia Gannoum, president of ABEEolica, the association representing wind power companies. “This period of gold rush makes less clear what will actually happen in generation,” she said. “When this effect passes, we will have more clarity about the dimension of the system itself,” she added. 

Recent examples of deals in the sector include the agreements announced by Brazil’s national oil company Petrobras [B3:PETR4] with Chinese companies in late August. One of the agreements was a MoU with China Petroleum & Chemical Corporation (SINOPEC) to collaborate in the evaluation of opportunities in Brazil or abroad in segments including energy transition projects and carbon capture, according to the announcement. In the same trip to China in August, Petrobras signed a strategic cooperation framework agreement with China International Energy Group (CIEG) "with the aim of identifying potential business opportunities in Brazil related to renewable energy generation and the production of green hydrogen and ammonia." 

Other Chinese companies, such as China General Nuclear Power Group (CGN), State Grid Corporation and Three Gorges Corporation are already invested in renewable assets in Brazil. 

Equinor [OSE:EQNR], a Norway-headquartered energy business, announced in July that it agreed to buy certain assets and the trade name of Rio Energy from Boston-based Denham Capital. This deal is a proof that low-interest rates are not the only driver for renewable energy deals, said Watt Capital’s Tobias. “Rio Energy was for sale for at least five or six years, including when the Selic [reference interest rate] was at 2%. And the deal only now came through.” 

Sao Paulo-based Comerc Energia canceled an IPO in 2021, sold a 50% stake to Rio de Janeiro-based Vibra Energia [B3:VBBR3], and in August concluded the acquisition of Ceara-based solar assets consultant and manager Soma Energia, as previously reported. 

This month, Paris-based Voltalia [EPA:VLTSA] sold its Arinos solar cluster to Gerdau [B3: GGBR4] and its invested company Newave Energia. 

In September, Atiaia Energia, part of family-owned Recife, Pernambuco-based Grupo Cornelio Brennand, acquired two solar power plants from Ibitu Energia, which is owned by the Minneapolis-based private equity fund Castlelake. “A PE fund has a mandate to sell,” noted Tobias. 

Furthermore, there is always the case of people who are either a little strangled or people who want to recycle capital to make other investments that they understand have a better return, as in any sector, Tobias said. Another source of deals is distressed companies, he added. “The guy may be having a lot of difficulty, or is in the final phase of implementation, or is performing poorly and needs to pay the financing.” 

As the number of GD1 projects diminishes, these assets will become more rare and thus much more valuable, which could cause a new wave of M&A deals in the segment, Tobias said.