Economy & Energy
Year IX -No 63:
August - September 2007 
ISSN 1518-2932

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Auctions of New Energy: Vectors of Offer and Demand Crisis or Adjustment 

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New Energy Auction:

Vectors of Crisis or of Adjustment

Berween Supply and Demand^[1]

Nivalde J. de Castro[2]

Daniel Bueno[3]

Abstract

The new power auctions set for July 2007 comprise two auctions of New Energy, in the A-3 (energy supply in 2010) and A-5 (2012) modes. These are the fourth and fifth auctions conducted by the MME since the beginning of the restructuring process of the Brazilian Electric Sector (SEB) in 2003. The use of auctions as a means of ensuring the energy supply expansion with low tariff is one of the fundamental bases of the current model. Data concerning undertaking offers for these next two auctions indicate predominance of non-renewable energy thermo power plants emitting GHE gases and with higher tariffs. The auction profile reflects the problems of an environmental legislation that has not yet been assimilated by society and the delay regarding studies of the hydroelectric potential of hydrological basins. Thus, the auctions are an important mechanism of adjustment between supply and demand in that it permits to incorporate to the energy matrix any type of energy to prevent crises like the "Blackout"

Introduction

Brazil structured an electrical sector with peculiar and unique characteristics as compared to other countries. The main differentiation factor is the predominance of hydroelectricity in its electric energy matrix, ensuring clean, renewable and cheaper energy relative to other energy sources. This feature gives comparative advantages to Brazil in a scenario of global instability and potential energy crisis but at the same time it imposes certain restrictions and attention regarding the dynamics of supply capacity expansion, mainly, among others, the need for higher investments, greater period of maturation, complex environmental studies and, therefore, an intrinsic need for long-term offer planning.

Recently, some studies and articles, such as ENERGY ENTERPRISE COUNCIL (2006), TRANSPARENT ENERGY PROGRAM (2006) and DELFIM NETTO (2007, b) have shown with a certain insistence the possibility of a new supply crisis similar to the "Blackout Crisis" 2001-2002. The central assumption is the strong and consistent growth in electricity demand due to the GDP growth, in order to retake the "time lost" during the Blackout. However, the offer is not growing in the desired and necessary pace, an arithmetic average around 4,000 MW per year.

This study aims at examining the possibility of a supply crisis, not based on statistical models, thereby avoiding probabilities parameters of complex behavior and modeling, particularly the rainfall indexes. The methodology chosen is that of scenarios, more qualitative, which also has its limitations and should be seriously considered by our readers.

The analysis that follows is structured in three parts. It is the study of aggregated data concerning the two auctions of new energy-LEN - scheduled for July 2007, examining the aggregated composition separated by type and energy. In the second part the analysis is focused on the A-3 auction and the third part on the A-5 auction. In both cases we will try in particular to determine the causes and consequences of the composition of the offered undertakings by type of energy source, particularly thermoelectric energy. Finally, it is presented the conclusions that indicate the possibility of overcoming the crisis by adjusting the operation rules regarding the current model of the electricity sector.

1 – New Energy Auctions - aggregated analysis

The Ministry of Mines and Energy prepares for July 2007 two auctions of Energy from New Undertakings. These are the fourth and fifth Auction of New Energy-LEN-made since the consolidation of the restructuring process of the electricity sector that was effected with the definition of the set of decrees signed in July 2004. This new legislation has given form to what can be called, according to CASTRO (2006), Model of Public-Private Strategic Partnership. This new model has as one of its main features the stimulus to the formation of partnerships and / or the division of private and state capital in the expansion process of the installed capacity of the Brazilian Electric System-SEB (see also Correia et al, 2005).

 The two auctions are scheduled in the A-3 and A-5 mode, namely the winners will have to start electric energy production in the years 2010 and 2012, respectively. These auctions are the conclusion of a long and complex planning task that included studies of the river basins potential, of hydroelectric plants, forecasts regarding electricity demand from studies made by the distribution companies and the government itself. The first instance environmental licensing is the last and decisive step in this long process, which ensures the inclusion (or not) of the undertakings in the LEN.

From a set of studies and procedures a total of 106 power plants (hydro and thermo) were authorized by EPE and approved by ANEEL to be auctioned. These power plants total an offer of installed generating capacity equivalent to 16,022 MW for the A-3 (2010) and A-5 (2012) auctions.

For an in-depth analysis of the undertakings put up for auction, it was necessary a cross section of the energy source composition. This information is relevant to the extent that it will indicate the energy vector that will have an impact on the energy matrix and consequently on the value of future tariffs. The results indicate that of a total of 106 plants registered, 61 undertakings use renewable energy sources, while 45 use non-renewable sources for power generation.

According to the EPE, of the 61 renewable energy undertakings listed, 26 projects refer to hydraulic energy, 7 plants use wind power and 28 projects are for biomass.

However, of the non-renewable sources undertakings 32 projects were approved for fuel oil and diesel thermal power plants. The EPE also listed 4 natural gas thermal projects, a low number that reflects limitation of access to natural gas by Petrobrás. Other 3 projects are bi-fuel (natural gas and diesel), 4 projects are coal fired. And two projects refer to coke thermal plants [4].[4]

By comparing data of new undertakings from the perspective of installed generating capacity by type of source, one notes a reversal in relation to the current electric power matrix [5], since only 29.5% of the power plants using renewable energy sources - clean-energy - total 4,722 MW. In contrast, the non-renewable energy has a 70.5% share of the total, with 11,300 MW. All these data are consolidated and presented in Table 1.

Table n.º 1:
New Energy Auction A-3 and A-5 by type of Plants Listed. June 2007 (in MW and %)

Source: GESEL- IE-UFRJ, based on EPE data

What is notable in the supply potential composition is the presence and expressive majority of non-renewable energy to be generated by power plants that use as input diesel, coal, coke and to a lesser extent, natural gas. This predominance of non-renewable energy and more expensive power plants indicate a vector of growth that apparently is a cause for concern in two respects. The first regards environmental issues. These plants will increase the greenhouse effect, in contrast with hydroelectric plants that show significantly lower pollution levels, according to figures presented in a recent study by the European Commission (2007, p. 23) [6]. Accordingly, the predominant basis of hydroelectric energy ensures access to clean and less expensive energy. (See DELFIM NETTO 2007 to). The second aspect is the impact on the tariff. These two issues will be examined later.

Another important analytical cross section regarding the present study is the distribution of undertakings between the A-3 and A-5 auctions, which will be object of analysis in the coming topics. For this purpose, it must be noted that there is a rule adopted by EPE in LEN: namely there is no impediment of an enterprise to be approved in A-3 and A-5 auctions. This rule was adopted because the amount of electrical power demand that will be negotiated in the LEN for the captive market (demand from distribution concessionaires) is only known by EPE. Thus, this procedure is intended to expand the supply of new power plants, seeking greater competitiveness in auctions, that is – low tariffs. Thus, a single plant can be listed in two auctions, and if it does not wins in the A-3 auction, it continues to compete in the A-5 one. Undertakings which have shorter duration for their construction are favored, that is thermoelectric plants and PCH's (small hydroelectric plants), wind power and biomass. For both auctions, 50 plants are listed, totaling 8,834 MW of installed capacity.

2 - The A-3 Auction -energy for 2010

About 91 undertakings were listed for LEN’s A-3 which means a total planned capacity of 12,078 MW to be supplied from 2010 on, as shown in Table No. 2. This amount is equivalent to about 75% of the total shown in Table 1, indicating a high concentration of supply for 2010. Of the 91 undertakings, 54 projects use renewable sources, while the other 37 power plants use non-renewable sources. However, in terms of source type, the renewable one represent only 37.1% of the total power listed by EPE, with 4,486 MW of the total planned capacity. Concerning the projects fueled by non-renewable sources they represent 62.9% of the capacity, namely 7593 MW.

Table nº. 2:
Undertakings Listed for New Energy Auction A-3 by Generation Source . June 2007 (in MW and %)

Source: GESEL- IE-UFRJ, based on EPE data

Three points deserve emphasis in the examination of these data. The first one is that it was expected the largest composition in non-renewable generating plants, non-renewable and more expensive energy, due to the shorter time of start of operation, which favors the thermoelectric undertakings. The offer of 25 hydroelectric power plants with total capacity of 3,028 MW (average of 121 MW) indicates the opportunities for investment in PCH's, not only by the dynamics of auctions (figures for the most competitive MW) and construction time, but also the existence of increased financing capacity via the special BNDES credit lines and better conditions of the Brazilian capital market- debentures and FIDIC. (See BORGES & CASTRO, 2006). This is a recent and promising trend that positively affects the generating capacity expansion of electric power, energy matrix and low tariffs.

The second point is the growth of biomass plants reversing the table presented in Proinfa, which failed to stimulate the renewable energy segment. Now, with the new internal and mainly external conditions regarding ethanol, the prospects for energy generation using biomass are much favorable, and this opens a new vector of supply growth with a more diversified matrix, corroborating the Brazilian differential in terms of renewable sources.

The third point is the share of fuel oil and diesel thermo power plants that is the highest one in the A-3 LEN. This data reflects, in reality and foremost, the lack of alternatives for the generating capacity expansion in the short term, confirming the saying that it is better non renewable and expensive energy than no energy at all.

The problems concerning expansion of electricity supply is due, basically, to two factors:

First, the demand growth, which tends to be accentuated due to the Program for Growth Acceleration PAC (See CASTRO & BRANDÂO, 2007 a).

Secondo, the imbalance determined by the insufficient production and significant industrial demand of natural gas. Here, the solution will only be possible by increasing NG supply from 2009 on through the production of new wells and the introduction of LNG in the Brazilian market. However, this is the critical aspect of the problem, because there is a current shortfall in supply, estimated to be about 4,000 MW, which will have to be met as the production increases in order to meet this repressed demand, according to the agreement reached between Petrobrás and Aneel. [7] .[5]

3 – The -A-5 auction -energy for 2012

In A-5 auction the composition by energy source has the same structure as that of the LEN A-3, as shown in Table 2. Differences are due to the total number of enterprises listed: 65, about 29% lower. This LEN A-5 composition causes concern because renewable energy sources are only 29.7% of the total power but they should be higher, since the deadline for start of operation is more compatible with and appropriate for hydroelectric undertakings.

Another concern relative to the matrix and low tariffs is the significant increase the of the coal thermo power plants share. Besides expanding the non-renewable and expensive energy matrix, it introduces in the energy matrix an element of cost in dollar, which had practically disappeared from the SEB cost structure.

Finally, the decrease of biomass power plants share should not indicate a reversal of trend in that the LEN A-3 are more appropriate for this type of plant, since the construction time and the difficulty of predicting the market behavior of its primary product, namely sugar cane.

Table nº. 3:
Listed for New Energy Auction A-5 by Generation Source.
June 2007 (in MW)

Fonte: Elaboração do GESEL-IE-UFRJ, com dados da EPE

The greatest concern in the composition of the LEN A-5 offer is the low participation of hydro power plants. In the case of an auction to supply energy only in 2012, it was expected a larger participation of this energy source. The data are disappointing and give rise to concern. The cause of this low share of UHE's (hydroelectric power plants) is the environmental legislation, which will be examined in a more systematic way in the next topic.

As a result of the structure presented for the next two LEN, there is a reverse situation in the renewable energy and non-renewable ratio relative to the Brazilian electric power matrix, according to data in Table 4.

Thus, the low offer of hydro power plants in the next two auctions is due to the reduced number of projects with inventories studies and integrated environmental assessment concluded. This problem is an inheritance, a liability, of the Pure Privatization Model.

Another problem that has exacerbated the supply of hydroelectric power plants in the LEN is well defined and focused on the environmental issue. It is the slow pace of the Previous Environmental License issuance needed so that a hydroelectric power plant that has already completed the feasibility studies can be included in the auction. The most obvious and disturbing example of this type of restriction are the power plants of the Rio Madeira Complex.

This environmental blocking can be examined and understood by two strands of problems. The first one is an environmental legislation that is still very diffuse and has not yet contributed to building up an environmental studies culture. However, there is a legal aspect namely to put the entire responsibility of the licensing studies on the technical expert that signs them, that generates a natural fear and consequently a delay in the final license.

Table n.º 4:
Brazilian Energy Matrix. May 2007
(in n.º of plants, MW and %)

Source: Aneel, elaborated by GESEL-IE-UFRJ                                                

4 – Inheritances of and Prospects for the
Brazilian Electric Sector

The important issue for the SEB development is to identify the factors that explain this significant reversal in the marginal expansion of the electric power supply and whether this phenomenon indicates a new trend for the national energy matrix. To answer these two questions one should go back to the 1990s, when a profound and radical change in the Brazilian Electric System structure began.

 

The main objective of the SEB restructuring in the 90s was to transfer to the private sector the responsibility for the supply expansion, removing from the State the investments burden, (See FERREIRA, 2002 and Correia et al, 2005). For this purpose, it was adopted the strategy of state companies privatization. The aim was to take away the financial burden from the public sector, which was facing serious imbalances since the early 80s. This process was started with the privatization of distribution concessionaires and it intended to move forward in the privatization of generation companies, in particular the Eletrobrás Group [8].[6].

However, this strategy, more focused on the public deficit issue [9], resulted in the stagnation of investment regarding generating capacity expansion, culminating with the 2001-2002 "Blackout Crisis" (See KELMAN, 2001). Other factors corroborated the trend to the reduction of investment in the expansion of supply, mainly the following:

·         The uncertainties of the new regulatory framework, which has failed to consolidate due to the magnitude of the proposed restructuring.

·         The national macroeconomic instability was influenced by the international economy scenario, which presented strong instabilities.

·         The real perspective of privatization of the Eletrobrás Group generating companies contributed to discourage new investment, as it was easier and safer to buy the operating plants.

·         The dismantling of the SEB’s planning structure.

This last factor has played an important role in investment discouragement. The real prospects for full privatization pointed to the micro-planning, that is, each company / group would do its own planning, deciding where, when and how to invest. Thus, the state planning system integrated with state-owned enterprises had no meaning, gradually lost substance and nothing substituted it. Thus in the Pure Privatization Model the state would interfere less in the SEB, except in what regarded privatization. The model intended to adopt and impose a new expansion dynamics based on decisions of private agents. This transformation did not occur. And the "Blackout Crisis" confirmed the inconsistency and inability of the Pure Privatization Model to meet the needs of expanding electricity demand

Studies regarding the exploitation of the Brazilian hydro potential were also hindered because the planning sector was interrupted. These studies are crucial to indicate the location, power and economic viability of new plants. Without these studies, which include environmental impacts and ways and measures to overcome them, there are no conditions for expanding the hydroelectric generation capacity - the cleanest and less expensive energy available in the world. Without these studies it can not be guaranteed the future supply of electricity demand in its most efficient way, both from an economic and mainly environmental point of view. (See GUERREIRO, 2003; SAMEK, 2007))

         The construction of new hydroelectric power plants is a long time-consuming process, especially if studies of electric potential to be exploited are included. An inventory study concerning technical feasibility of a generation undertaking usually takes three years to be made. Thus, including the resumption of electricity sector planning, the creation of EPE in mid-2004, and feasibility studies of new undertakings, most of the projects under study are in progress. According to the EPE, new hydroelectric undertakings will be available to participate in auctions only in 2008.

         The data in Frame No. 1 present a good example of the present situation of ongoing studies of hydrological basins related to the CAP-Program for Accelerated Growth - where you can see, on one hand the long term of these studies, and on the hand the electric potential that Brazil can explore.

Frame nº. 1:
Brazil: Basins with Viability Studies foreseen in PAC

Source: Elaborated GESEL-IE-UFRJ with Growth Acceleration Program (PAC) data and from the Energy Research Enterprise (EPE)

The second problem is the power structure of the Ministry of Environment (MMA), creating a mismatch in and paralysis of the decision-making process. Due to strong pressure, including from the Presidency of the Republic, the (power) structure of the Ministry of Environment has been modified, specially the division of IBAMA, indicating a dual purpose: to give more flexibility to environmental licensing and restoring the MMA’s power structure that was divided among NGOs representing environmentalists groups.

The recent approval by the Congress of the Provisional Measure that divides IBAMA and the inclusion of the clause that transfers the responsibility of the first instance environmental licensing approval from IBAMA’s technical staff to the board of directors, indicate that the environmental issue tends to be readier without disregarding the law in force.
 

5 - Conclusion

In this sense, and by way of conclusion, the low participation of hydraulic energy sources undertakings in the new energy auction reflects, ultimately, problems inherited from the past model, a still incipient legislation and a lack of tradition that does not yet allow the establishment of a paradigm for environmental studies

As the generating capacity expansion cannot wait for the solution of these problems, the punctual, economic and pragmatic solution is the construction of thermoelectric power plants. Even if they will generate non renewable and more expensive power, it is much better to have non renewable and expensive energy than not having energy at all. Then its price is expensive.

On the one hand this alternative shows that the new model, consolidated by the 2004 decrees, has the capacity and flexibility to adjust the supply of electricity demand, avoiding the risk of a crisis similar to that of the Blackout. As the environmental issue and the hydraulic studies of the country’s potential tend to normality in the medium term, then the country and its economic and social agents will create a critical mass of knowledge, studies and parameters concerning the environmental impacts. The energy matrix reversal of these two auctions is punctual and does not represent a hegemony trend and will not even have a significant impact on non-renewable and expensive energy in the Brazilian power matrix. Given the vast hydroelectric potential that the country has, which is a comparative advantage- from the energy and environmental points of view – as compared with other countries, the hydraulic power plants have a guaranteed place in the Brazilian energy matrix. And new hydro power plants will be built, extending the electric border to the inland of Brazil, integrating new geographic areas to the economic space, respecting the limitations imposed by care and protection of the environment.

Rio de Janeiro, June 2007

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Graphic Edition/Edição Gráfica:
MAK
Editoração Eletrônica

Revised/Revisado:
Thursday, 24 November 2011.