annual report 2017
Hydropower plant, Rio Grande do Sul.

OVERVIEW

We are one of the largest global investors and operators in power generation using renewable sources. We have a long history of over 100 years and, especially in the last decade, we have made great progress in the diversification of technologies, with important growth in the wind energy segment and entry into the solar and biomass generation segments as well. Globally, our assets under management total approximately USD 40 billion. In Brazil, we operate an extensive portfolio comprised of 65 power generation plants, and our assets under management total approximately BRL 11 billion.

Wind farm of Renascença Complex, Rio Grande do Norte.

OPERATIONS

Following a challenging 2016, 2017 was particularly difficult for power generating companies. Water volume in 2017 was the lowest for the last five years, with low rainfall levels in all regions causing high volatility in prices throughout the year. The Northeastern region was the most affected by the shortage of rainfall, followed by the Southeast, which greatly influenced the behavior of the entire system, since it is the country’s main subsystem.

The storage levels in the reservoirs reached critical levels in the Northeast (5.5% in November). The Southeast, South, North and Northeast regions ended the year with storage levels of 22.6%, 57.1%, 23.3% and 12.7%, respectively. Due to this scenario, there was an increase in energy exports from the Southeast to the Northeast, despite the extensive wind generation observed in the Northeastern region.

Prices were highly volatile throughout the year, reaching a high of BRL 533/MWh between September and October (compared to approximately BRL 300/MWh in 2016). With the improvement of flows in the month of November and the beginning of the humid period in December, prices returned to a downward trend. Improvements to the macroeconomic scenario, especially as of the second quarter, had a positive impact on energy consumption, which grew 0.8% from 2016 levels, with emphasis on the industrial (+1.3%) and residential (+0.8%) segments.

Despite this volatility, Brookfield Energia Renovável was able to deliver the expected results and recorded growth in its operations, through new acquisitions and delivery of new ventures. One of our main strategies was the development of a commercial structure focused on the direct relationship with major clients, offering aggregated post-sale services, which reduce the dependence on participation in auctions and create a certain protection from market price fluctuations. We currently rely on a base of over 100 clients in direct sale contracts.

We closed 2017 with revenues of BRL 1.2 billion and EBITDA of BRL 903 million, amounts respectively 27% and 35% higher than those recorded in the previous year. As a result of our sales strategy, we achieved 21 new clients and renewed contracts with another eight, over terms of three years, which total 1,310 GWh.

The Agribusiness and Retail sectors were our major markets in 2017, with 35% and 34% in new sales, respectively.

With respect to our operational base, two new plants were finalized and began operations in 2017. Santa Cândida II, a biomass cogeneration plant located in São Paulo, with an installed capacity of 30MW, received investments of BRL 281 million. PCH Serra dos Cavalinhos I, a hydroelectric plant located in Rio Grande do Sul, has a 25 MW capacity and received investments of BRL 220 million.

We began to operate 14 new Brazilian wind farms in Bahia in late 2017, adding to the five farms we have already been operating in the State of Rio Grande do Norte since 2015. These wind farms were part of the TerraForm Global portfolio, which Brookfield acquired during the year. As a result, we tripled our installed wind-energy capacity in Brazil, from 150 MW to 450 MW. We closed 2017 with 65 generating units, 42 of which are hydroelectric, 19 wind farms and 4 biomass cogeneration plants, for a total installed capacity of 1,500 MW, 25% higher than 2016.

OUTLOOK

We believe that the M&A activity in the power sector will continue to be favorable in 2018.

One of the main challenges of the sector continues to be a regulatory matter, more specifically the water generation scaling factor (GSF). In the current model, hydroelectric generators do not have full control over the variables associated with the government’s energy policy, since the dispatch of energy in water crisis situations is determined by the National Operator of the Electricity System (ONS), but still have to bear the costs of the risk associated with these policies. It will be important that this matter evolves in order to stabilize the sector and, at the same time, avoid raising tariffs for consumers, as it has been occurring in recent years.