Clean Electric Energy The Brazilian Experience

Clean Electric Energy The Brazilian Experience Mario Veiga Pereiramario@psr-inc.com 2006 Energy Week

Outline • Brazilian power system overview • Clean electricity programs • Proinfa • Renewables for isolated systems • Bioelectricity • Integrated environmental assessment for hydro • Conclusions

The Brazilian power system • Surface area: 8.5 million km2 • ( continental USA + 1/2 Alaska) • 180 million inhabitants • Inst.capacity (2004): 90,000 MW • Production: 44,000 ave. MW •  55% of South America • Peak Demand: 57,000 MW • - comparable to UK or Italy

Electricity production sources • Thermal plants (15%): natural gas (combined and simple cycle), coal, heavy fuel, diesel and nuclear • Hydro (85%): large plants in cascade, in different river basins • Hydro plants are jointly operated, to take advantage of hydrological diversity (export from “wet” to “dry” basins) Itaipu plant: 14 thousand MW

Need for additional generation • Projected annual load growth: 5%  3,200 ave. MW / year  US$ 6 billion/year in investments

Need for additional generation • Projected annual load growth: 5%  3,200 ave. MW / year  US$ 6 billion/year in investments Brazil’s challenge: to promoteclean and efficient energy growth

Proinfa • Mandatory contracting of 3,300 MW of renewable energy: 1/3 wind; 1/3 small hydro; 1/3 biomass • Law approved in 2002 • First units start operation in 2006 • All units installed by 2008

Proinfa assessment • “Classical” subsidy program • Economic rationale was criticized (e.g. why 1/3 for each source if wind is more expensive than biomass?) • Lack of economic signals for efficiency and technological improvement

Brazil’s isolated systems • Several cities in the Amazon region are not connected to the main transmission grid (long distances, small load) • Those cities are supplied by diesel and fuel oil generators; the cost is paid by all electricity consumers (social subsidy) • Yearly subsidy cost exceeds US$ 2 billion; no incentives for efficient generation; severe emission

Renewables for isolated systems • 75% of the investment in new renewable generation or transmission in isolated systems can be compensated with basis on the avoided subsidy costs • Law/regulation approved in 2002/2005 • Projects approved so far: • 12 small hydro • 3 biomass • 10 transmission lines

Isolated/Renewables program assessment • Smarter regulation; clear economic advantage for installing renewables • Ongoing plans to improve the program: create auctions for the subsidies (more efficiency and incentives for technological improvements)

sugarcane mecanical harvest crush room biomass to burn steam boillers steam turbines & generator control room 34 MW Current cogen production Installed capacity: 2,800 MW(600 MW commercialized w/ discos)

Window of opportunity for cogen • Brazil will expand by 50% its sugarcane production area in the next five years • Cogen cost is the additional investment in larger/more efficient boilers • Additional gains in transmission investment and losses new projects major electricity load centers

The bioelectricity program • Joint initiative of sugarcane producers, cogen associations and equipment manufacturers • Objectives • Install from 3 to 5 thousand MW of biomass cogen in the next five years • 100% private investment • Compete with other sources on the same footing

Current status of bioelectricity • About 200 MW of biomass cogen were contracted in the Dec 2005 auction promoted by discos • 25-year contracts, delivery starts in 2008/09/10 • biomass competed against all other sources, such as hydro, coal and natural gas • 80 new ethanol/sugar plants, corresponding to 2,400 MW of new capacity may compete in the next auction (May/June 2006) • Special financing conditions will be offered by Brazil’s Development Bank (BNDES) if higher pressure boilers are used

Next step: leverage of investment • The revenue stream from long-term electricity contracts will be used as collateral for private financing of additional ethanol/sugar plant capacity …which in turn will produce more electricity • Work with the World Bank and with the Kyoto protocol agencies to create “umbrella” qualifying of bioelectricity plans for carbon credits (additional revenue streams to leverage investment in clean energy)

Bioelectricity program assessment • Win/win situation for consumers and environment • Relies on private sector and competition • Government has an essential role as a regulator and promoter of efficiency and technological advances

Brazil’s hydroelectric potential • Brazil uses less than 30% of its hydroelectric power potential; 170 thousand MW can still be economically developed • Current situation: deadlock between developers and environmental agencies • only 500 MW of new hydro projects were licensed in time for the energy auction, after two years of direct effort by the Ministry of Energy and other officials • it is easier to license diesel and fuel oil plants than hydro

Integrated environmental assessment • Solution: integrate environmental and economic aspects to the inventory and planning of hydro plants, looking at the whole basin instead of project-by-project • The new methodology takes into account impacts on biodiversity, water quality, sustainable development, social impact etc.

Parnaíba Tapajós Tocantins e Formadores do Tocantins Araguaia Paranaíba Tibagi Doce Paraíba do Sul Iguaçu Uruguai Ten basins, totaling more than 10 thousand MW, are being inventoried with the integrated assessment scheme Hydropower options resulting from those studies should become available again by 2008 (start operation in 2013)

Conclusions (1/2) • The development of both clean and efficient electricity is critical for emerging countries, where load growth is fast and investment resources are scarce • Governments can be “smart” regulators, promoting competition and technological development; mandatory construction of “renewables” may not be the most efficient path

Conclusions (2/2) • Brazil’s bioelectricity program is one example of a win/win situation for consumers and the environment • Carbon credits will be crucial for extending the “virtuous circle” of bioelectricity to poorer regions in the country • Energy developers and environmentalists are not natural enemies - but they must work hard at believing that!

Clean Electric Energy The Brazilian Experience