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Mauricio Tiomno Tomalsquim, President, EPE, Brazil

Mauricio Tiomno Tomalsquim, President of EPE discusses the uncertain future of nuclear energy in Brazil given the recent situation in Fukushima, and why the country cannot close the door entirely to this option in the future.

Prior to joining EPE, you were Executive Secretary for Brazil’s Ministry of Mines and Energy where you participated in Brazil’s new electricity sector. Today, as president of EPE, how would you define the evolution of the electricity sector since its New Model was inaugurated in 2003? What are the major differences between previous models?

To understand the reason behind the introduction of the New Model for the power sector in 2003, it is important to understand how Brazil’s energy policy had previously evolved. In the 1970’s, Brazil’s energy sector was under a state monopoly framework with state-owned companies like Eletrobras. At that time, tariffs were partially adjusted for inflation that eventually got so high that it caused severe financial problems to the power and distribution companies.

In the 1990’s we tried to adapt the English power model, which was based on complete liberalization and privatization of the power sector, an unbundling process. Brazil’s state-owned companies were restructured to be privatized and their investments in the expansion were restrained due to fiscal problems. Neither private agent had incentives to invest, given that the model was highly risky: they had to build plants and bear the entire market risk, that is, to look for new contracts. In other words, the investor was uncertain of obtaining a contract and had huge upfront costs.  Furthermore, regarding hydro power plants, obtaining hydro power plants licenses at that time was not guaranteed and without such a license it was impossible to build the plant. Therefore, when the investors offering the largest amount of financial resources to the government won the auction, they were granted concessions but they were never sure to recover the initial investment because of environmental licenses and market risk.

Consequently, in 2003, the need for a new model was urgent to resume expansion in the power system. This model was referred to as the “hybrid model”, combining government coordination and market competition. Among the main reforms, we ensured that all distribution companies had to buy electricity only through public auction organized by the government. In addition, the concession of the power plants is only given to the investor that offers the lowest tariff to build and operate the power plant. Therefore, only the more efficient investor would win the concession. Finally, only hydropower, wind and thermal power plant investors with preliminary environmental license can participate in the auction. So, in the new model, we have reduced the risk of both the investor and the country. Investors winning the auction receive long-term power purchase agreements (PPAs), granting 20 years of concession for thermal and wind power plants, and 30 years for hydro power plants. All of these PPA contracts are accepted by BNDES Brazil’s national development bank as part of their financial guarantees.

For new power capacity, two different auction types exist with five and three year forecasts on electricity buyouts. After these forecasts are made, any company regardless of its nationality, size, and legal status offering the lowest tariffs are then grouped together and participate in the auction.

Overall, Brazil’s hybrid power model has significantly reduced environmental risks, and completely eliminated market risks for investors as contracts are predefined, with inflation-adjusted revenue regardless of fluctuations on energy demand. Finally, this new model sets government as a simple mediator and organizer, not influencing or taking part of a particular front since contracts are private.

How has Brazil’s power model defined its focus on renewable energies?

Renewable energies have always been a priority. However, previous frameworks were not adequate enough to boost the expansion of renewables in the power mix.

In 2005, wind capacity was almost nonexistent. Therefore, we realized there was a necessity to push this renewable energy, indispensable to Brazil’s power matrix, and we set a new framework based on feed-in tariffs, similar to the ones they use in the United States or in Europe, and the average sale price was USD 150 per MWh. This price was of course extremely high and noncompetitive.

One of the main difficulties of feed-in tariff mechanism is to find the appropriate price that encourages investors without excessively burdening taxpayers or electricity consumers. The problem is that there is a strong information asymmetry between the regulator and the investor. I think that one way out of this problem is to introduce the auction mechanism, in which the task of setting the appropriate price for promoting a particular technology is left to the market.

Therefore, we turned to power auctions in 2009. The strong competition in the power auctions resulted in one-third of the previous price: USD 50 per MWh. These auctions have attracted a very high number of wind power projects and wind related companies, which gather around 300 companies and 12,000 MW on average per auction of potential bidders. This high level of competition has assured us to really get the lowest price and USD 50 per MW has been the lowest price ever offered. Moreover, these auctions have attracted many wind equipment producers to Brazil, which were nonexistent in the past. Today we have almost 10 of them established.

EPE has been acting on several fronts to promote Brazil’s power sector especially in terms of renewable energies. What would you say are EPE’s priorities today?

EPE acts as a government and ministry advisor. We provide energy reports, set the perspectives for Brazil’s energy market, organize power auctions and participate in building the country’s energy regulatory framework. Although EPE can be referred to as a “Think tank”, we also participate actively in the execution of energy policy, especially in power auctions.

On an annual basis, EPE releases the 10-year plan on the Brazilian energy sector under the approval of the Ministry of Mines and Energy. This plan gathers the entire country’s investment portfolio for Brazil’s energy sector, covering generation, distribution, transmission, oil, gas and biofuels, energy efficiency and distributed generation, and environmental related effects. In addition, we are currently proceeding with a much longer plan, which would set the priorities for the energy expansion until 2050.

Brazil’s power model today focuses mainly on hydropower, but other sources are gaining more interest like wind, biomass, gas and coal. We prioritize renewables, but there is room for energy source diversification. For instance, coal represents a very small percentage, around 1.3 percent of our power mix, but given the recent developments on low reservoirs and the need to use thermal power plants, coal may regain some strength.

Even though hydropower will remain by far the highest share in the power mix, wind, biomass and thermal power plants have a great future ahead of them in Brazil. Moreover, given the recent droughts and difficulties to maintain reservoirs high, fossil fuels will compensate this loss of capacity and thermal power plants are the most viable option given their overall efficiency. Of course, these thermal power plants come with higher operational costs and emissions, but they represent the best option for now to complement hydropower production.            

Natural gas, LNG and Shale gas represent critical energy sources to maintain Brazil’s sustainable energy matrix. What are the challenges to integrate more gas into the energy matrix?

Today, our domestic resources of natural gas do not allow us to build more thermal power plants fueled by gas. Other options are under study like LNG, but current prices really restrict us from using this energy source. We are hoping that this year’s auction of shale gas, will allow us to find large quantities and make this source highly competitive. Clearly, without finding large quantities of gas, gas-fired power plants will remain on hold.

Besides gas, nuclear power’s future is highly uncertain. Today, the government is putting on hold the development of four new nuclear power plants, given the recent incidents at Fukushima. What are your views on Brazil’s nuclear program?

Closing the door to nuclear technology is not an option. Currently, few countries in the world possess full nuclear fuel cycle. Brazil has the sixth largest uranium reserves in the world and we have the technology to produce nuclear fuel to meet the needs of our nuclear program. Today, Angra-3 nuclear power plant is still under construction and once it starts operating and shows the results we need, the nuclear program will be reassessed.

Of course, Brazil’s nuclear power future is still to be defined. The government wants to proceed step by step and assess the results of the new power plant. However, it is impossible to say when nuclear power will really emerge.

What makes Brazil’s power model special and what can other countries learn from it?

Our model is a success given the government’s role as a coordinator on one side and market competition on the other. Generally, investors participating in power auctions are mainly looking for government’s coordination role, and low market risks, which is exactly the case here. Therefore, since these two conditions are met, the country’s power model is on the right track.

Moreover, BNDES considers Brazil’s power model risk as extremely low and this is the reason why BNDES is financing almost 100 percent of any energy-related project taking place in Brazil. With such financial support, investors feel confident to carry on their long-term projects in the country, and Brazil’s power model becomes highly sustainable.

As long as we keep attracting investors to the power system expansion, energy security is assured.  And I hope our energy policy continues to contribute to our society in order to fully take advantage of the country endowments in the wisest manner, keeping our power mix predominantly renewable at competitive prices.

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