Subscriber Login

Features

Brazil's Economic Downturn: Recession and lack of funds affect grid development [free access]

July 14, 2016

Brazil is going through one of its toughest and longest recessions. Its growth rate fell from 7.5 per cent in 2010 to -3.5 per cent in 2015, and is expected to decline further in 2016.  Inflation was at a 12-year high, unemployment is approaching 10 per cent, and the country’s currency fell by a third in 2015. As a result, by the end of 2016,  Brazil’s economy is likely to be 8 per cent smaller than it was in the first quarter of 2014.  Brazil’s economic downturn, like that of other emerging economies, is partly due to the fall in global commodity prices. However, Brazil’s structural weaknesses—poor productivity and unaffordable, misdirected public spending—have exacerbated the damage. The recent bribery scandal surrounding the state-controlled oil company Petrobras has made the situation worse. Recently, both Standard & Poor’s and Fitch downgraded Brazil’s credit rating to junk status.

 

The economic slowdown is hampering infrastructural development in the country. The economic contraction is leading to limited availability of funds for the development of upcoming power generation projects (especially those based on renewable energy) and transmission line projects.  After years of economic growth that made Brazil the world’s 10th biggest wind market, the industry is revising down new capacity targets for 2016, along with the number of new wind projects expected to be allotted during upcoming government auctions. As part of the country’s efforts to address climate change, Brazil’s government has set a very ambitious target of generating 23 per cent of its electricity from renewable sources by 2030. But with the economic crisis, the government is no longer giving more incentives for various industries including renewable energy.

 

The country is also experiencing contracting power demand. In January 2016, electricity demand decreased by 5.9 per cent to 38,214 GWh, compared to the demand in January 2015.  As per the estimates of the government-controlled energy research company Empresa Provincial de la Energia’s (EPE), in January 2016 industrial demand was down by 9.3 per cent and residential demand dropped by 5.4 per cent compared to the same period in 2015. According to Brazil’s power distributors association Associação Brasileira de Distribuidores de Energia Elétrica (Abradee), distribution companies currently face excess contracted supply of roughly 7 per cent of total demand, or an average of 3,000 MW. Decreasing power demand along with the slow growth of the power transmission network due to delays in receiving various approvals are further affecting the development of power generation projects in Brazil. As a result, the country’s power sector is under a lot of pressure.

 

Transmission bottleneck

Even before the recession, Brazil’s power transmission network was experiencing a slow growth rate due to various hurdles in receiving approvals for projects. According to a recent report of Brazil’s energy regulator Agencia Nacional de Energia Eletrica (ANEEL), roughly 62 per cent of transmission line projects awarded are behind schedule. The majority of these projects have been planned for upcoming wind power projects. Delay in grid connectivity has impacted the development of these projects.

 

During the May 2016 generation auction, majority of the contracts were signed for small hydro projects, as they are generally located closer to load centres as compared to wind power projects, and thus require comparatively less grid network.  The projects contracted through the auction also have to start producing from 2021 onwards, for which grid connectivity surety is an issue for the developers.

 

Delay in developing the power transmission network is also deterring investments in the segment. The share of un-allotted projects has increased significantly in transmission auctions held over the past few years. To address this issue, the Ministry of Mines and Energy (MME) is evaluating the permitting process, the plans to consolidate wind farm development with transmission projects, and the environmental licensing procedure. The regulators are also advocating the creation of more flexible contract terms, giving the regulatory body the ability to revoke concessions for projects that have serious installation issues.

 

This has made integrated planning for projects and grid connections necessary. The government’s decision to only include wind farm projects with transmission lines is a good start in this direction, but further changes in the auction system are required. For instance, possible delays in receiving licence approval or in the construction process should be considered while deciding the commissioning date for the planned wind and transmission projects.

 

To ensure a continuous flow of investment in the power transmission segment, Brazil’s Tribunal de Contas da União (TCU), or the Auditors Court, issued a directive asking ANEEL to make changes to its concession rules for upcoming transmission auctions. Following this, in March 2016, ANEEL issued revised concession rules. Under this, it increased the Receita Anual Permitida (RAP), or annual permitted revenue, to an average of 11 per cent. The return on the projects has also been increased from 8.5 per cent to 9.5 per cent per year in line with TCU recommendations. As part of the new tender rules, ANEEL has decided to block companies with financial difficulties from taking part in the tender in order to avoid future issues or delays in the construction of the lines.

 

On the basis of these rules, ANEEL decided to auction 12,811 km of transmission lines, 34 substations and 19,560 MVA of transformer capacity, in two auctions. Despite the new rules, the first auction held in April 2016 attracted limited investment with only 14 of the 24 lots on offer being allocated.

 

This decline could be due to two key reasons—limited private interest and the deteriorating financial health of the country’s largest power company, Eletrobras, in which the federal government owns a 54.4 per cent share. Earlier, the power transmission segment had witnessed significant private participation given Brazil’s rising investment prospects. However, now, due to the global economic downturn, the level of private investment has reduced considerably.

 

Eletrobras, which dominates the electricity sector with a 44 per cent share in the total transmission network capacity as of 2015, has witnessed a significant reduction in its share from 53 per cent in 2009. A key factor responsible for the deteriorating performance of the company is the enactment of Law No. 12,783 in 2011, which offered auto renewal of expiring transmission concessions for 25 years in exchange for lower electricity rates. In addition, it offered compensation to the utilities for non-depreciated assets as an upfront payment. However, disputes over the amount of this compensation are yet to be resolved, impacting the financial stability of some of the transmission concessionaires including Eletrobras. The company reported a net loss of BRL7 billion for the first time in 2012, which increased to BRL14.4 billion in 2015, further inflated by the recession. Eletrobras’ financial woes have also impacted its ability to undertake regular transmission investments. As a result, the company’s transmission capex has reduced significantly over the past few years, with the associated growth rate becoming negative in 2015.

 

However, to meet Eletrobras’ future investment requirements, the government has outlined plans to raise up to BRL20 billion via the sale of stakes in joint ventures held by Eletrobras. According to the plan, interests in 174 special purpose entities  (SPEs)—mixed-capital entities that build and operate specific transmission and generation projects—will be offered to private investors.

 

Further, Brazil’s government has also issued a decree formalising the transfer of up to BRL3.5 billion in federal funds by 2017 to Eletrobras. These initiatives will help the company secure the funds required to support its power sector expansion plans. However, in the short-term, until the recession prevails, limited improvement in the company’s financial performance is expected.

 

Figure 1: Eletrobras’ capital expenditure on transmission (BRL million)

gtr2_822

Source: Eletrobras

 

Abengoa conflict

Spain-based company Abengoa’s recent bankruptcy announcement has further added to Brazil’s power network development woes. Abengoa is one of the largest private players in Brazil’s power transmission sector. In November 2015, the company filed for bankruptcy. In Brazil, the announcement has affected the development of about 6,100 km of new lines (including the high voltage direct current line associated with the Belo Monte hydropower project) and the operation of 6,800 km of existing transmission projects. Wind power developers in Brazil are reportedly studying the possibility of taking over some of the transmission line projects abandoned by Abengoa, in order to avoid having their wind farms impacted by a lack of connection to the national system. Specialists are suggesting that this option be considered for other transmission projects as well, especially those connecting to generation projects operated or being developed by larger companies such as CPFL Renovaveis or Renova.

 

Companies like State Grid Corporation of China (SGCC) are showing interest in buying Abengoa’s operation facilities in Brazil. However, until these concessions are allotted, the development of Abengoa’s power transmission projects will remain stalled, which will affect the construction and operation of several wind power and hydropower projects in the country.

 

Outlook

The ongoing global as well as domestic economic crisis has shrunk the available credit, making infrastructure investments, including in the energy sector, tough to finance in Brazil. The country’s power transmission sector is expected to see limited private investment until the economic conditions improve. The government needs to put in place policies and take measures to create an environment that is conducive to attracting private investment and improving the financial performance of Eletrobras.