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Research from the Federal University of Ceara and the Federal University of Sao Joao del-Rei, published in Electric Power Systems Research and reported by pv magazine Brazil, has analyzed contracting methods within Brazil’s Free Contracting Environment. The work compared long-term power purchase agreements with self-generation of solar photovoltaic energy for major industrial consumers.
The analysis employed stochastic modeling to evaluate different approaches. It found that a direct investment model, where a consumer finances, builds, and operates its own photovoltaic plant, presents the greatest potential for lowering costs relative to power purchase agreements. Alternative self-generation structures like matching and leasing were also considered.
Results indicated that direct-investment self-production can achieve cost reductions of up to 32.9% compared to conventional power purchase agreements. This model also showed a discounted payback period of around ten years. The calculated internal rate of return for such projects spanned from 11.8% to 18.1%, with a most likely figure of 15.1%.
However, the study notes that self-generation carries greater risk exposure. A project’s financial viability is highly sensitive to capital expenditure, operational and maintenance expenses, solar resource variability, and short-term electricity price movements. Differences between projected and actual energy generation can create surpluses or deficits that must be managed in the short-term market, impacting cash flow predictability.
The research was based on case studies of a large industrial consumer in Northeast Brazil with continuous, constant energy demand. For the power purchase agreement scenario, modeling produced a range of net present values. For the self-generation via direct investment scenario, a separate set of net present values was calculated, demonstrating the potential savings.
Regulatory exemptions were identified as a central factor influencing the economics of self-generation. Benefits include exemptions from certain sector charges, which are reflected in distribution system tariff structures. The level of discount on these tariffs directly correlates with the net present value savings achieved. Exemptions from other specific charges also improve the internal rate of return and shorten the payback period for projects.
The study concludes that while these regulatory conditions significantly enhance the financial appeal of self-generation compared to power purchase agreements, they also introduce a regulatory risk. Future revisions to exemption policies could affect the long-term viability of such investments.
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