A study comparing power purchase agreements and solar self-generation in Brazil’s free market finds that direct investment in photovoltaic plants can cut costs by up to 32.9%, with solid returns but higher risk exposure. While regulatory exemptions significantly improve project economics, self-generation remains sensitive to costs, market prices, and policy changes that could affect long-term viability.
From pv magazine Brazil
Researchers from the Federal University of Ceará and the Federal University of São João del-Rei have assessed contracting strategies in Brazil’s Free Contracting Environment (ACL), comparing power purchase agreements (PPAs) with self-production of solar photovoltaic energy for large industrial consumers.
Using stochastic modeling, the scientists found that self-production via direct investment, where the consumer finances, builds, and operates its own solar plant, offers the highest potential cost savings compared with long-term PPAs. The analysis also considered alternative self-generation structures, including matching and leasing schemes.
The results indicated that direct-investment self-production can reduce costs by up to 32.9% relative to PPAs. This option also delivers a discounted payback period of approximately 10 years. The internal rate of return (IRR) ranges from 11.8% to 18.1%, with a most likely value of 15.1%, supporting its economic feasibility.
However, the study highlights that self-generation entails higher exposure to risk. Project viability is particularly sensitive to capital expenditure, operation and maintenance costs, variability in solar resource, and short-term electricity price fluctuations. Moreover, deviations between expected and actual generation may lead to energy surpluses or deficits that must be settled in the short-term market, affecting cash flow stability.
This study analyzes two case studies. In both cases, a large industrial consumer in Northeast Brazil was considered, classified as a free market consumer, operating continuously 24 hours a day, 7 days a week, with an essentially constant load profile and an average consumption of 29,200,000 kWh/month.
Case Study 1 considers energy acquisition through conventional PPAs. The researchers assumed a known base price over a 20-year horizon, with uncertain annual adjustments, and stochastic modeling was applied to predict future values of the official inflation index and define electricity prices through geometric Brownian motion combined with Monte Carlo simulation. The final monthly cash flow costs incorporate operational costs such as energy contracts, distribution contracts, ACL charges, and CCEE fees. The net present value (NPV= results for this case range from BRL 1.323 billion ($264.9 million) to BRL 1.605 billion, with a most likely value of BRL 1.477 billion.
Case Study 2 considers self-generation through direct investment in a photovoltaic plant. Fixed parameters include 730 hours of operation per month, average daily solar irradiance of 5.94 kWh/m²/day, system efficiency of 80%, project lifespan of 20 years, and a Minimum Attractive Rate of Return (MARR) of 7.5%. Stochastic inputs include most likely photovoltaic system costs of R$2,650/kW and most likely O&M costs of 3%. The photovoltaic plant is sized to supply 100% of the consumer’s energy demand. Operational costs include plant operation, maintenance, management, distribution costs, energy settlement, and connection costs. The NPV results for this case range from BRL 0.925 billion to BRL 1.100 billion, with a most likely value of BRL 0.991 billion.
Regulatory exemptions play a central role in the economic viability of self-generation and in comparison with PPAs. Self-generators benefit from exemptions from sector charges such as the Energy Development Account (CDE) and the Incentive Program for Alternative Electricity Sources (PROINFA), which are reflected in the Use of the Distribution System Tariff (TUSD) structure. Higher discount levels on these charges lead to greater NPV savings. For example, a 78.75% discount on TUSD tariffs results in a 32.90% saving in the most likely NPV.
Self-generators are also exempt from charges such as the Energy Reserve Charge (EER) and the Energy Security Charge (ESE). Maintaining these exemptions, especially when combined with higher unit values for these charges, amplifies the perceived economic benefits, resulting in a better IRR and shorter payback period. Reducing the exemption percentages for EER and ESE decreases the IRR and increases the payback period.
Considering a 50% discount on the TUSD demand tariff for self-generators expands the range of viable prices for self-generation contracts, providing greater flexibility in negotiations.
In conclusion, regulatory exemptions are a critical factor that can materially affect the cash flows of self-generation projects, making them more financially attractive compared to PPAs, but also introducing regulatory risk due to the possibility of revisions to these conditions.
The study “Economic assessment of long-term power purchase agreements and self-generation of photovoltaic solar energy: Case study of a large industry in brazil,” was published in the scientific review Electric Power Systems Research.
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