Brazil: Saving for a rainy day

Distributed generation could mitigate Brazil’s energy concerns Saving for a rainy day

Distributed generation, primarily based on solar PV, is garnering interest in Brazil as the ideal way to diversify the energy mix Credit: Greenpeace

A long-running drought impacting Brazil’s hydroelectric assets has caused concerns over the nation’s energy security, leading to growing interest in distributed generation. But policies to help get the sector off the ground are not yet in place, finds Ivan Castano.

It is no secret that Brazil is facing an energy crisis as a severe drought has thrown its largely hydro-thermal electricity network into great distress and soaring electricity demand, expected to worsen with the imminent FIFA World Cup, fuels calls for power rationing.

As water levels drop to dangerously low levels in key reservoirs, observers say the government must quickly find short and long-term solutions to boost supply at a time of rising blackouts fueled by a scorching summer and growing electricity demand in Latin America’s largest economy.

As the government mulls ways to reduce the nation’s hydropower dependence, distributed power generation, mainly stemming from solar photovoltaic (PV) technology, is coming to the fore as the ideal way to diversify the matrix, in combination with larger-scale renewables growth and energy efficiency schemes.

Generation at the point of consumption, also known as distributed or decentralized energy, remains at an embryonic phase. However, recent government policies enabling small businesses and consumers to lower their electricity bill by using the technology, coupled with future tax breaks, is expected to bolster the sector’s growth in the near to medium-term future, observers say.

If all goes well, they predict Brazil could have 2000 MW of distributed generation in five years, up from a paltry 10 MW now. It is not a lot but shows the country is likely to step up efforts to diversify its power matrix at a time when worsening droughts, increasingly blamed on climate change, will continue to burden the hydroelectric system, which accounts for over 70% of supply.

Distributed generation is initially likely to gain traction in Brazil’s solar sector Credit: Greenpeace

‘Distributed energy is just starting in Brazil but we expect it to take off soon,’ says Claudio Sales, director of Instituto Acende, a energy think-tank.

Sales adds that solar remains 50% more expensive than conventional power, making it unattractive for consumers. However, this is likely to change soon because the state is likely to deploy smart or net metering incentives for utilities and move to slash sky-high energy taxes.

‘The large-scale introduction of net metering will help leverage consumers’ consumption and make solar power more feasible, bringing a reduction in solar panel costs,’ Sales says, adding that once people see the big savings, they will rush to purchase solar PV infrastructure.

‘The taxation system is cruel in Brazil,’ he adds. ‘Almost 50% of electricity is taxed, which is nonsense. If you are a factory or home using 500 kWh per month and 400 kWh of that comes from solar panels, that’s not deductible.’

According to Sales, the government must introduce a more efficient regulatory system or distributed energy’s potential benefits will be null. The tax situation is triggering huge debates in the capital, Brasilia, he adds, largely because state governments have different policies.

That said, the large Sao Paulo and Rio states are favouring a tax reduction which Sales forecasts could come in the next 12 months.

According to observers, distributed energy is expected to initially gain traction in the solar sector, then in wind, though that transition will face big challenges because small-scale costs remain high.

Brazil’s largest wind farms, mainly operating in the northeast and south, are also largely disconnected from the national grid. Small consumers will lead distributed energy’s growth wave because they pay their bill on a per-kWh basis instead of on a wholesale or per-usage basis, meaning their savings will be bigger.

Ricardo Baitelo, Greenpeace’s Brazil director, agrees lower energy taxes are urgently needed. However, import tariffs for PV panels and inverters, currently at around 30%, must also come down to cut solar generation costs.

If the government slashes the duties, Baitelo estimates solar generation prices could fall by as much as 40% in the next two to three years. Meanwhile, panel costs have declined 75% since 2006.

Rafael Kelman, director of Brazilian power industry consultancy PSR, says power tariffs for small enterprises and consumers are high (despite a 2001 reduction), boosting the case for decentralized energy.

Growth hurdles

Though the industry is not facing big technical obstacles, Kelman agrees an aggressive tax regime is a key growth obstacle for the sector. Taxes apart, he claims utilities are also hindering the market’s growth by making it difficult for consumers to install solar systems in their homes.

‘We are seeing some market abuses from utilities concerned with solar growth,’ Kelman points out, adding that many argue businesses or homes ‘don’t have the right connections’ or ‘that net meters must obtain a specific certificate’ before they can grant a project. Engineers and installers to set up the systems are also scarce, Kelman adds while small consumer credit lines are also needed.

He notes that the Brazilian electricity regulatory agency Aneel will intervene soon to force utilities to approve projects. ‘Eventually they are going to say enough is enough and establish some market rules,’ Kelman says. ‘The federal government is supporting solar power and wants to make this [the transition to solar distribution] simple.’

According to Kelman, regulations to help utilities recover installation and technical losses linked to solar adoption are crucial to help flesh out the decentralized energy sector.

‘Business and residential customers pay a kWh tariff but there is no fixed component to help utilities recover installation costs which is available for high-voltage ones,’ Kelman explains. ‘If people start to install solar panels, their energy usage is going to decline so utilities will start raising prices for non-solar consumers to compensate. This is going to create problems. There is a lot of discussion in the government about how to resolve this right now.’

The 2000 MW estimate is on the money, Kelman says. While rooftop projects are scarce so far, he expects them to mushroom in the near future.

Jonathan Kendall, president of Rio Energy Consulting and TSS, says Brazil must deepen its involvement in distributed energy or risk a bleak supply scenario in the future.

‘We have a big drought and power shortages which are not going to fly much longer,’ Kendall warns. ‘The government needs to get more involved in distributed energy and look at it as a holistic opportunity.’

According to Kendall, the government must introduce a firm plan and regulatory framework to take small-scale and sustainable energy to all corners of the country, but mainly to the populous states of Sao Paulo and Rio de Janeiro.

Also, ‘we need stronger policies to bring cutting-edge technology for heat-based power and wind generation.’ According to Kendall, Brazil has a strong wind power industry, thriving mainly in the windy northeast. Yet a dearth of transmission infrastructure is scuppering distributed wind’s development.

There is also a big opportunity for the state to help transform Brazil into a supplier of solar and distributed-wind generation technology.

‘Brazil has the opportunity to become a global leader in distributed generation technology,’ Kendall says. ‘Every day, I get calls from companies who want to sell new solar and wind technology here.’

PSR’s Kelman agrees. With the right institutional support, Brazil could begin assembling its own solar panels from imported components and become a significant player in silicon purification. According to Kelman, the country can build a fully-integrated industry, from raw material to final product, but there would have to be big support from the government, as well as from the BNDES development bank to make it happen.

Import tariffs and decentralized energy demand would have to gain traction first, however.

‘There is no real demand yet, not enough regulations and products [solar panels or small-scale wind] are still too expensive,’ Kelman says. ‘But this could change in five years.’

Kelman says the micro-wind industry is still in diapers. ‘There is only one micro-wind turbine manufacturer and its products are very expensive,’ he notes. ‘This is still very much a niche space.’

Brazil must release a distributed-generation target as part of so-far sluggish plans to develop solar power, Greenpeace’s Baitelo says, adding that a large-scale goal is also missing.

The government intends to expand power generation by 80% to 200,000 MW by 2022, he says. Half of that will come from new hydro facilities, 35% from mainly wind and biomass and 15% from natural gas-fired thermal facilities. Hydro output, to some experts’ vexation, is poised to increase to 90,000 MW from around 40,000 MW currently. Brasilia is forecast to spend at least US$230 billion in the process.

‘Basically, there is no plan for solar but the government has said it intends to support the sector,’ Baitelo says. ‘We need solar to be in the plan,’ which is reviewed every year.

Currently, there are 2 million PV systems in Brazil, accounting for around 10 MW of generation. Depending on future policies, Baitelo hopes that will increase to 2000 MW by 2019.

Power rationing

The government’s focus on hydro output continues to puzzle experts, who argue that Brazil’s longer and increasingly intense droughts will likely exacerbate with global warming. Many have slammed the government, claiming it continues to sit on its hands while the country’s energy woes intensify.

According to Instituto Acende’s Sales, the administration is jeopardising supply though flawed regulation that is creating a ‘perfect storm with no storm,’ referring to the increasing possibility that water shortages will force the state to ration energy as the World Cup and record-high summer temperatures bolster demand.

There are 2 million PV systems in Brazil, which equates to 10 MW of generation capacity Credit: Greenpeace

‘The government is not being transparent about the supply difficulties Brazil is facing,’ Sales charges. ‘They are running a big risk by not addressing the drama of this situation right now. But the situation is crucial and very real, and much worse than desirable.’

According to Sales, the eye of the hurricane is at the South East/Central West subsystem that accounts for 70% of Brazil’s reservoirs. Because of the severe drought, water levels have dropped to 37.8%, which electricity grid operator ONS has declared should be at least 43% by the end of April for the country to avoid supply disruptions. ONS’s statement comes as the system’s entire (including emergency) thermal and renewables capacity is currently being used to save water.

‘Two things need to happen to ensure we have a comfortable year: rain, which we obviously can’t control, or some sort of power rationing,’ Sales points out, adding that there is a 40% chance rationing will take place.

If it takes that route, the state would be wise to do so now rather than later, Sales says.

‘If we have supply problems in November or December, a cut would have to be much stronger, which would have a greater damaging effect on Brazil’s GDP,’ Sales says.

Like other observers, he calls the government ‘irresponsible’ for failing to address the situation. ‘They are acting under the assumption that there is a 60% probability that rationing won’t be needed but it is irresponsible, for a country that wants to attract investment, to live under such a risky scenario.’

Observers say the World Cup, which will kick off in June, is unlikely to be affected by stadium power shortages as these will have diesel-powered back-up systems. Similar systems would theoretically help avert shortages during the 2016 Olympics, but observers say the government is simply gambling too much.

Government slammed

Baitelo says Brazil’s droughts have worsened and are unlikely to improve in the face of climate change.

‘They are becoming more frequent,’ he says. ‘We used to have them every five to six years but we’ve now had them for three years in a row and they are not going to get better.’

Meanwhile, the energy ministry insists Brazil enjoys a ‘structural surplus’, boasting an installed power generation capacity of 126.7 GW which far exceeds average demand of 66.8 GW. That said, observers claim that capacity is insufficient to meet its ‘assured energy’ requirements, leaving the country vulnerable to a sudden burst in demand.

To meet growth in an economic boom, Brazil has expanded the grid in recent years with fossil fuels and nuclear power now accounting for 20% of supply, up from 6% in 2000. There have also been efforts to bolster renewables production, with the wind sector now leading Latin America and boasting prices similar to thermal output.

Partly due to a series of highly successful auctions, the sector has flourished to contribute 5.2 GW of generation currently. It is expected to grow by 2 MW a year to a whopping 24.6 GW with a development potential of 300 GW.

Kendall notes, however, that a lack of transmission infrastructure is limiting wind’s growth with many wind parks, unable to connect to the domestic grid, being forced to sell to the local market.

While transmission capacity has increased, Baitelo says it’s not enough to avert an energy crisis (construction of new lines has been fraught with delays, leaving ready plants idle) at a time when one of the hottest summers on record is prompting citizens to crank up air conditioners, ramping up demand to unsustainable levels.

In early February, six million Brazilians were left in the dark after a key north-south interconnection system failed. Analysts are also projecting the risk of brownouts at 20%, above the 5% ONS deems feasible.

Rationing is now ‘the responsible thing to do’, Baitelo says, adding that increasingly unsatisfied voters (which led heavy anti-government protests last summer) are unlikely to put President Dilma Rousseff back in power if she fails to properly handle the energy ticket.

Indeed, Rousseff, who is running for a second term in October, is likely to rush out a few measures to please the population. This could very well include a rationing campaign — though much better managed than in 2001 when similarly parched conditions forced her rival party to launch a botched rationing effort which booted them out of power.

‘Rousseff obviously wants to win and she will do everything she can to bring good news on the energy front,’ Baitelo says.

According to Baitelo, the government may put new renewable projects on the block, mainly solar and biomass, which can be built more quickly than hydropower or fossil fuel-run thermal stations which have utilities up in arms about their high operation cost. Rousseff faces a tricky balance as utilities have called for power tariffs to increase to offset mounting losses from being forced to use thermal generation. At the same time Brazilians, used to lower electricity prices, are likely to balk at an increase.

Baitelo says the best way out is rationing, adding that a successful scheme could save 10% of consumption and 10% of power waste, and could be pursued very quickly. Moreover, Brasilia could introduce new regulations to encourage or even mandate electricity efficiency in public and residential buildings, Baitelo says. It could also roll out a tier-based tariff programme for industrial users.

‘That is now happening in the US where businesses can install PV panels to stay in the cheaper tariff tier and with solar energy becoming more affordable in Brazil, this would be very viable.’

Rationing apart, Kendall insists energy conservation/efficiency is the way forward. ‘It’s the truly low-hanging fruit,’ he notes.

Ivan Castano is a journalist focusing on the energy sector.

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