Brazil to encourage large-scale investment in thermal power plants

May 23, 2001 02:00 AM

Brazil's government is seeking to encourage large-scale investment in thermal power plants, after an over-dependence on hydroelectric power put the country on the brink of chaos. But if officials can't devise a more efficient natural gas pricing strategy, industry participants warn electricity shortages could become a recurring nightmare for Latin America's largest economy.
Poor rainfall this year has left reservoirs at dangerously low levels. That prompted the government to call for an average 20 % reduction in electricity consumption starting next month and for stiff penalties for consumers that don't comply. While the plan should buy the country some time, key structural questions remain hanging as Brazil struggles to make the transition to full deregulation over the next five years -- and revamp a system that relies on hydro-generation for more than 90 % of power needs.
"While liberalization of the electricity sector has come a long way in the last few years in attracting private sectorcapital to the sector, they still have work to do," said Daniel Kastholm, head of Latin American corporate research at Fitch in Chicago. "The key component to resolve this issue will be coming up with a reasonable approach for gas pricing, and the concept of a fuel or energy cost pass-through to the final user, the consumer," he added.

Over the past decade, Brazil has generated around $ 30 bn from the privatisation of electric energy assets. Efforts to sell large federally-run generators and launch new thermal power plants, however, have hit road blocks the past few years, just as a sharp economic recovery boosted demand for electricity.
Earlier this month, US energy giant AES suspended $ 2 bn in planned investments in three gas-fired power plants in Brazil, citing "fundamental problems in regulation.", It was reported that Enron was suspending $ 600 mm in investments. The company denied the reports, but noted that the final analysis of the two thermoelectric projects for which the $ 600 mm is destined"depends on the definition of the price of natural gas and other regulatory conditions in the sector."
The price of natural gas -- which is fixed in dollars -- is the main issue on the generation side, particularly given the volatility of the Brazilian currency. The real has weakened to all-time lows in recent weeks, losing around 15 % of its value against the dollar this year.

"On thermal generators, about 50 % of the costs are associated with the price of fuel," noted David Hurd, Latin America utilities analyst at Deutsche Bank. "Costs of fuel in dollar, revenues in reals: there's no financing available given that mismatch." Meanwhile on the distribution end, companies are only allowed to pass along increased costs to consumers through tariff adjustments once a year. That often leads to a lengthy lag between the time companies incur costs and when they are able to recoup them.
"The pass-through issue is key for both" generators and distributors, said Andrea Ruschmann, CFO at Sao Paulo-based generator AES Tiete. On the thermal project side, she said AES would like to see the government bear the cost of foreign exchange variations affecting the price of natural gas, or allow the company to pass through the costs on a more frequent basis. For distribution, AES wants to be able to pass the cost on more frequently to end-consumers, or have a system in place that ensures costs are fully covered in the annual adjustment.
"We will not invest in the future (in Brazil) if the rules continue the way they are," the AES official said. Until now, power regulator Aneel has balked at making the existing contracts more flexible. The government's economic team is concerned meanwhile that such a pass-through could add inflationary pressure.

But the AES move to hold off on investments may be just the kind of jolt Brazilian authorities needed to refine the current regulatory regime, some observers say. Further cancelled investments could deepen an already-fragile power situation and put pressure on the country's current account balance.
The economic policy people "had been the ones blocking the most the idea of passing through dollar costs to distribution companies," said UBS Warburg analyst Gustavo Gattass. "And they are very much aware now that that is a very significant problem, so the government is now listening." he added, noting that he expects some new measures from the government in the next few weeks.
A few weeks ago, on the day after the AES move, the Ministry of Energy and Mines said that federal oil company Petrobras would sell natural gas at a fixed price in reals. Under the plan, Petrobras would cover the foreign exchange variation for a period of 12 months, at which point it would be allowed to pass on the costs to the generators.

An unconfirmed report said that Mines and Energy Minister Jose Jorge is set to announce a plan to boost energy capacity by 10 GigaWatt by 2002. The program includes the completion of 49 gas-fired plants, the construction of new hydroelectric plants, the acceleration of works in progress and the construction of new transmission lines. According to the report, Jorge will also announce the details of a plan under which Petrobras would assume full responsibility for the foreign exchange risk associated with natural gas purchases.
"Our understanding is that the government is making a huge effort to create an environment where new power plants can become feasible," said AES Tiete's Ruschmann. "We're eager to see the details of the Petrobras plan. It looks like it would help a lot, but we're not sure if it will be enough" for AES to resume investments.
Pedro Parente, who serves as President Fernando Henrique Cardoso's chief of staff and heads up a recently-created task force to address the energy crisis, told that attracting private investment remains a priority. He noted, however, that the government will step in where necessary if the private contribution is lacking.

Eleazar de Carvalho Filho, a director at the National Development Bank, told that the bank expects to increase funding to power companies in 2001. "The bank will speed up the process for energy companies obtaining credit. That would include faster approvals," he added. In addition, the government has already announced it will speed the process for environmental certification to less than six months for new generation projects, compared to more than a year in the past.

Source: Dow Jones
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