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Still facing ghosts of the past

Although in need of power, Brazil is having to face hurdles left by past administrations. The country’s new adminsitration is now beginning the task of bringing in investment in the sector in order to avoid a repeat of the power rations of 2001.

Peter Howard Wertheim and Dayse Abrantes
Rio de Janeiro, Brazil

The government of President Luiz Inacio Lula da Silva (Lula) of the Workers Party, that took office on Jan.1, 2003, created a taskforce to suggest solutions to avoid a repeat of Brazil’s dramatic electricity crisis that led to the rationing programme decreed by the previous administration in June 2001.

Former President Fernando Henrique Cardoso (1994-2002) claimed that the rationing was needed because Brazil was facing its worst drought in decades. This affected the country’s power generation capacity, which is 95 per cent dependent on hydroelectric plants. The rationing lasted until March 2002.

Headed by the mines and energy ministry, President Lula’s taskforce concluded that the Cardoso administration failed to notice that, irrespective of annual rainfall, it was necessary to source new energy and satisfy increased expectations by a population that had just repressed its energy needs. Another taskforce conclusion was that the rationing programme (20 per cent) for individuals and industries was caused by under investment in power infrastructure.

Private praise

The Mines and Energy Minister Dilma Rousseff, an economist and former energy secretary of the southern Rio Grande do Sul state, despite being a long-time member of the leftist Workers Party, was praised by electric power executives for emergency investments she directed in Rio Grande do Sul state, which avoided a blackout during the 2001 rationing of electricity. Minister Rousseff was also appointed by President Lula to chair the board of directors of Eletrobras and of Petrobras, the state-owned oil giant.

“She has a deep knowledge of the sector and acts as an executive,” said Wilson Ferreira Jr. president of Companhia Paulista de Foràƒ§a e Luz (CPFL), a power distributing company in Sàƒ£o Paulo, who worked with her in Rio Grande do Sul state.

“We feel the choice of Rousseff as minister was correct, and we are optimistic,” said Flavio Neiva, president of the Brazilian association of large electric power generators (Abrage).

Minister Rousseff said that to tackle the under investment problem, the government will launch tenders for licenses to build new power lines this year with the target to connect all regions of the country.

“Federal energy utilities Chesf, Eletronorte and Furnas will be allowed to associate themselves with private companies, through tenders, but preferably as minority shareholders,” said the minister. The first tender will be for installing power transmission lines totaling around 1637 km in several regions of the country.

Minister Rousseff said that one of her priorities is to promote the integration of the northern region (the poorest in Brazil) into the nation’s power grid. She added that boosting transmission capacity and integration in the north would pave the way for power produced in that region to be taken to other parts of Brazil: “One region that is not integrated into the system is the Amazon Basin. We will look into it very carefully.

“There are around 11 million Brazilians (of a total population of 170 million) which have no access to electricity, due to insufficient power infrastructure,” said Rousseff.

The minister added that the government is studying ways of increasing the participation of alternative energy sources such as wind, biomass and photovoltaic in the country’s energy matrix.

The restructuring of MAE

In addition, the task force concluded that part of the energy crisis is regulatory in nature and concerns the buying and selling of electricity on the wholesale energy market (MAE).

MAE transactions have been severely disrupted since September 2002 due to legal injunctions, changing regulations and adverse market conditions. Spot prices are currently down at around $1.13/MWh, after peaking at about $184.6/MWh during periods of shortage in 2001 and 2002. These price drops virtually paralyzed investments by power generators.

Minister Rousseff compared MAE to a “casino”, i.e. highly speculative, and she is working to replace it with a pool with a single purchaser to buy and sell energy, with each company having a share in this pool.

Executives from the power sector said that they fear that this pool would make it impractical to undertake any bilateral negotiation and create a monopoly of about $17.04 billion. The executives point to a World Bank study undertaken in Hungary, Indonesia, Pakistan and Thailand where similar projects were implemented and failed. The title of the bank’s study is: “The Model of the Single Purchaser”.

Defending the creation of the pool, the minister says it would reduce tariffs, which would be composed by power generators such as Furnas, that would sell energy in blocks to the distributors.

After the electricity rationing ended, power consumption started to expand again and the government forecasts that in 2003 consumption demand will surpass year 2000 levels which averaged 41 003 MW.

Separately, Brazilian power trading company Duke Trading is registering companies for a private power auction to settle surplus trades carried out in January, as an alternative to using the MAE, said general manager Jose Amorim of the Duke Energy market operations department.

Duke Trading is acting as an intermediary between buyers and sellers of surplus power that are not accounted for under existing bilateral contracts, said Amorim, adding that any power that is not sold at auctions will then have to be settled through MAE.

Consumption expands

Compared to 2001, electric power consumption in Brazil rose between 2.4 per cent and 2.8 per cent in 2002, reaching between 290 000 GW and 291 000 GW said Luiz Pinguelli Rosa, president of Eletrobras, the government-controlled utilities holding.

The 291 000 GW figure represents a return to 1999 consumption levels. The years 2000 and 2001 showed declining consumption because of the rationing programme plus a series of rate hikes.

According to Eletrobras, when all the 2002 numbers are tabulated, they will show a rise in industrial consumption but will also show declines in residential and commercial consumption levels.

According to the mines and energy ministry Brazil has 66 hydroelectric plants with installed capacity above 100 MW. A total of 1207 operating plants are generating 82 319.447 kW. During 2001, hydro generation monthly average reached 33 413 MW while the average thermal generation reached 2222 MW/month and nuclear generation, 1629 MW.

“Brazil’s energy balance clearly characterizes the country as being much like a thirsty nomad that reaches an oasis of economic stability after having erratically marched through a desert of hyper-inflation and recession (before the Cardoso administration). The wanderer quenches his thirst but is now used to normal water intake. Brazil has equally depleted its energy reserves to satisfy its unleashed, formerly repressed demand, after economic stabilization. But the new comfort level of its citizens and companies has also brought the country to new levels of energy use that will have to be sustained and increased throughout the years to come,” said Jean-Paul Prates an international energy consultant and executive-director of the Expetro Group in Rio de Janeiro.

Financial woes

The government’s taskforce is also concerned about the financial health of Brazilian utilities, which are highly indebted. “The situation of utilities is much worse than we thought,” said Pinguelli Rosa, head of Eletrobras.

According to analysts, the National Economic and Social Development Bank (BNDES), which financed the privatization of Brazilian power companies in the late 1990s, will play a key role in bailing out some of the troubled firms.

BNDES’ president Carlos Lessa said: “big companies that are in trouble because of bad management cannot be allowed to fail.” Lessa added that such companies should be treated in the BNDES’s ‘hospital’ and cleaned up.

Among prospective patients for the BNDES’s hospital are Eletropaulo and Light, the power distributors in Sàƒ£o Paulo and Rio de Janeiro.

Like other utilities in the country, Eletropaulo and Light suffer from a demand slide and were hit by the sharp depreciation of Brazil’s currency during 2002, which made US dollar loans more difficult to repay.


Brazil’s Mines and Energy Minister, Dilma Rousseff
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In serious financial difficulties, Rio de Janeiro’s utility Light plans to slash $28.4 million in costs this year, reported a Light spokesperson. The move is part of a broader plan to restructure and downsize the company, thus reducing its dependency on capital injections from àƒâ€°lectricité de France (EDF), its controller.

Light has been in the red since 1999. Last year, after a $1 billion bailout from EDF, Light resorted to headquarters again to avert another insolvency threat.

It is not just the state utilities that are in financial difficulty. AES took loans from the BNDES in 1998 to buy Eletropaulo Metropolitana, Latin America’s largest electricity distributor, with 5 million clients.

Apart from the $85 million in arrears, AES Elpa faces an imminent $500 million debt installment. Part of it is due in April 2003 and another portion in October, totaling $1.2 billion, according to market analysts.

In the loan contract, AES Elpa gave Eletropaulo Metropolitana’s stock as guarantee to take the loan. In practice, defaulting means that control of the utility could be shifted to BNDES.

Meanwhile, Petrobras is forecasting that it will lose $205 million in 2003 due to low electricity prices. In 2001, at the peak of Brazil’s power crisis, the former government used Petrobras to finance the construction of new thermoelectric plants.

Most of the planned investments were suspended after the end of rationing in March 2002, but the company still has financial obligations with some plants. Petrobras sources told PEi that the company expects to suffer from the electricity sector losses (caused by the rationing) for the next two years.

Petrobras is looking to divest its 1000 MW in 11 virtually new thermal power plants in Brazil because of the economic and regulatory turmoil coupled with weak power prices. The plants would have a total capacity of 3519 MW.

More investment

The government is mulling the construction of 100 new hydroelectric plants to go on stream over the next few years, but that may not prevent the risk of electricity shortages in Brazil. According to the analysts, 90 per cent of the new plants lack water storage systems, which means that a drought could compromise power supplies in Brazil yet again.


Pinguelli Rosa, president of Eletrobras and internationally known physicist
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The building of new plants is based on governmental forecasts that the economy will expand at the rate of 4.5 per cent per year in the next few years, compared to less than two per cent last year.

The Inter-American Development Bank (IDB) and Iberdrola group’s Guaraniana Company closed a financing contract for the 520 MW Termopernambuco, a thermoelectric power project that will be inaugurated this year in Pernambuco state.

The total investment will be approximately $400 million, with $42 million coming from the IDB and the balance from other banks, including BNDES.

According to IDB executive Roberto Velutini, this is the first private thermal initiative to receive resources from the bank. The unit should be ready to start operating in December 2003.

Neighbourly implications

The Bolivian government is concerned about the announcement made by Eletrobras, saying they would prioritize hydroelectric power in Brazil. Bolivia’s Hydrocarbons Minister Fernando Illanes said his country intends to negotiate with Brazil’s government, urging it to expand thermal generation.

Bolivia exports around 30 million m3/day of natural gas to Brazil through the Bolivia-Brazil gas pipeline and Eletrobras’ decision could decrease this volume.

Pinguelli Rosa threw out the possibility of increasing the participation of thermoelectric plants in Brazil’s energy matrix and said: “It is irrational to consider this could happen in a hydroelectric country.” He also announced a change in Brazilian energy policies and said that the price of gas (now paid in US dollars to Bolivia) would be renegotiated with Petrobras.

Future scenarios

Eneas Aguiar, an electricity engineer and senior consultant of Macroplan, a prominent consultancy based in Brasilia, Brazil’s capital, specialized in creating power scenarios, noted: “Marcoplan forecasts that investments ranging from $35 billion to $78 billion would be required solely for the construction of projected hydroelectric plants. These values represent average annual investments ranging from $2.69 billion to $5.96 billion.

Marcroplan prepared four scenarios for the period 1999-2010: scenario A ” moderate competition, by taking into consideration a moderate evolution of the gas and alcohol sources plus a small reduction of oil participation in Brazil’s energy matrix; scenario B ” modernization and fierce competition, a strong expansion of natural gas usage coupled with a minimal increase in the use of alcohol plus a mild reduction in the use of oil; scenario C ” indigenous growth, with moderate expansion of gas usage, with substantial increase in the use of hydrated alcohol plus a slightly accentuated reduction in the use of oil; and scenario D ” stagnation, that is, small participation of gas and hydrated alcohol in the energy matrix plus maintenance of the levels of oil utilization.

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For Aguiar, if the private sector provides at least one third of the required investments, it is possible to reduce forecasted investment in scenario C shown in Table 1.


Brazilian government may reassume control of AES subsidiary

Brazil’s news agency Folha, reported that the US energy giant AES Corp. admitted that one of its Brazilian subsidiaries failed to pay $330 million in debt it owes to Brazil’s BNDES bank, blaming the default on a temporary lack of funding.

The subsidiary, AES Transgas, previously said it wanted to delay the payment, as well as $6 million it owes minority shareholders, until April 15. The payment was due at the end of February. However, the BNDES has decided not to accept the offer to extend the payment. AES subsidiaries, AES Elpa and AES Transgas owe the BNDES $1.2 billion. The money was used to finance the acquisition of electricity distributor Eletropaulo when it was privatized five years ago and for the subsequent purchase of its outstanding shares.

Sources at the BNDES said that AES had offered to give up a 50 per cent stake in Eletropaulo and other assets in order to settle the debt. Eletropaulo’s debt problems have raised the possibility that the BNDES may reassume control of Eletropaulo, Latin America’s largest electricity distributing company.

Another unit, AES Elpa, defaulted on an $85 million payment to the state bank earlier this year. Local press reports say that the US associate trade secretary William Lash asked the Brazilian government not to foreclose on the AES subsidiaries, in other words he asked that the government does not re-nationalize Eletropaulo.

The Brazilian government is in a difficult situation because the collateral granted by AES, when it received the loans from the BNDES bank, are Eletropaulo’s common and preferred shares which have slid by about 50 per cent in value since the loans were granted in 1998/2000.

Analysts estimate if Eletropaulo goes back to the state, the government will lose around $1 billion.

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