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José da Costa Carvalho, President, Eletrobras, Brazil

Jose da Costa Carvalho, President of Eletrobras, talks about the many challenges he faces running the largest state-owned power company in Brazil. He discusses how new directives from the government put pressure on their private agenda, and stresses the urgency of incorporating new technologies in order to become more competitive. Finally, he stresses the need to take advantage of the country’s natural resources in Hydro to keep growing their impressive portfolio.

Since you were appointed as new president of Eletrobras in November 2012, what has kept you busy this last year?

It has been a critical year, especially considering that in 2015 many of our concessions will expire, which implies that assets need to be returned to the government, who would then launch a new bidding round. Nevertheless, after conducting a series of economic, financial and strategic studies, we have decided to carry on with the concession and accept the government’s general terms and conditions. As most of our investments have already depreciated and the remaining costs are related to operations and maintenance, we have been actively working on how to deal with this upcoming challenge. As a result, we will implement new measures to reduce operation costs and restructure our organization.

Eletrobras has been under a lot of pressure and financial underperformance, with revenues falling from USD 17 billion to USD nine billion, due to our mutual agreement with the government to reduce electricity tariffs by 20 percent. It is our priority now for us to get more from what we have.

My role as the president of Eletrobras is to look after the shareholders but also to help the country develop. Eletrobras has such an important history and role in this country that we owe our citizens a better future.

What will be the influence of renewable energy sources on Brazil’s energy matrix?

Brazil’s energy matrix will still depend on hydropower with a similar influence in the future—around 70 percent. Our power generation potential in Brazil is 260 GW, but currently we are only exploiting 80 GW. Therefore, 160 GW of capacity are still available to ensure more than enough energy to our citizens. Of course, because of environmental limitations, our true potential lies between 150 and 200 GW.

The important question at hand is to understand which other energy sources will play a more important role in the future? Certainly, wind, solar and biomass will have their part despite their limited role in comparison to hydropower. These energies are difficult to store; therefore reservoirs until now have been the best solution at hand to maintain a permanent energy resource to the grid. However, reservoirs are also sensitive to climate variations and during the dry season, reservoir capacity is too low to fulfill the demand of energy. In response to this phenomenon, thermal power plants have been reconnected to meet the energy demand.

In the future, my conviction is that nonrenewable energies will play a stronger role, especially natural gas and nuclear energy. These sources are part of Brazil’s energy opportunities but our success will depend on our ability to focus on a few important energies and not attempt to develop all energy sources at the same time.

What are the best alternatives to manage the supply of the contry’s energy demand in a more sustainable and economic way, given that the use of thermal power plants is a costly short-term solution for the country?

Our best alternative would be to maintain large reservoirs, but this is impossible as environmental authorities are stopping us from taking these measures. However, environmental challenges are important and thermal power plants are strategic for the country’s energy plan.

Ultimately, we need to focus on reducing thermal power plants costs, especially regarding natural gas, nuclear, and coal-fueled power plants. If we manage to reduce these operational costs, thermal power plants will represent a sustainable solution.

Eletrobras represents Brazil’s electricity backbone, regrouping 12 subsidiaries, 56 percent of the country’s transmission lines, 36 percent of the nation’s total power, and electricity distribution to 3.4 million consumers. What are your main priorities today, when the company celebrates more than 50 years of presence in the market?

Eletrobras’ DNA is related to very large national grid projects in generation, distribution and transmission. In the past, our financial performance has been influenced by our distribution companies, which were poorly managed. We have managed to restructure these companies over time, but these companies do not represent our main priority. Brazil’s National Interconnected System (SIN) reflects Eletrobras’ achievements over time in such a large and regionally diversified country. In the next months, we will be connecting Manaus to the grid, Macapa in the next semester and Boa Vista in 2015. Through our efforts and contributions, 99.5 percent of Brazil’s loads have been connected to the national grid.

Of course, if we compare electricity prices with other countries, we are still lagging behind. Our goal is to reduce electricity tariffs for the end consumer and this 20 percent reduction is a first signal of our willingness to make our end consumers pay less for their consumption. Our market share will remain the highest, taking on new projects in hydro, wind, and nuclear power projects.

Our future challenge will be to connect the rest of South America, but our track records of interconnecting projects with Argentina, Paraguay, Uruguay and Venezuela confirm our ability to expand across borders. We also wish to maintain our position in Brazil’s generation and transmission areas, while growing our participation in South America, Central America and Africa. All of which will depend on our ability to expand our innovation capacity and increase efficiencies in our transmission lines.

In reference to Cepel, Eletrobras’ Research and Development center, you stressed the importance of innovation and increasing efficiency. What has Cepel helped Eletrobras achieve and what are your priorities in terms of R&D?

Our research institute is fundamental to our expansion and modernization plan. Nowadays, we are prepared for this challenge and are testing various equipment in relation to residential voltage utilization—800 kv on direct current lines and 1100 kv on alternative current lines. This preparation is fundamental and together with China, we are the only countries prepared for these kinds of challenges in the world.

At Eletrobras, our holding as well as our subsidiaries participate in the company’s innovation strategy. Hence, four task forces in generation, distribution, transmission and energy efficiency are studying new ideas in terms of power generation and renewable sources such as wind and solar. Both have storage challenges and we need to find new technology alternatives to help reduce this barrier.

In addition, in the transmission area we are studying new designs for more efficient lines, and higher supervision, control and data management of transmission systems. Indeed, Brazil’s transmission line systems are highly complex, especially because of distances and accessibility issues. Our aim will be to overcome these factors and improve the overall efficiency rates.

On a different level, distribution is another area, which is fundamentally dependent on new technological innovation. Part of this innovation will depend on smart grids, which represent a new growth potential and modernization factor. In fact, we are currently undergoing with CEPEL very useful research for new smart grid solutions.

BNDES is Brazil’s exclusive energy financing partner and has been a real contributor to your financing power. In light of ensuring a sustainable growth perspective for the company, what should be the focus of Eletrobras in financing its activities?

Our company has suffered drastic losses last year and our objective is to reduce our costs by 30 percent for the next two years. Today, our electricity coverage is 42 GW and we are planning to reach 54 GW by 2015. These targets will help us secure larger profits and market share. Our projects will rely mostly on BNDES’ support, including other banks and in 2015 we are also planning to rely on equity and public offerings to give us a wide array of possibilities to grow again.

To implement our financial strategy for the future, our board of directors will give the support needed to reduce costs and ensure the company’s sustainable expansion. This expansion will need Eletrobras to work on larger projects, fulfilling deadlines, and securing return on investments.

To fulfill our restructuring process, our board members are constantly evaluated, and our bonus system depends on their results. Our board of directors is experienced and ranges from various ministers and deputees—mining and energy, development, civil house and finance—to representatives from unions and minor investors. The reforms we are putting the bases for will help the company set the priorities both on a national and international scope.

As president of Eletrobras, your responsibility is to secure the foundations for the company’s growth for the next 50 years. What are your priorities in taking the company to the next level?

In the future, our electrical system needs to rely on five fundamental pillars: quality, reliability, tariff mobility, sustainability, and universality. Eletrobras is the country’s electricity representative body and main innovation driver. Our next step will be to spread out of Brazil and become the largest player in South America, Central America and Africa.

The pressure from the end consumer is constant, with an ever-growing pressure for lower tariffs and higher quality. Therefore, we will continue working on improving our customer service, increase our market share, efficiency and reduce our costs. Finally, we want to give our employees the best working conditions and always value the company’s effort both nationally and internationally.

These are my priorities and I expect all of our subsidiaries to work towards the same goal.

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