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Hopes hang on new power model

Investment in Brazil’s electricity sector is being held up by uncertainty over the proposed new energy sector model. But can this new model create the right climate, asks Siàƒ¢n Green.

A recent report from Brazilian infrastructure association Associaàƒ§àƒ£o Brasileira da Infra-estrutura e Indàƒºstrias de Base (Abdib) has indicated that Brazil needs to invest $82.3bn in its electric power sector up to 2020 in order to support economic growth. This is broken down into $68bn for 85 GW of new generating capacity and $14.3bn for transmission and distribution infrastructure.

Abdib’s findings are based on an assumed economic growth rate of three per cent per annum and iterate the fact that a lack of power resources will stunt the country’s economy. Abdib has called on the government to create an environment that will foster this investment.

The need for investment in Brazil’s electricity sector has been clear since the implementation of the electricity rationing programme in 2001. A prolonged period of low rainfall left the country’s hydropower dependent electricity system lacking in supply and all consumers were forced to cut electricity consumption by 20 per cent.

The rationing programme was lifted in early 2002 and a raft of reforms introduced to stimulate investment in power generating capacity ” especially thermal plants. That programme and the country’s thermoelectric priority programme have seen only limited success. However, the new government, recognising the need to prevent electricity shortages in the future, has pledged to reform the regulatory environment.

Thus since the mines and energy minister, Dilma Rousseff, came to office, key energy market players have been taking part in a consultation process to help the government devise a new energy sector model. The announcement and format of the new model is now eagerly anticipated.

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The complexity of devising the new model cannot be underestimated, given the country’s partially-privatized electricity market structure, the increasing importance of natural gas, and the need to reduce hydropower risk and encourage investment and long-term stability. Yet as Abdib points out in its study, damage is being done to the country’s electricity sector ” and its economy ” for as long as these issues go unresolved. Investors and energy market players are growing impatient with the uncertainty surrounding the model.

The government has given no clear date for revealing its plans for the energy sector: initial indications pointed to June as the month for all to be revealed; now September looks more likely. While many companies are keen to take advantage of the opportunities offered by Brazil’s electricity sector, none are willing to make commitments ” or even plans ” until the new energy model is revealed.

In May, Portuguese power company EDP abandoned plans to build two thermal plants in Brazil. It blamed the lack of clarity in the country’s energy sector ” among other things ” as being a key factor in its decision to shelve plans for a $300m, 550 MW project in Sao Paulo state. Belgian company Tractebel recently froze plans to invest $1bn in two hydropower projects until the government produces its new model.

El Paso Energy, one of Brazil’s largest energy investors, has also put investment plans in the country on hold until the energy model is revealed. While keen to strengthen its business operations in the region, the company is focusing on closing outstanding financing on its existing projects, according to Eduardo Karrer, president of El Paso’s Southern Cone business.

El Paso entered the Brazilian energy market eight years ago by investing in the Bolivia-Brazil gas pipeline. The company’s strategy is to create an integrated energy business through the production of natural gas and investment in gas fired power plants. The company was the first independent power producer to operate in Brazil. It now operates over 2000 MW of thermal capacity, including the 900 MW Macaé plant in Rio de Janeiro state ” the first in Brazil to use domestic natural gas.

According to Karrer, natural gas will become an important resource in Brazil as the country seeks to reduce its exposure to hydropower risk. In an interview with PEi, he said that thermal power plants should account for 15-20 per cent of installed capacity, compared with the current level of around six per cent, and that the government needs to build incentives into its new energy policy to achieve this.

Brazil’s current electricity market does not value thermal power plants appropriately, says Karrer, and therefore makes them less attractive to potential developers compared to hydropower projects. Thermal plants are more flexible in terms of where they can be located, and therefore do not necessarily require the construction of long high voltage transmission lines, and do not depend on rainfall or reservoir levels to operate reliably.

In addition, a large number of future hydropower plants will be run of river with limited storage capacity. The country’s hydro risk will therefore rise. “The new energy model needs to recognise the unique characteristics of hydro and thermal plants, as well as the added value that thermal plants bring to this market,” said Karrer.

Early indications are that the government will create an electricity market based on the single buyer model, with a federal agency responsible for buying electricity from generators and selling to distributors. Such a system would be based on long term contracts.

Such a model will help to bring long term stability to the market and will encourage investment, says Karrer. However, the government needs to encourage the development of bilateral contracts as well as a short-term element, such as a spot market. This, says Karrer, will help market players to manage risks and avoid over-contracting.

But even with long-term bankable contracts, investors will still be concerned with over exposure to currency risks, which must be addressed by the new model. As Karrer suggests, the thermoelectric priority programme included a number of measures to help overcome this risk, and so could be a good place to start.

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