IN DEPTH: Brazil's power struggle

Dilma Rousseff: playing down problems in the energy sector

Dilma Rousseff: playing down problems in the energy sector

It may come as a surprise to those only loosely following Brazil’s fast-growing wind industry, but there is a deep-seated crisis in the country’s power sector that could affect the outcome of the presidential election in October — and, in turn, the election result could have a big impact on the energy industry, including wind and solar.

President Dilma Rousseff, who is seeking re-election, faces a range of issues that analysts believe will dog her campaign — slow economic growth, rising inflation, high government spending, and liquidity and supply problems in the power industry. The latter will be the first item on the agenda of whoever wins the presidential race, say analysts.

Under Rousseff and her predecessor Luiz Inácio Lula da Silva — both of the centre-left Workers’ Party — the energy industry has gone through a series of upheavals that have reduced the income of generation, distribution and transmission companies, leaving them without the liquidity they need to make investments.

This could leave them unable to pay for already-contracted wind energy and make them unwilling to purchase new capacity that they can ill afford.

The first of these upheavals was the government’s attempt to control power prices in the wholesale and consumer markets. It has been setting low price caps at the auctions, squeezing companies’ margins and putting pressure on the whole supply chain.

This has been exacerbated by the fact that Aneel, the country’s power regulator, has not allowed the energy companies to improve their margins by increasing the rates they can charge consumers.

The second upheaval happened in 2012, when the government negotiated new 20-year contracts for generators, distributors and transmission companies, to replace the current 20-year concessions, which expire in 2015.

The government insisted it would only renew the concessions if companies significantly cut their prices, arguing that lower rates would more closely reflect the actual operating costs, since the initial capital spending on facilities had been paid back.

In an instant, their cash flows were vastly reduced, and the value of power companies on the Electric Power Index at São Paulo’s Bovespa exchange plummeted from a high of 35,827 points in April 2012 to about 23,000 points in mid-July. With their businesses devalued and their income reduced, finding affordable financing for future investments is proving difficult.

Thirdly, energy companies argue that there has been a lack of long-term planning, resulting in an unstable energy matrix that is over-reliant on hydro and wind. The effect of this was felt during large-scale droughts in 2013 and 2014, when depleted hydro reservoirs forced spot-market power prices to record highs. Generation and distribution companies, faced with low supply, had to buy in power on the spot market at several times the price they could charge customers.

Rousseff has tried to sweep these problems under the carpet by saying that they are only minor, temporary difficulties, but she is not fooling anyone.

Indeed, earlier this year her own government was forced to provide R$11bn ($4.8bn) of subsidised loans to distribution companies, while injecting a further R$4bn into the sector to reduce a development surcharge on consumers’ power bills. And because liquidity problems remain, analysts expect that another R$50bn of cut-price bail-out loans may be needed to help power companies balance their books.

In a rare moment of unison, the power companies (through their trade associations) wrote an open letter to the presidential candidates, urging them to solve this unsustainable situation.

Their proposals include more transparent long-term planning; fixed schedules for auctions; differentiated prices for different technologies at the auctions; a more predictable and transparent price- and tariff-setting process; several measures to guarantee baseload hydro and thermoelectric power production to avoid the wild fluctuations in spot power prices; and more support for new generation technologies such as wind and solar.

So what are the three main contenders for the presidency planning for the energy sector?

Dilma Rousseff, Workers’ Party (centre-left)

Rousseff’s campaign team is trying to play down the extent of the problems in the power sector, yet her economic and planning advisers have publicly pointed out that price-control mechanisms must be revised (although they have not explained how), and there is a general consensus that the auction model that her predecessor, Lula, instituted in 2004 needs to be improved.

With the coalition of minor parties supporting her unchanged since her election win in 2010, her energy policies — and her attitude to wind and solar — are unlikely to significantly change.

Aécio Neves, Social Democracy Party (centre-right)

Neves is the most market-friendly of the three main candidates. He is a long-standing critic of current interventions in the economy by state companies and state banks, and has indicated that he would loosen local-content policies such as that seen in the wind industry. This could result in cheaper wind energy and improved margins for turbine makers and the supply chain.

Although Neves does not want to set specific targets for renewable energy, he says he wants to boost wind and solar, particularly rooftop PV; provide tax incentives for low-carbon technologies; develop a national energy-efficiency programme; and seek new financing arrangements to

reduce dependence on the national development bank, BNDES. He has also said he would carry out national energy planning in conjunction with state governments, while implementing more transparent price- and tariff-setting mechanisms.

His key environment adviser, in what is effectively a shadow cabinet, is Fábio Feldman, a renowned green-economy consultant, pro-renewables activist and former Green Party gubernatorial candidate in São Paulo state.

Eduardo Campos, Socialist Party (centre-left)

The least known of the three candidates is undoubtedly the most overtly pro-renewables.

During his seven years as governor of Pernambuco state, which he led until April this year, Campos promoted the country’s first regional solar power auction and attracted wind-power investments from companies such as Impsa and LM Wind Power.

His manifesto calls for shifting the focus of the country’s industrial policy to promote the green economy and low-carbon technologies, although he would not be expected to change local-content policies. He says he will use revenues from deep-sea, pre-salt oil exploration to promote renewable-energy programmes and invest in new renewables technology and research centres. At the forefront of his energy policy is a pledge to promote rooftop PV through tax incentives and financing at below-market rates.

His green trump card is undoubtedly his running mate and would-be vice-president, Marina Silva, an internationally lauded environmental activist who came third in the 2010 presidential race with almost 20 million votes, when she was the Green Party candidate.

Silva was environment minister under President Lula for more than five years, while Campos served as Lula’s science and technology minister for about 18 months.

Note: Since this article was written Eduardo Campos has been killed in a plane crash

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