Brazil continues to face the prospect of a serious power shortage. Peter Wertheim and Dayse Abrantes explain what action is the country taking to avoid this, and what opportunities are there for foreign investment.
Brazil’s power sector has seen a continued recovery in demand over the last two years but along with it has been some extraordinary tariff increases which analysts say is threatening competitiveness.
The country has a total installed generation capacity of 88.7 GW. Over 40 per cent of this is controlled by the federal government’s holding company Eletrobras (Centrais Elétricas Brasileiras), approximately 35 per cent by state-owned energy companies, while the remaining 25 per cent has been privatized.
The National Operator of the Electric System’s (ONS) figures for last December’s energy consumption showed 48 398 average MW compared to 48 301 average MW in November – a 0.2 per cent sequential growth. In a year-to-date comparison, the 3.9 per cent growth by December points to a solid recovery of Brazilian energy consumption.
The average cost of energy supplied to Brazil’s industrial park rose by 151.2 per cent (from $38.22 to $96.01 per MWh) in the last five years, while the tax load for the energy sector increased by 167 per cent, according to the Brazilian Association of Large Industrial Power Consumers (Abrace).
When compared to competing countries, the average price of energy in Brazil ranks second after Germany, according to estimates by Abrace.
The source of Brazil’s electricity production for 2005 as published by the Ministry of Mines and Energy
The downside of high tariff costs is a decrease in the country’s competitiveness. It is scaring away investment in some sectors of the economy, warns Paulo Mayon, president of the National Association of Energy Consumers (Anace).
On the other hand, first semester 2006 results from 30 power companies listed in Bovespa (the São Paulo stock exchange) posted a record value for the period: total net profits of $2.38 billion. However, for Adilson Primo, CEO of Siemens do Brasil and vice-president of the Brazilian Association of Infrastructure and Basic Industry (Abdib), the period 2007-2009 will be critical. He believes urgent measures must be taken to avoid another power outage like that of 2001.
Primo points to 22 generation projects frozen through lack of resources, slow-paced environmental licenses, delays in projects due next year in the Amazon region and indecision over construction of large extensions of transmission lines, as alarming signals.
When considering an average 3.7 per cent annual growth rate for the Brazilian economy, it is estimated that its power generation sector needs annual investments of $4.7 billion to avoid shortages. Some forecasts call for investments of $82 billion through to 2020 just to keep supply and demand in balance. The consensus is that Brazil will have to rely on the private sector to achieve this goal.
Not all doom and gloom
A 2006 study by the consulting firm Economática compared the performance of Bovespa-listed power companies with the results obtained during the same period by 236 open capital companies, representing all sectors of the economy, but excluding banks and Petrobras, the national oil company.
Comparing financial data from all these companies Economática’s president Fernando Exel was optimistic: “Power is a very healthy sector, with results far superior than several other sectors of the economy.”
The report shows that power companies’ profits were 8.5 per cent higher than the $2.19 billion result from the first semester of 2005. By comparison, total profits of first semester 2006 from the 236 companies showed a negative variation of 3 per cent, down to $11.32 billion from the $11.74 billion profited during the first half of 2005.
Exel added that this occurred over a very high base because during 2005 power companies trading on Bovespa multiplied gains by six-fold to $2.10 billion in the first semester, compared to $338.35 million for the same period in 2004.
In 2002, the sector faced really tough times. The results of power companies listed in Bovespa showed a loss of $2.61 billion, worse eventhan losses of $980 million madeduring the power outage year of 2001. Electricity rationing, combined with dollar appreciation, boomed foreign debt burdens at that time.
The crisis faded away after the sector started receiving resources from the National Economic Development and Social Bank (BNDES). Since then, power companies have changed the profile of their debts, becoming less exposed to exchange fluctuation.
According to Fabiana D’Atri, analyst for Tendências Consultoria, “Our analyses show that the risk of a new blackout is low, especially in the short run. If we look some years ahead (2010-2011) the balance between supply and demand for energy is more straight.”
Tendências forecasts that Brazil will pay higher prices for energy in the coming years. However, starting in 2009 there is no guaranteed expansion of energy production.
The government tries to meet different interests with at least two auctions of new energy per year. One for energy to be delivered in five years (A-5) as occurred last October, with energy for 2011, and another to adjust the part of the demand that was not met in previous auctions (A-3) as happened in June, when the auction negotiated energy for 2009.
The study observed that the closer the date to the delivery date, the more expensive the energy becomes, and therefore A-5 auctions tend to register lower prices. Current prices are considered low by the private sector because the government is setting price limits. The goal is to assure low prices for consumers, competitive prices to guarantee return of generators’ investments and to attract capital for the sector.
Nonetheless of the 39 projects available during last October’s auction, only 14 were negotiated. The generators and distributors traded 569 MW of hydrolelectric energy at an average price of $56.09/MWh, in addition to the 535 MW of thermoelectric energy at $64.05/MWh.
The biggest purchasers of electric energy at the auction were Eletropaulo Metropolitana Eletricidade de São Paulo SA (31 million MWh); Copel, from Parana state (22 million MWh) and Rio de Janeiro state’s distributor Light (19 million MWh).
Suez Energy, which operates Tractebel Energia SA in Brazil, the largest private power generator, with an eight per cent market share, sold 148 average MW from the São Salvador plant in the northern state of Tocantins during last October’s auction.
The sale will allow Suez to restart investments in Brazil, said Suez Energy president in Brazil, Mauricio Bähr. “With this sales contract secured, we are in the final stages of contracting financing from BNDES bank for 70 per cent of the project budgeted at $372.89 to $419.44 million. The construction should last three years and the energy is contracted to start in 2011.” Suez Energy also announced it will soon start the construction of the l087 MW Estreito hydroelectric plant in northern Brazil, along with partners.
Mines and Energy Minister Silas Rondeau said after the October auction that sales guaranteeing 99.6 per cent of projected electric energy demand up to 2011 had been contracted.
But specialists remain worried because the volume of energy assured through auction during 2006 will not match demand expectation from 2011 onwards. Also, power generation has been growing modestly since 2005 because of an energy surplus, postponed power auctions, changes in the Mines and Energy Ministry, and a complex and slow environmental permit process.
Recently, the Brazilian Environment and Renewable Natural Resources Institute (Ibama) released data showing that during 2006 the licensing pace increased by 17 per cent, to 278 licenses from 237 granted in 2005. For the energy sector, including installation of hydroelectric, nuclear and thermal plants, only 85 licenses were issued during 2006.
According to the government’s plan, estimated expansion of generation capacity should be an average of 2 550 MW/year in the scenario of 5.1 per cent average GDP growth until 2015. Tendências’ forecast is more conservative than the government’s, which forecasts an average yearly GDP growth of 4.4 per cent between 2006 and 2009. Tendências expects a 3.25 per cent rate for the same period, which would imply the need for an expansion of nearly 2 300 MW/year.
Currently Brazil has 18 hydropower plants under construction, but many face environmental delays. When ready, these plants are expected to generate 4 226 MW. An additional 25 hydro plants with a generating capacity of 5 909 MW are at permit stage.
As a result of the Mines and Energy Ministry’s “Proinfa” renewable energy programme, launched in 2004, investments in renewable energy are expected to reach $2.5 billion during 2005-2007. Proinfa provides incentives such as a 20-year power purchase contract with Eletrobrás, and below-market rates for financing from BNDES for wind, biomass and small-scale hydroelectric projects. Eletrobrás will sign contracts to buy 1 100 MW from wind, biomass and small hydros.
According to civilian chief of staff Dilma Rousseff, to avoid another blackout, the government plans to invest $34.81 billion in power generation and $7.69 billion in further construction of transmission lines. Eletrobras participates in these projects through its subsidiaries Chesf, Eletrosul, Furnas and Eletronorte, as well as the private companies Alusa and Schahim.
USA investment in the sector is concentrated in power distribution and generation. El Paso, Duke and AES compete with Iberdrola (Spanish), EDF (French) and EDP (Portuguese). The locally established equipment suppliers are mostly European and Japanese.