Risk addressed: Financing risk

The Tropicália project, a 245-kilometre transmission line in the state of Bahia, in the northeast of Brazil, is an example of how a trustworthy and dynamic regulatory environment can attract private capital from new players, even during a crisis. Costing around 370 million reals (around USD 112 million at the time)1, the project was developed to transmit excess wind power to cover power deficits in the southern regions. The bidding process took place at the end of 2016, a time of political and economic uncertainty, which dissuaded many traditional investors. Transmission line auctions around the time did not succeed in attracting the typical investors in the sector (e.g., large local and international energy or construction companies) because of an economic downturn, exchange rate depreciation, high inflation and high interest rates. At the same time, debt and equity markets were retreating, leading companies to pull back on investments.

To address this situation, the Brazilian energy regulator increased the maximum tariffs in auctions to attract new players. This resulted in financial investors, such as the Brazilian BTG Pactual, stepping in, along with other new strategic investors. Given higher perceived risks under the prevailing macroeconomic environment, the fund managed by BTG Pactual opted to finance construction with full equity, and third-party financing would be raised only post-completion. Ultimately, the project managed to raise long-term finance from a national development bank and from local capital markets and banks prior to completion. Apart from the tariff level, financing was secured by pre-defined inflation-indexed revenues, an objective cost of capital formula and the possibility for a payment extension in the event of delays due to licensing and land acquisition.

This case study was included in special report Financing clean energy transitions in emerging and developing economies.