Risks, rates, and rays: domestic financing shapes Brazil's utility-scale solar PV costs in regulated auctions

Abstract

Solar photovoltaic (PV) is the fastest growing electricity source by capacity, with global additions reaching 600 GW in 2024. At the same time, rising interest rates adversely affect solar PV's competitiveness. This study examines the financial dynamics of Brazil's solar energy sector, focusing on how financing conditions impact the Levelised Cost of Energy (LCOE) for solar PV projects. We estimate the nominal after-tax Weighted Average Cost of Capital (WACC) for solar PV projects in Brazil, calculate the nominal LCOE for projects awarded in energy auctions from 2014 to 2022. We build the WACC from observable domestic, public financing instruments and combine it with auction-specific costs to decompose LCOE for 195 awarded projects. This market is 36% of cumulative capacity and 10% of construction volume in 2024. Brazil's WACC is significantly higher than in advanced economies, and our monthly, nominal after tax WACC series indicates values in the range of 10%–15%. Despite a 35% decline in capital expenditures (CAPEX) over the study period, financing costs increased from 47% of total project costs in 2014 to 62% in 2022, offsetting cost reductions and limiting LCOE decreases. Our novel intra-annual (monthly) WACC captures short-term macrofinancial fluctuations. These findings highlight the critical role of macro-financial stability and access to competitive domestic debt for auctioned utility-scale PV in Brazil and capital-market design in other emerging markets.