Evaluation of Brazilian Auctions for Photovoltaic Projects Using Traditional and Real Option Approaches

The Brazilian government provides incentive mechanisms for photovoltaic projects to improve the power capacity in the country, to enhance the diversification of energy sources and promote cleaner energy production. In energy auctions, the government uses feed-in tariff, offers low-cost sources of financing and offers tax breaks, among other initiatives to stimulate investment in photovoltaic projects. This paper uses traditional and real option approaches to evaluate the mechanism of feed-in tariff in the auctions and the access to sources of financing with lower costs. The evaluation focuses on a specific restrictive clause in the contract for the winners of the energy auctions. Based on the financial evaluation the paper shows that more flexibility in the contract for auction winners may result in reduced bid prices in the auction, i.e. a lower feed-in-tariff incentive or a reduction in the need for credit lines from the Brazilian financial agency.