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Update on Brazilian power sector: Key highlights of 2017 [free access]

January 8, 2018

After going through a difficult period, resulting from the ongoing political chaos and economic crisis, Brazil’s economy has started showing signs of recovery since the third quarter of 2017 with low interest rates, recovering business sentiment, robust agricultural output, and stronger dynamics in the labour market. During the third quarter of 2017, the economy grew at a 1.4 per cent annual growth rate, the highest since the first quarter of 2014.

 

With this, Brazil has also accelerated plans to attract local and foreign investments, and boost its nascent economic recovery. To these ends, the key steps adopted or planned are the announcement of Agora, é Avançar, or Now, Move Forward programme by the Ministry of Mines and Energy (MME) to prioritise energy, logistics infrastructure, defense, social and urban projects; the federal government’s initiatives to privatise the country’s largest state-owned power utility, Centrais Eletricas Brasileiras SA (Eletrobras), to improve the company’s financial strength; and MME’s Programa de Parcerias de Investimentos (PPI), or the Investment Partnership Programme, to foster private investment in the country’s infrastructure sector. This has helped improve investor confidence, clearly reflected by the fact that Brazil’s energy regulator, Agencia Nacional de Energia Eletrica (ANEEL), was able to award all 11 transmission concession lots offered during auction number 02/2017 in December, for the first time since 2014.

 

Brazil’s energy agency Empresa de Pesquisa Energética (EPE) recently approved the Plano Decenal de Expansão de Energia 2026 or Decennial Energy Expansion Plan 2026 (PDE 2026). The approved Plan includes an investment of BRL1.4 trillion for the expansion of energy infrastructure by 2026. About 25 per cent of the investment will go towards the energy generation and transmission segments. The total investment for the power transmission segment is likely to reach BRL119 billion, of which BRL78 billion will be invested in transmission lines and BRL41 billion in substations, including border facilities.

 

Existing network

Brazil is dependent mainly on hydro generation for meeting its power demand. As of October 2017, it had over 155 GW of generation capacity, of which more than 64 per cent was based on hydro energy. About 27 per cent was based on thermal energy, and the rest was based on renewables. During the last decade, the country’s power generation capacity grew at a compound annual growth rate (CAGR) of 5 per cent. Major contributors were wind and solar projects, which grew at a CAGR of 46 per cent, followed by thermal projects at a CAGR of 7 per cent and hydro projects at a CAGR of 3 per cent.

 

As of October 2017, Brazil’s transmission network comprised 136,835 km of lines and 343,816 MVA of transformer capacity at the 230 kV to 750 kV levels. During 2006-16, the line length increased at a CAGR of 4 per cent and transformer capacity at a CAGR of 6 per cent. In December 2017, State Grid Brazil Holding (SGBH), the Brazil-based concern of China’s State Grid Corporation of China (SGCC), put the country’s largest ±800 kV high voltage direct current (HVDC) line into operation. This was the first transmission line associated with the 11.2 GW Belo Monte power complex.

 

Recent developments/trends

MME initiatives

In November 2017, the MME launched the Agora, é Avançar, or Now, Move Forward programme, with a budget of approximately BRL130 billion to complete some 7,000 projects by the end of 2018. In the energy sector, 97 projects will be completed under the programme by 2018.

 

The programme is divided into three axes: Avançar, with a public budget of more than BRL42 billion and a portfolio of more than 6,000 projects; Avançar Cidades (Advanced Cities), with almost BRL30 billion of financing for more than 1,100 projects; and Avançar Energia (Advanced Energy), with investments of over BRL58 billion for 97 projects.

 

In the power sector, the programme covers 28 transmission projects and 58 renewable power plants. Under this, 26 wind farms, 29 solar photovoltaic (PV) plants and three hydroelectric power plants will be constructed at a total investment of BRL25 billion, of which BRL13 billion will be invested by the end of 2018.

 

The energy-related funds under Avançar will be invested by the Orçamento Geral da União or General Budget of the Union (OGU) and will be executed directly by the Agência Nacional de Petroleo e Gás or National Petroleum and Gas Agency (ANP), the Empresa de Pesquisa Energética (EPE), and by energy distributors.

 

The government is also making a concerted effort to boost private investment in the country. The PPI programme, comprising measures to foster private investment in the country’s infrastructure sector, is a major step in this direction. Under the programme, several changes were made to the concession rules to strengthen legal certainty, provide regulatory stability and modernise governance. These include increasing the period between the release of bidding rules and the holding of the auction to 100 days and allowing tenders to be announced only after preliminary environmental licensing has been received. To reduce private investor risks, each project is required to have at least 20 per cent of its financing from investor resources while the remaining can be financed via loans and debentures. By creating a transparent, secure and stable investment environment, the PPI aims to re-establish the trust of foreign investors to bring in the much-needed investment to jumpstart the economy and as a consequence, generate new jobs.

 

More recently, in March 2017, the government expanded the list of infrastructure projects under Projeto Crescer to include 55 concession projects, taking the total to around 90 projects entailing an investment of over BRL45 billion. Of these projects, 16 relate to the energy sector, of which three are oil and gas projects, five are electricity generation projects, one is a power transmission project (comprising several lots) and seven are power distribution projects.

 

Privatisation of Eletrobras

To improve the financial health of the debt-ridden Eletrobras, MME proposed the privatisation of the company. The proposal has been accepted by the Conselho do Programa de Parcerias de Investimentos (CPPI) da Presidência da República or Council of the Program of Investment Partnerships of the Presidency of the Republic. Reportedly, the federal government is likely to relinquish the right to vote in the company after privatisation and will have the power of vetoes on strategic issues. This alleviates investor concerns regarding the federal government’s plan to have a strong presence in the company even after losing control, since the projection is that the government may continue to hold up to a 40 per cent stake in the company.

 

As per the proposal, there would still be a cap limit of 10 per cent of the votes for each shareholder in the company from the time of privatisation. The government will continue with the shareholding, but a new block of shares will be launched, including a special share class—golden share, which gives the right to vetoes, but not the right to vote. The government is trying to take the privatisation model to the Senate in early 2018.

 

Following the government’s announcement regarding the privatisation of Eletrobras, various players have started showing a strong interest in buying stakes in Eletrobras’ 77  projects that are expected to be privatised. Eletrobras is also considering selling stakes in these projects to its current partners in the ventures. It also plans to announce agreements to sell minority stakes in projects such as wind farms and power transmission lines soon, as part of the plan to dilute the government’s stake and privatise the company. Under this plan, it is likely to issue new shares in the second half of 2018 to raise cash and reduce the firm’s huge debt of over BRL40 billion.

 

The company is also set to offer stakes in its distribution companies. Under the Official Gazette Resolution No. 20 of November 8, 2017, Conselho do Programa de Parcerias de Investimentos (CPPI) da Presidência da República or Council of the Program of Investment Partnerships of the Presidency of the Republic published and approved the basic rules of the privatisation process of six distributors of Eletrobras serving in the north and northeast regions. The final version of the model is likely to be announced during the first quarter of 2018.

 

Following its privatisation and the conclusion of internal restructuring, Eletrobras is likely to resume investments to expand its network in 2019. However, the company is not planning to participate in any upcoming tenders and does not wish to have any pending projects by the end of 2018, with the exception of concluding the Belo Monte hydroelectric plant in Para, and the Angra 3 nuclear plant that remains suspended. All remaining projects, including those currently delayed, are due to be concluded by the end of 2018, allowing the company to focus on further expansion and investment in 2019.

 

Rising investor confidence

After two years of disappointing power generation and transmission auction sessions, a surge in investment levels was experienced in 2017 with the allotment of the majority of the concessions. This shows both growing demand for power and increasing investor confidence.

 

During 2017, ANEEL hosted seven power generation and transmission auctions. Of these, two energy auctions took place during the first half of 2017. The first one was an auction for transmission lines in which 31 of 35 lots were awarded to add 7,068 km of transmission lines and 13,132 MVA of substation capacity at an investment of BRL12.7 billion. The second auction was for power generation intended to serve 55 locations in the interior of the Amazon with the addition of 297 MW of capacity at a cost of BRL1 billion.

 

Two more auctions took place after mid-2017. The first one was a competitive mechanism for ‘de-contracting’ energy reserves, which promoted the termination of reserve energy contracts for wind, solar and hydro sources from past auctions. Through this, ANEEL cancelled nine solar projects totalling 249.7 MW of capacity and 16 wind farms with a combined capacity of 307.7 MW. This reverse auction helped the over-stretched developers to return their contracts and also resulted in the reimbursement of BRL105.9 million to the nation's Conta de Desenvolviment Energético (CONER) or Energy Development Account.

 

The second auction was for granting new concessions for four hydroelectric power plants formerly operated by the state-owned company Companhia Energética de Minas Gerais SA (Cemig), totalling almost 3 GW of installed capacity, for BRL12 billion.

 

During December 2017, ANNEL hosted the last three auctions of the year for power transmission and generation projects. International energy companies dominated the transmission auction held on December 15, 2017, under which 11 lots of 4,919 km were awarded at an investment of BRL8.7 billion. France’s Engie SA, India’s Sterlite Technologies Limited and Neoenergia SA (majority-owned by Spain’s Iberdrola SA), were among the companies that won the right to build transmission lines at prices averaging 40 per cent below ceiling values set by regulators.

 

During the last two generation auctions of the year, solar projects totalling 574 MW of capacity and wind parks totalling 1,387 MW of capacity won contracts to sell electricity. Last year, the government had to cancel the wind and solar auctions due to the recession. However, the last two auctions saw strong competition, which resulted in a significant reduction in the average prices for solar and wind energy to BRL145.68 MWh and BRL98.62 MWh, respectively. These projects will provide an initial supply of power during 2021 to 2023.

 

Future investment

As per EPE’s PDE 2026, the average power load in the country is likely to reach 69 GW by 2018. This is estimated to increase to 92 GW by 2026 at a CAGR of 4 per cent, under base case scenario. To meet this increase in power demand, Brazil’s government plans to add 54 GW of power generation capacity during 2018–26. Of this, 72 per cent will be based on renewable energy sources and the rest on thermal energy sources. According to EPE, Brazil’s wind energy capacity is likely to increase by 29 per cent during the period. During 2018–26, a total of 60,004 km of line length is expected to be added to Brazil’s network, along with more than 188 GVA of substation capacity. Of the total line length capacity, 20 per cent is likely to be based on direct current (DC) technology at the ±800 kV level and the rest on alternating current (AC) technology.

 

Figure1: Expected growth in power load in Brazil during 2018–26 (GW average)

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Source: Plano Decenal de Expansao de Energia 2026, EPE

 

Figure 2: Voltage-wise transmission line length expansion during 2018–26 (%)

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Source: Plano Decenal de Expansao de Energia 2026, EPE

 

Outlook

While the economy is finally growing after the worst recession in the country’s modern history, many challenges lie ahead, and severe macroeconomic imbalances need to be addressed. Rising investment from private players, especially foreign players, would facilitate the injection of significant investment in the electricity sector. This, however, puts additional responsibility on the regulators to ensure the financial and management strength of these players to avoid any delay or hurdle in the development of power projects. Further, regulatory and political stability will also be required to achieve the desired growth results.