Valmor Alves, President, Electra Power, Brazil
Valmor Alvez, President of Electra Power, talks about the potential he saw early on in becoming a specialized small hydropower player, not only as a necessity for Brazil, but also as a long-term profitable business and a low-risk investment.
What were the main reasons behind choosing small hydropower plants as your main focus back in 2005, when the company was created?
In 2005, Electra Power saw the opportunity to grow with small hydropower plants (HPPs), given the quantity of rivers and steady water flow present across Brazil. Choosing to specialize in small hydro made sense at that time due to government incentives and smaller capital expenditure and risk. Nonetheless, while small hydropower plants do not require reservoirs, generating energy at a low cost was a challenge, and still remains one. Producing energy is capital intensive, therefore the cost of capital is high as well. Being competitive at energy auctions and offering low cost energy is a difficult mission that the sector has not been able to resolve. Today, the price per MW hour from small HPPs offered during auction is USD 65. My perspective is that this price should be 15 percent higher, to make us competitive. Price is an obstacle of course, but is not the only one. We also need to take into consideration environmental, regulatory and transaction risks.
Prior to the foundation of Electra Power, in 2003, the government provided more security to these plants, and this marked the start of a sudden increase in their number. Today the situation is different: many power sources are competing at auctions and small hydropower plants are having difficulties competing against wind generation or large HPPs. This is exacerbated by the fact that the price of producing power in the south of the country is different than in the north. The way to resolve this is to have auctions by source and region, in order to increase the competitiveness of small plants.
For the last decade, the government supported the development of renewable projects through programs like Proinfa, which was a great success. How would you describe the situation today, and how has this influenced your strategy for the Brazilian market?
Proinfa was a success; however, its benefits were extremely short-lived, as the program only lasted six years. Proinfa attracted foreign investors to the country and some of them invested in manufacturing plants that drastically improved our capacity to increase the number of plants being built in Brazil. However, after this program finished in 2010, the number of projects dropped and this was very unfortunate for businesses like ours, and the country’s energy matrix as well.
Our society must realize that these plants are flexible, easy and quick to install, can be located close to the electric charge and provide the energy needed to cover peak demand. To ensure that small HPPs have a brighter future, Mauricio Tomalsquim, president of EPE, Energy Research Company, withdrew small HPP participation from the last energy auction after realizing the need to create a specific auction for this niche. This could be an important factor for the future success of small hydro.
Electra Power today is participating in 20 new small HPPs over the next five years, and six plants are currently being built. This includes a five MW plant in Rio Grande do Sul, three others located in Rondonia totaling 54 MW and the remaining two in Goias for an installed capacity of 45 MW.
Currently the government is contracting around 200 MW per year specifically from small HPPs, but this number is insufficient. To really oxygenize the sector the government would have to contract 400 MW every year.
With 20 new small hydropower projects in your pipeline, it seems as if interest in your products and services is just beginning to take off in a major way. How much of a challenge was it to build capacity to work on 20 simultaneous projects?
ANEEL, the National Agency for Electric Energy, has a role to play in our expansion plan, because the company has the ability to release more of these projects. We also need to have access to more competitive power purchase agreements, and attain a lower cost of capital. Finally, environmental organizations must realize that small HPPs have a minor impact on the environment in comparison to large HPPs. Combining these four conditions would really ensure the development of our sector.
Having such a large amount of projects does represent a challenge, especially when all of these small HPPs are unique in design. To do so, we have outsourced some of our projects. In terms of opportunities, Brazil has a large pool of reliable technicians in this field. Perhaps Brazil has the best technicians in the world, already providing expertise for the past 50 years. From small, to medium and very large size dams, Brazil achieved such a high level of expertise that technically speaking, our plants are perfect. The real challenge lies with environmental issues and social acceptance. Of course with small HPPs the impact is smaller, but we still have to face this battle over and over again for every new project. Finally, the government needs to set better priorities for energy and clearer rules and guidelines for the sector.
Electra Power has been partnering with leading companies such as Demuth and Sinfonia Technology. What factors led to this arrangement, and what are the concrete outcomes from these partnerships?
At Electra Power, instead of contracting an EPC partner like most of the sector, we decided to find strategic partners and join forces to develop our strategies for building new plants. By partnering, we internalize engineering forces and reduce costs. Through these partnerships we make sure that we analyze the best solutions and align on obtaining the best conditions for both players. For instance, with the Rondonia plant, we were able to discuss important changes in the equipment directly with our manufacturing partner, which significantly reduced costs.
Following this pattern of building forces with new partnerships, Petropolis, a local beer company, recently acquired 50 percent of the group’s shares. How did this new participation influence the growth of your projects?
In 2004, the company’s strategy was focusing on building solid projects to ensure a secure financial return. However, without a strong financial partner it was difficult to increase our project portfolio and finance new projects every year. When Petropolis joined us, their financial support changed the situation: our balance sheet improved, we became more responsive to our customers and our overall business improved. Today, we are capable of working on six projects every year, and building a long-term vision with a large amount of new projects in our pipeline. Our target is around 50 MW per year, although this year we achieved a record 90 MW.
What can we expect from Electra Power in the next five years?
Our 2017 business plan sets a goal of 106 MW of installed capacity. This includes the current 11 small power plants that are already operating, and six new power plants under construction. These ventures represent an EBITDA of USD 18 million for the next five years. Our strategy is to proceed step by step. First, we finalize building our operations on the six new power plants and then we look into our pipeline of 17 new projects to come. Our business plan does not yet include any project in wind or solar power as we decided to focus only on small HPP for the moment, but this situation could change in the next few years.