News Column

Fitch: Brazil's Move to Wind Power Challenges Standby Producers

June 20, 2014



NEW YORK--(BUSINESS WIRE)-- Increased use of standby thermal plants may pose some unexpected operational challenges to power producers, Fitch Ratings says. Brazil's effort to diversify its electricity production into other renewable resources, including wind farms and expanded hydroelectric projects (currently being auctioned), should result in more frequent dependence on standby power producers.

Consistently high employment of standby services could cause operators to defer major maintenance and raise life cycle costs. We believe this cost increase would be particularly acute if the demand for standby power rises due to a prolonged drought or other supply interruption.

Thermal plant operators that do not meet the dispatches required by the National System Operator may be exposed to risks to their cash flow generation and debt coverage metrics if they must buy energy in the spot market. An operator's higher costs to purchase energy in the spot market due to operational issues such as maintenance of units would not be recoverable.

Fitch believes strong standby projects must fulfill power production requests and contracts should include pass-through mechanisms to fully recover variable costs - such as fuel (particularly for projects that are in remote areas where fuel supply may be subject to increase transportation cost) - in a timely manner.

The reliance on standby plants could play a more important role in the electricity system's reliability going forward. Fitch plans to produce a report soon that will analyze the associated risks to standby projects more deeply.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Fitch Ratings

Alberto Santos

Senior Director

Global Infrastructure and Project Finance Group

+1-212-908-0714

33 Whitehall Street

New York, NY

or

Rob Rowan

Senior Director

Fitch Wire

+1-212-908-9159

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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