Brazil’s power industry has long been dominated by its vast hydro resources, which historically have accounted for over 80% of the country’s generation capacity. With engineering marvels like the massive Itaipú dam and the proposed Belo Monte project, the country is a leader in the development and use of hydroelectricity on a grand scale. But as the 2001 energy crisis proved, dependence on a single source leaves the country vulnerable to severe shortages. Thanks to government programs designed to take advantage of the country’s favorable climate, Brazil is committed to diversifying its energy mix while continuing to maintain a renewable energy focus.
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| Energy demand in Brazil, the fifth-largest country by area, is expected to grow nearly 4% per year. Developers see opportunities for growth in wind and solar as well as the country’s traditional hydro resources. Courtesy: GE |
From an investment perspective, Brazil is an enticing market. The country, with a population of close to 200 million people, is experiencing rapid growth. As the decade unfolds, Brazil will be the focus of the world’s attention during the 2014 World Cup and the 2016 Olympic Games in Rio de Janeiro. Thanks to the dynamic economy and a growing middle class, energy demand is set to grow by nearly 4% per year.
“Brazil is a fast-growing market; the quality of life has to grow, and therefore power generation will be a very important business over the next 20 years,” said José Antunes Sobrinho, president and CEO of Desenvix, a renewables-focused project developer. “What happens if you cannot build large-scale hydro projects on the Amazon River, or if you have trouble with the environment? You must shift to renewables.”
Brazil’s energy portfolio is dominated by hydropower, with natural gas a distant second, accounting for less than 10%, despite the country’s large gas reserves. The strongest growth is expected to come from wind projects, which in 2011 received a record amount of funding from the Brazilian national development bank, BNDES.
Mauricio Tolmasquim is president of Empresa de Pesquisa Energética (EPE), Brazil’s energy research company—an entity under the Ministry of Mines and Energy that aims to provide studies and research to support energy sector planning. According to Tolmasquim, a noted figure in the energy community, Brazil’s generation portfolio will consist of 90% renewable sources in the future, compared with 18% globally. “In 2020 hydroelectric capacity will be at 67%, and alternative sources of energy will increase to 16%, which is nearly double today’s figure,” he explained. “We will see a reduction in hydro and an increase in renewables, with the remainder comprised of thermal power plants.”
The massive 14-GW Itaipú dam is second only to China’s Three Gorges in installed capacity and supplies nearly 20% of the country’s electricity. Three new dams are scheduled to come on stream over the next five years: Santo Antonio, with 3,150 MW; Jirau, with 3,300 MW; and Belo Monte, which is slated to begin construction in early 2012 if environmental conditions are met (Figure 1).
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| 1. Awaiting final approval. Belo Monte powerhouse overview, as designed by Engevix, a Brazilian company that is responsible for “basic and executive design” of the project. Courtesy: Engevix |
However, this dependence on hydropower leaves the country increasingly reliant on a potentially volatile resource. In 2001, a few years of low rainfall left reservoirs with only enough capacity to supply power for a few months, and with limited thermal generation capabilities, the country faced power supply shortages. The government quickly formed a committee of ministers and industry experts who were tasked to develop immediate solutions to the growing challenge.
“The committee decided that each household would have to reduce consumption by 20%, based on the levels of usage from previous years,” said Mario Veiga Pereira, CEO of consultancy company PSR and himself a member of the committee. “This applied to people across the board, from government downwards; we took care not to show favoritism.”
The system of quotas also allowed bonuses for consumption well below average levels and helped the government to avoid rolling blackouts. It also provided the opportunity for large consumers to trade their credits on a secondary market.
“Interestingly, after the rationing, loads never returned to pre-crisis levels; people learned the delights of having an energy efficient system,” continued PSR’s Pereira. “Overnight, we went from having a shortage to having excess capacity. The population realized that they were wasting a lot of energy.”
As a result, within Brazil’s power industry, there is a growing push both from the public and private sector to diversify the country’s energy sources. Blessed with good winds and an abundance of sunlight, conditions are ripe for wind, biomass, and solar projects.
“The renewable potential in Brazil is very high, not only for wind but also for other sources,” said João Carlos de Oliveira Mello, CEO of Andrade & Canellas, a leading Brazilian energy consultancy. “If those nonconventional sources have not been more developed, it is because in Brazil we have an immense capacity of hydro generation.”
The country also has largely untouched gas reserves that, once developed, could ensure a reliable supply. “The production of gas in Brazil in the next 10 years will increase exponentially, and prices should come down as supply becomes higher than demand,” de Oliveira Mello explained. “We expect gas-fired generation to gradually become more and more competitive and progressively develop within the next decade.”
Meeting the energy needs of a booming population and robust economy will be a key challenge for Brazil’s power sector, from generation and transmission and distribution companies to the engineering and contract players in the market.
“Brazil needs nearly 5,000 extra megawatts per year to support our GDP growth over the coming years, so it is a good country to be working in at the moment,” said Eduardo Karrer, CEO of MPX, an integrated resources company that, in addition to developing the country’s first solar plant, operates a number of thermal plants.
“Brazil is a country of renewables,” said Desenvix’s Antunes. “As more people move into the middle class, the power market is a motor behind everything in society.”
Regulatory Framework and Challenges at a Glance
The Brazilian energy sector is organized around five main institutions: the Ministry of Mines and Energy (MME); the Conselho Nacional de Politica Energética (CNPE); the regulatory agency Agência Nacional de Energia Elétrica (ANEEL); the national transmission grid operator Operador Nacional do Sistema Elétrico (ONS); and the Câmara de Comercialização da Energia Elétrica (CCEE), which manages the wholesale power market. Alongside those federal institutions are many bodies charged with management and regulation at a state level.
The MME has responsibility for policy setting in the energy sector, receiving consistent support and expertise from the CNPE. ANEEL, created in 1996 by Law 9427 and linked to the MME, although mainly independent from it, regulates and controls the generation, transmission, and distribution of power in compliance with existing legislation and directives and policies dictated by the central government. ONS is a private entity created in 1998 and monitored by ANEEL that is responsible for the control and coordination of transmission and generation facilities linked to the National Interconnected System (SIN).
In addition, there is a dense network of associations representing different players in the Brazilian energy sector: Associação Brasileira de Geração de Energia Limpa (ABRAGEL), Associação Brasileira das Grandes Empresas de Transmissão de Energia Elétrica (ABRATE), and Associação Brasileira de Distribuidores de Energia Elétrica (ABRADEE) gathering respectively generators, transmitters, and distributors, as well as Associação Brasileira de Concessionárias de Energia Elétrica (ABCE) for concessionaires and the Association of Independent Electrical Energy Producers (APINE) for independent power producers.
These associations play a crucial role as active interlocutors between energy companies and the authorities. Nelson Fonseca Leite, president of ABRADEE, explained the kind of support associations provide: “ABRADEE helps its members to understand the regulatory environment in Brazil, as the distribution sector is highly regulated, so we must interact all the time with regulators to discuss regulation modifications in order for our members to be updated.”
An intricate question within the Brazilian energy market is the fixing of energy prices. The regulated energy tariff is determined every five years in each concession area by ANEEL and is revised annually on the basis of a computational model. Energy tariffs are thus geographically differentiated, taking into account the specific generation, transmission, and market attributes of each concession area. Moreover, in accordance with Law 8.987/1995 approved in 1995, the energy tariff established by ANEEL has to guarantee the economic and financial balance in each concession area. With the approval of Law 10.848/2004, the cost of energy bought by distribution companies from generators is determined through public auctions, thus providing increased transparency as well as improved competition.
Charles Lenzi, president of ABRAGEL, the Brazilian association for small hydro (which recently changed its name to Association for Green Energy Generators to comprise other types of renewable projects), pointed out another variable affecting energy prices: “In Brazil, tax burdens on the electric sector are high; Brazil has some the lowest electrical production costs in the world but some of the highest tariffs on consumers.”
On this matter, José Simões Neto, president of ABCE, added: “Brazil has a long road ahead in order to have a better-resolved tax relation. We have much inefficiency in our tax structure, and this is penalizing the electric power industry.”
One of the main specificities of the Brazilian power sector is that energy auctions are how distribution companies acquire energy to serve their captive consumers. The current auction’s model has been effective since 2004, when Law 10.848/2004 and Decree 5.081/2004 were enacted. The auction’s scheme aims to secure the constant and centrally organized expansion of power facilities while ensuring a fair balance between universal service access and return on investment together with the provision of progressive tariff adjustments. One of the most notorious effects of this particular model is increased competition within the Brazilian power sector, which introduces downward pressure on energy prices, which benefits end users.
Renewal of the Concessions. Today one of the concerns in the Brazilian energy sector is the controversy over the renewal of concessions in 2015. An impressive number of concession contracts were extended for a 20-year period in 1995 and are thus set to expire in 2015. This includes 112 generation units representing 28% of total generation capacity; 37 distribution contracts corresponding to 40% of the regulated market; and nine transmission contracts amounting for 73,000 kilometers (km) of transmission lines, equivalent to 82% of the total grid. According to Law 10.848/2004 for generation concessions and Law 9.074 for distribution and transmission, legislation currently in force does not provide for a second renewal of the concessions; on the contrary, it envisages a return of the concessions to the federal state for a prospective reattribution.
If the actual legislation remains untouched, the government will have to transfer the expiring concessions to other players or implement a bidding process in which companies will compete for new contracts. This possibility is supported by consumers and industrial associations, which forecast that the convocation of new auctions will considerably reduce energy tariffs. Many private investors also back this possibility, as they expect it will bring new investment opportunities.
The alternative would be modifying the legislation in order to let current contract holders extend their contracts for a third concession term. This option is backed by those companies concerned by the renewal, among them, the Brazilian energy giant Eletrobras as well as other relevant players including Companhia Energética de São Paulo (CESP); Companhia Energética de Minas Gerais (CEMIG), the energy company of the State of Minas Gerais; Companhia Paranaense de Energia (COPEL), the energy company of the State of Paraná; and the privately owned transmission company ISA-CTEEP.
De Oliveira Mello of Andrade & Canellas justified support for a renewal of concessions this way: “Today the Brazilian energy sector is in the middle of a large expansion stage, and without the assets from the old concessions, companies won’t be able to support their development plans.”
Between these contending positions is a middle option that would involve renovating the concession’s contracts and lowering energy tariffs in a way that would take into account the individual features of each conceded facility. This would satisfy consumers’ demands without jeopardizing the position of current concession operators.
The debate is as intense as the interests at stake, but there is a point on which every party agrees: Whichever solution is preferred, federal authorities have to make public their final decision as soon as possible if they want to reduce the harmful effects derived from uncertainty.
Luiz Fernando Vianna, president of APINE, illustrated the damaging effects resulting from such uncertainty: “A few years ago, when the government of São Paulo decided to sell CESP, most of CESP’s concessions were close to an end; this discouraged potential buyers, and the government of São Paulo decided not to sell. Now, the state’s government has to wait for the final decision on the concessions before being able to decide on the future of the company. These uncertainties are making the market increasingly nervous. Last year was an election year, and the government did not want to deal with the issue, but this year a decision must come.”
Environmental Licenses. Another hot subject concerns the delivery of environmental licenses. This does not constitute an insubstantial issue in a country known for, and proud of, its biodiversity and its opulence in natural resources. However, in a country that must increase its generation capacity by an average of 5 GW to 6 GW per year, impediments imposed by the granting of environmental licenses are often seen as a threat to the energy industry.
Environmental licenses are delivered by state agencies, if the project is geographically limited to a single state, or by IBAMA (the Brazilian Institute of Environment and Renewable Natural Resources), the federal institution, when it is an interstate venture. PSR’s Veiga explained that his company offers services that help investors with environmental regulations: “PSR is also working on the design of hydro plants, and doing more work in environmental consulting. We have done three river basin assessments in Brazil to determine which are the best combinations of hydro plants. PSR is also involved in environmental auditing; when a transmission line is constructed, we are hired by the investors to ensure that they meet the environmental requirements. We are working on the economical-environmental plan for the state of Bahia, and have helped to plan the water supply for São Paulo State. As the engineering arm of PSR keeps growing, we are contemplating the possibility of creating a spin-off to focus exclusively on environmental engineering.”
The question of environmental licenses especially affects the development of new transmission lines and hydroelectric projects. ABRAGEL’s Lenzi pointed out a paradox in the constraints posed by the delivery of environmental licenses: “It is not always understood that hydro is generally a clean source, and it is today easier to get approval for a thermal power plant than for a hydroelectric facility.”
Indeed, belated issuance of environmental licenses or negative answers often imply turf wars pitting IBAMA and the Ministerio Publico against those bodies working for the development of the Brazilian energy infrastructure: the MME, ANEEL, and EPE.
Many industry players see a need to clarify the prerequisites for acquiring environmental licenses and to simplify and hasten procedures associated with their delivery. Many energy associations, like ABCE, are working with the authorities to make the licensing process more predictable. “We are aiming to end the uncertainty generated by the opaqueness of environmental licenses’ delivery procedures,” ABCE’s Neto said.
Overall, despite some complexities related to the setting of energy tariffs, the delivery of environmental licenses, and the concessions’ renewal, the Brazilian energy regulatory framework has improved significantly, especially with the reforms accomplished after the energy crisis and approval of the new regulatory framework for the electric market in 2004. Today, Brazil is a secure haven for investment, as contracts are respected and regulatory risks are reduced.
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