by Dr Britta Rennkamp, researcher for the Energy, Environment and Climate Change group at the Energy Research Centre (University of Cape Town)

Brazilians love their flag, which successfully works as a label for products made in Brazil. Rubber sandals, beach towels, coffee cups, sports gear, caipirinha shots…Almost everything sells better with a Brazilian tag on it. Does this include wind turbines?

Localization in the renewable energy industries is a hot topic in Brazil at the moment. The Brazilian government requests 60% of local content in the wind turbine installations to incentivize local manufacturing. Since 2009, these requirements apply for those companies who chose to benefit from the financial support of the National Social and Economic Development Bank (BNDES). Most companies seek the bank’s support, with exception of a few mostly Chinese companies, who manage to bring funding from China. Do the local content requirements of the Brazilian government hinder the rollout of wind turbines? This is an important question for governments to understand. Brazil is currently regarded as ‘the brightest spot on the global wind energy map’ as the Director of the Global Wind Energy Council, Steve Sawyer, described it. Many countries observe this showcase to learn from the Brazilian experience.

Local content requirements cause heavy debates on their usefulness and discriminatory effects. Governments mostly in developing countries believe that these interventions create local jobs and local wealth. Trade economists argue that they produce overall welfare losses, increase technology costs and reduce production and employment. The research literature shows mixed implications of the interventions for technology costs, employment and overall welfare.

Brazil has a history of protecting its markets from international competition. In the 1970s, the government sought to advance the national industries through an import substitution strategy. In few sectors this worked, in others it triggered a strong demand for foreign products. Throughout the 1980s and 90s Brazilian leaders pursuit neoliberal economic policies following the Washington Consensus, which suggested that economic development would best work through non-intervention and free market forces. In the early 2000s, with the worker’s party leader and former unionist Ignacio Lula da Silva in power, the appetite for localization returned. In the automotive sectors, as well as the oil industry, the Lula administration required local content, mostly around 60%. The implementation of these regulations hasn’t been simple and showed mixed results.

The wind energy sector was incentivized through a feed-in-tariff, in 2005, which was changed into an auction program in 2009. The main change here was that the feed-in-tariff guaranteed a fixed price, which power producers receive for twenty years in the future. Through the auction system this price came down to a third. After the power cuts in 2003, the so-called apagão, the government understood that it was necessary to diversify the energy sources and not only rely on hydropower. The hydropower infrastructure wasn’t enough to sustain the growing energy demand. Localization was part of both incentive systems—the feed- in tariff and the auctions– in different forms. In the first program, the government asked the developers to provide 60% of the whole project value. The program did not specify which components needed local manufacturing. The succeeding program required 60% of value and weight of the turbine, which only those developers needed to fulfil who required public finance. A localization index (FINAME) then certified specific parts produced in firms in Brazil, which could then supply the developers. BNDES became quite powerful, because of its role in certifying firms, providing financial assistance and enforcing the rules for localization.

A vibrant wind energy sector emerged in Brazil only over the past five years. Many foreign firms came to Brazil, because the auction system seemed a lucrative opportunity beyond the worldwide financial crisis, which slowed down economic opportunities in Europe and the US. These firms had no manufacturing infrastructure in the country. Other firms had already been in the country for years and had set up their own factories, which made it easier to build components locally, as per the government policy. The newcomers had to either catch up with their investment or find their ways around building local factories. Offices opened, factories signs were posted, territories bought, and opening dates postponed. The delays in the new firms to build their local manufacturing basis caused a sense of injustice among the competitors, who then pushed for action from the government. BNDES responded with inspections and consequently withdrew the certification for local content from five producers in March 2012, all newcomers. These firms can recover their permits over the course of the year, but have missed out in the business for more than six months. These sanctions penalized not just the firms, but also partially the independent developers who had subcontracted components with these firms.

One could go into more details in this story, which almost reads like a thriller revealing the politics caused by a simple intervention. It illustrates how setting numerical targets for local production is easy, but the implementation is tricky. The Brazilian case shows the importance for clear rules for the implementation. Regulation creates winners and losers and cannot please everyone. The implementation needs to be transparent and no subject to individual negotiations between the bank and the firms. This story is full of important experiences, which are valuable for South Africa, and other countries who consider incentivizing industrial development through local content requirements.

Implementation of local content requirements was one of the hot topics discussed on the Brazil Windpower Conference, the biggest wind energy meeting in the Southern Hemisphere, which took place in Rio during the last week of August 2012. Fernanda Westin, researcher at the Federal University Rio de Janeiro and myself interviewed 25 firms at the Brazil Windpower Conference and found that the local content requirements are slowly beginning to taking effect.

Towers, nacelle boxes, hubs and blades are produced locally for the Brazilian market. These components range in from low to medium technological content. High technology components, such as gearboxes, nacelle components and transformers continue to be imported. The research report will be available online soon.

This blog was originally published on the Energy Research Centre (University of Cape Town) blog site.

Image courtesy of  the Energy Research Centre (University of Cape Town)