Energy in Brazil: Towards a Renewable Energy Dominated System

Energy in Brazil

Energy in Brazil Towards a Renewable Energy Dominated System

Antonio Dias Leite

London • Sterling, VA

First published by Earthscan in the UK and USA in 2009 Copyright © Antonio Dias Leite, 2009 All rights reserved ISBN: 978-1-84407-847-9 Typeset by 4word Ltd, Bristol, UK Cover design by Susanne Harris For a full list of publications, please contact: Earthscan Dunstan House 14a St Cross St London EC1N 8XA, UK Tel: +44 (0)20 7841 1930 Fax: +44 (0)20 7242 1474 Email: [email protected] Web: www.earthscan.co.uk 22883 Quicksilver Drive, Sterling, VA 20166-2012, USA Earthscan publishes in association with the International Institute for Environment and Development A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Leite, Antonio Dias. [Energia do Brasil. English] Energy in Brasil : towards a renewable energy dominated system / Antonio Dias Leite. p. cm. Includes bibliographical references and index. ISBN 978-1-84407-847-9 (hardback) 1. Power resources--Brazil. 2. Energy policy--Brazil. I. Title. HD9502.B7213L437 2009 333.79'40981--dc22 2009016848 At Earthscan we strive to minimize our environmental impacts and carbon footprint through reducing waste, recycling and offsetting our CO2 emissions, including those created through publication of this book. For more details of our environmental policy, see www.earthscan.co.uk

This book was printed in the UK by TJ International, an ISO 14001 accredited company. The paper used is FSC certified and the inks are vegetable based.

Contents

List of Figures and Tables Acknowledgements Foreword Preface List of Acronyms and Abbreviations

vii ix xi xiii xvii

Chapter 1

Historical Overview of the 20th Century

1

Chapter 2

Energy and Economic Growth: A Statistical Abstract

29

Chapter 3

Hydroelectric Power

43

Chapter 4

Fossil Fuels

77

Chapter 5

The Nuclear Issue

107

Chapter 6

The Role of Biomass and Land Use in Brazil

123

Chapter 7 New Energy, Small Hydro and Biomass-Fired Thermal Plants

159

Chapter 8

Energy Efficiency and Environment

171

Chapter 9

Brazil’s Energy Prospects within the World Context

201

Looking Forward

221

Appendix 1 Brazil in Maps Appendix 2 List of Main Sources of Information in Brazil Appendix 3 Brazilian Exchange Rate 1995–2007 Index

227 235 239 241

List of Figures and Tables

Figures 2.1 2.2 2.3 2.4 2.5 2.6 2.7 3.1 3.2 3.3 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 5.1 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 9.1

Per-capita economic growth, 1902–2007 Current foreign transactions Foreign debt GDP and total primary energy supply (TPES) Total primary renewable energy supply in Brazil Total primary non-renewable energy supply in Brazil Primary energy supply – renewable and non-renewable Hydro and thermal generation capacity Results from auctions of transmission lines since 1999 Price of electric power for the initial years of contracts Investments in exploration and new discoveries of oil fields Value of imports and exports of crude oil and oil products Results from auction rounds for oil exploration Deep-water wells Proven reserves of natural gas in Brazil Natural gas balance Regional distribution of natural gas sales Natural gas sales by consumer Natural gas prices at city gates Capacity factor of Angra I and Angra II power plants Automobile sales: domestic market share by type of fuel Production of ethanol Sugar cane yield in Brazil Charcoal consumption according to its origin Average productivity of forest plantations Results from auctions for the purchase of bio-diesel Land utilization in Brazil, 1970–2006 Grains – production, area and productivity Exports from agriculture – value, quantity and price Sugar cane and soybeans – regional distribution of planted areas Deforested area of the Amazon region Ratio between energy per capita and GDP per capita, 1965–2000

30 35 36 37 39 39 40 50 69 72 78 81 85 87 90 94 95 95 101 112 126 127 128 134 137 142 146 148 148 150 154 204

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9.2 9.3 9.4 9.5

World total primary energy consumption Projection of carbon dioxide emissions Final energy consumption by source Probable flow of liquid fuels in 2011

207 209 213 218

Tables 2.1 2.2 2.3 2.4 2.5 3.1 3.2 3.3 3.4 3.5 3.6 4.1 4.2 4.3 4.4 4.5 4.6 6.1 6.2 6.3 6.4 6.5 6.6 7.1 7.2 8.1 8.2 8.3 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8

Economic growth and inflation, 1948–2007 Total primary energy supply in Brazil by source Total primary energy supply and CO2 emissions Total energy consumption in Brazil by sector Dependence on energy imports by source Privatization of the electricity system Results from auctions of rights to potential hydroelectric sites Results from auctions of transmission lines – first phase Results from auctions of transmission lines – second phase Taxes and other charges added to the electric power price Generating capacity expansion Direct foreign investments in exploration and production of oil Proven reserves and production of oil Dependence on oil imports PETROBRAS concessions Foreign oil companies in activity in the Campos Basin Charges on fuel prices in 2004 Primary energy supply from sugar cane Input and output of energy in the sugar agribusiness Breakdown of energy content in sugar cane Primary energy supply – wood and charcoal Bio-diesel plants authorized by ANP up to January 2008 Harvested area of major crops in 2006 Status of PROINFA projects in February 2008 Comparative expenditures for water heating Results from PROCEL initiatives Household consumption of electricity Number of vehicles and fuel consumption, 1995–2007 Total primary energy, population and GDP World population, GDP and primary energy growth rates Growth forecasts of worldwide energy consumption Economic forecasts for Brazil, 2006–16 Electricity forecasts for Brazil Forecasts for electricity-generation capacity Power plants construction schedule Production forecasts for oil and natural gas

30 36 38 41 41 55 60 60 68 75 75 79 79 80 84 88 100 127 130 131 134 143 147 165 167 190 190 195 202 203 207 212 214 214 215 217

Acknowledgements

This book, in the English language, would not have been completed without the assistance and friendly advice of many people to whom I would like to express my gratitude. I begin by thanking, for their criticism and advice, the professors from the energy group of the Institute of Economy at the Federal University of Rio de Janeiro (UFRJ), where I worked for 40 years: Adilson de Oliveira, Helder Queiroz Pinto Jr and Edmar Fagundes Almeida; and also Carlos Eduardo Frickman Young for his advice on the environment. I am also grateful for assistance and support from Marcos J. Marques, Jayme Buarque de Holanda and Pietro Erber from the National Institute of Energy Efficiency (INEE). I am grateful for the advice that I received from Jerson Kelman and Gilma dos Passos Rocha from the National Electric Energy Agency (ANEEL), Luiz Augusto Lattari Barreto from the National Systems Operator (ONS), Rubens Cristiano Garlipp from the Brazilian Forestry Society (SBS), James Bolivar Luna de Azevedo from the National Energy Research Company (EPE), Nelson Fontes Siffert from the Brazilian Development Bank (BNDES), Felipe A. Dias from the Brazilian Petroleum Institute (IBP), Jose Domingos Migues from MCT, Leo Hime and Nelson Silveira from Brazil Eco-Diesel, and Henrique Saraiva from Usina Verde, all of whom offered pertinent suggestions. Regarding the nuclear issue, I received valuable support from Witold Lepecki (retired), Adriano Maciel Tavares and Mozart Camara de Miranda Filho from Brazilian Nuclear Industries (INB), and Leonam dos Santos Guimarães from ELETRONUCLEAR. The maps were kindly organized by Edna Campello and Helena K. Ito from the National Institute of Geography and Statistics (IBGE), Lilian Cordeiro de Mello and Leila Lobo de Mendonça from Centro da Memória da Eletricidade, and Haroldo de Moraes Ramos from PETROBRAS. I thank Aglen McLauchlan and Noreen Vanderput for their patience and a careful translation into English, as well as Cynthia Azevedo for her editing of the final text. A very special reference must be made to Hugh McManus (a Brazilian Scotsman), who patiently read the book from the first to the very last page and offered invaluable suggestions on the book’s coherence.

x Energy in Brazil

I must also thank Stephan Albrecshkirchinger from the World Energy Council and Norberto Medeiros from its Brazilian Committee for giving me the incentive to prepare this book, as well as Stephanie Flinth for her assistance. I must register, at this point, the decisive role of my daughter Maria Cristina, who always believed and insisted on the usefulness of this adventure in English. I must also express my gratitude to the rest of my family, especially to my wife Manira, for their moral support. I must thank my grandson, Antonio Fernando, an economist, who helped with statistics and graphs; and my granddaughters: Maria, a lawyer, who assisted in putting the book together; and Paula, a photographer residing in England, who gave decisive local support regarding the book format and editing, and her husband Pablo Ghetti, a law professor, for advice on legal concepts.

Foreword

Christoph Frei, Secretary General, World Energy Council Energy in Brazil: Towards a Renewable Energy-Dominated System, with its timely examination of Brazil’s renewable energy experience represents a valuable contribution to one of WEC’s core aims: to promote the sustainable supply and use of energy for the greatest benefit of all. In the spirit of WEC’s three sustainability goals to meet global energy demand – accessible, available and acceptable energy for all – the book offers the reader an outstanding case study on developing a sustainable energy mix in which renewable energy has a meaningful role. Antonio Dias Leite draws from his experience as Brazil’s former Minister of Mines and Energy in which role he was ultimately responsible for the development of sustainable energy production in Brazil. With his insights and practical experience, Energy in Brazil is a testimonial from one of the visionaries that made Brazil what it is today – one of the world’s most environmentally conscious energy producers. Brazil’s energy mix differs considerably from the rest of the world, including 46 per cent from renewable sources, with hydroelectric power overwhelmingly predominant. As a world first, in 2008 ethanol overtook gasoline as Brazil’s most used motor fuel. Facing an exciting and challenging energy future, where awareness and understanding of energy supply and the impact of climate change has never been greater, I highly recommend the book to decision- and policy makers in the energy business. The world needs exemplary cases and this book represents an excellent national case study for the development and implementation of a sustainable and diverse energy mix. The Brazilian energy success story, together with others around the world, must be the foundation for building a sustainable energy future for all. WEC is the world’s foremost multi-energy organization, with Member Committees in nearly 100 countries, including the world’s largest energy producers, and consumers covering all types of energy.

Preface

At the time of the publication of the second edition of my book A energia do Brasil,1 I began to consider the idea of an English version in a compact and readable format. It took me a year to complete the task. My objective is to focus on the original aspects of the Brazilian renewable energy experiences and on the complex relationship with both sustainable economic development and environment. This last issue is attracting attention from informed populations around the world. Compatible solutions take different forms in each nation depending on their territory, size and stage of development. They are extremely difficult in the poorest countries. The World Energy Council2 identifies three main aspects of the energy challenge to be analysed: accessibility, availability and acceptability, all of which gained importance after the Industrial Revolution and the entry of coal and subsequently of oil into our lives. At the present time, the main global concern with accessibility derives from the existence of some 1.6 billion people who are entirely dependent on highly inefficient traditional forms of energy. The access to affordable modern energy services is an inseparable part of acceptable economic and social development. The concern with availability was marked by the reports issued by the Club of Rome in the middle of the 20th century that pointed to a possible exhaustion of several natural resources, fossil fuels among them. The drastic conclusions were later moderated. The prospects are, however, being revived, especially regarding oil reserves that might have already reached a maximum. Many nations became dependent on fuel imports, a situation of such important economic and political consequences that in certain instances the quest for control over reserves gave way to military actions. The issue of acceptability of the ever-growing worldwide use of energy and of its corresponding aggression against the environment is continuously gaining force. The Rio-92 Conference3 became a landmark in the discussions on this subject due to its amplitude and global participation. Government goals and the society’s acceptance of proposed changes became relevant political issues. The concept of ‘sustainable development’ dates from that time. The geographical accident of the

xiv Energy in Brazil

choice of the city of Rio de Janeiro for this historical meeting made Brazilians feel like important interested parties. My initiative publishing the present book fits into this scenario. The concept of sustainability brought profound consequences to the decision process regarding new business ventures, especially to those related to energy production and use. Since then feasibility studies have to incorporate rigorous appraisal of damage to the environment, as well as social inconveniences to the population directly affected by the project. In a few countries, like Brazil, one must also consider the possible effects of any new project on the way of life of scattered groups of native Indian inhabitants. The industrialized countries only recently began to concentrate their technological capability on development of alternative sources such as wind and direct solar, as well as on increased efficiency in the use of energy. In most underdeveloped countries no significant efforts have been made in these directions. Due to the interrelation of all these aspects, the choice of new human projects to serve a defined purpose, including its time schedule and horizon, became a difficult task, for both entrepreneurs and licensing agencies. It is impossible to define precise quantitative criteria to compare alternative solutions to a certain need. Sometimes emotional, ideological or even political aspects dominate. Another consequence of the sustainable development concept is the classification of energy sources into the two groups, of renewable energy and non-renewable energy, which became part of everyday language and dominate the media and political discussions. To us in Brazil, the frequent exclusion of major hydroelectric power as a renewable source of energy in many international forums seems politically relevant. It is conceivable that in the industrialized world, which has already developed almost all of these natural resources, they represent an insignificant part of future domestic energy supply. However, on the basis of climate change studies, this question of developing all possible renewable forms of energy must be discussed on a worldwide basis, independently from its geographic location. There exists a large hydroelectric power potential to be harnessed in underdeveloped countries. And this may be accomplished at much less cost to the environment than some critical projects of the past. It also seems relevant to us in Brazil that ethanol production based on sugar cane has been mistakenly included as an example of diverting agricultural production capacity from foodstuffs to energy, which is not true in the Brazilian case since we are expanding both.

Preface

xv

In another scenario, public attention was recently attracted by the results of systematic studies that have been carried by scientists on climate change linked to greenhouse gas emissions produced in the combustion of fossil fuels. These studies provoked controversies within forums of scientists and businessmen, and entered the political scene, both local and international. In all these discussions a critical and difficult question is the quantitative estimate of the identifiable human causes of climate change. The dominant position is that, whatever the proportion, it is imperative that action be taken against further human contributions to climate change. In this worldwide context it seems to me that the present review of the Brazilian experience in renewable energies may be a useful case study, not only for developing countries but also for all those interested in the global energy and environment scene. Newcomers to renewable energy may profit from the analysis of our successful initiatives and innovations, as well as from our errors and failures. As an outcome of this history, Brazil now occupies an outstanding position in the world regarding the proportion of renewable energy in its energy matrix. This situation derives from the dominant use of hydroelectric power in electricity generation and of sugar cane ethanol in transportation. *** The book has nine chapters. The first two are dedicated to introducing Brazil as a country, through a historical overview and a statistical abstract covering recent trends in the economy and the energy sector. They are complemented by an appendix containing a collection of eight maps specially designed to help readers with geographic references in the text. Chapters 3–7 take care of each of the main primary energy sectors: hydro, fossil fuels, nuclear, biomass and new modern forms of energy. In Chapter 8 there is a description of the environment question in Brazil and its relationship with energy efficiency, and Chapter 9 presents the Brazilian energy scene within the world context. There are a few closing pages entitled ‘Looking Forward’. As this book is addressed to non-Brazilian readers, the Appendices include a list of main sources of information in Brazil. A table, ‘Brazilian exchange rates’, was also included in the Appendices to facilitate conversion to US$ values expressed in the Brazilian currency, real (R$). Antonio Dias Leite Rio de Janeiro, August 2008

Notes 1 A reference book (2007) covering one century of energy history in Brazil, Editora Campus-Elsevier, Rio de Janerio 2 World Energy Council (2000) Energy for Tomorrow’s World – Acting Now 3 United Nations Conference on Environment and Development

List of Acronyms and Abbreviations

ABACC

ABIOVE

ABRAF AMFORP AMS ANA ANDE ANEC

ANEEL ANFAVEA

ANP BACEN BBPP

BEN BIG-GT

Agência Brasileira – Argentina de Controle e Contabilidade – Brazil–Argentina Accounting and Control of Nuclear Materials Agency Associação Brasileira das Indústrias de Óleos Vegetais – Brazilian Association of Vegetal Oil Industries Associação Brasileira de Florestas Plantadas – Brazilian Association of Planted Forests American and Foreign Power Company Associação Mineira de Silvicultura – Minas Gerais Forestry Association Agência Nacional de Águas – National Water Resources Agency (a regulatory agency) Administración Nacional de Electricidad Associação Nacional dos Exportadores de Cereais – National Association of Grain Exporters Agência Nacional de Energia Elétrica – National Electric Power Agency (a regulatory agency) Associação Nacional dos Fabricantes de Veículos Automotores – National Association of Vehicle Manufacturers Agência Nacional do Petróleo – National Petroleum Agency (a regulatory agency) Banco Central do Brasil – Central Bank of Brazil Holdings Ltd. International consortium comprised of British Gas Americas Inc., El Paso Energy and Broken Hill Proprietary Company [BHP] ‘Balanço Energético Nacional’ – ‘National Energy Balance’ Biomass Integrated Gasifier–Gas Turbine

xviii

Energy in Brazil

BNDES

BTU CANAMBRA

CAR CBTN

CCC CCEE CCOI

CDE CDM CDTN

CEA CEG CEMIG CENPES

CEPEL

CESP CGCE CGEE CGTEE

Banco Nacional de Desenvolvimento Econômico e Social – Brazilian Development Bank (government-owned) British thermal unit Consórcio Canadense-Americano-Brasileiro – A consortium of engineering firms organized for energy studies 1962–66 Curva de Aversão ao Risco – Risk aversion curve Companhia Brasileira de Tecnologia Nuclear – Brazilian Nuclear Technology Company (extinct, superseded by INB) Conta de Consumo de Combustíveis – Fuel Consumption Account Câmara de Comercialização de Energia Elétrica – Chamber of Electrical Energy Commercialization Comitê de Coordenação da Operação Interligada – Coordinating Committee for Grid Operations (extinct) Conta de Desenvolvimento Energético – Energy Development Fund Clean Development Mechanism Centro de Desenvolvimento de Tecnologia Nuclear – Centre for Development of Nuclear Technology Commissariat à l’Energie Atomique Companhia Estadual de Gás (RJ) – State Gas Company Companhia Energética de Minas Gerais (utility) Centro de Pesquisa e Desenvolvimento – Research and Development Center (belongs to PETROBRAS) Centro de Pesquisa de Energia Elétrica – Electric Power Research Center (belongs to ELETROBRÁS) Centrais Elétricas de São Paulo (utility) Câmara de Gestão da Crise de Energia – Energy Crisis Managing Committee Centro de Gestão e Estudos Estratégicos – Centre for Strategic Studies and Management Companhia de Geração Térmica de Energia Elétrica – Thermal Electricity Generation Company

List of Acronyms and Abbreviations xix CHESF CMSE

CNAEE

CNE CNEN

CNP

CNPE

COGEN

COMGAS CONAB CONAMA

CONPET

CONSIPAM

COPEL COPPE

CPFL

Companhia Hidroelétrica do São Francisco (utility) Controle de Monitoramento do Setor Elétrico – Monitoring Committee for the Electric Sector Conselho Nacional de Águas e Energia Elétrica – National Water and Electric Power Council (extinct) Conselho Nacional de Economia – National Economic Council Comissão Nacional de Energia Nuclear – National Nuclear Energy Commission (a coordinating body) Conselho Nacional do Petróleo – National Petroleum Council (extinct, superseded by ANP) Conselho Nacional de Política Energética – National Energy Policy Council (a coordinating body) Associação Paulista de Co-Geração de Energia – São Paulo Association for Co-Generation of Energy Companhia de Gás de São Paulo – São Paulo Gás Company Companhia Nacional de Abastecimento – National Supply Company Conselho Nacional do Meio Ambiente – National Council on Environment (a coordinating and regulatory agency) Programa Nacional de Racionalização do Uso de Derivados de Petróleo e Gás – National Programme for the Rationalization of the Use of Oil and Gas Products Conselho Deliberativo do Sistema de Proteção da Amazônia – Deliberative Council of the Amazonian Protection System Companhia Paranaense de Energia (utility) Instituto Alberto Luiz Coimbra de PósGraduação e Pesquisa de Engenharia – Alberto Luiz Coimbra Institute – Graduate School and Research in Engineering Companhia Paulista de Força e Luz (utility)

xx

Energy in Brazil

CTC CTM CTMSP

DETER E&P EDF EIA EIA/RIMA ELETROBRÁS

ELETRONUCLEAR EMBRAPA EMTU EPE ESCELSA ESCOS

FGV FOB FUNCEX GCOI

GCPS

GDP GEF

Centro de Tecnologia Canavieira – Sugar Cane Technology Centre Centro de Tecnologia da Marinha – Naval Technology Centre Centro de Tecnologia da Marinha em São Paulo – Naval Technology Centre in São Paulo (nuclear research) Deforestation in real time Exploration and production Electricité de France (utility) Energy Information Administration Estudo e Relatório de Impacto Ambiental – Environment Impact Study and Report Centrais Elétricas Brasileiras S.A. – Brazilian Electricity Company (a holding company under state control) Eletrobrás Termonuclear (operator of nuclear plants) Empresa Brasileira de Pesquisa Agrícola – Brazilian Agricultural Research Company Companhia Municipal de Transporte Urbano (SP) – Municipal Urban Transport Company Empresa de Pesquisa Energética – Energy Research Company (belongs to the MME) Espírito Santo Centrais Elétricas (utility) Empresas de Serviços de Conservação de Energia – Energy Conservation Services Companies Fundação Getulio Vargas – Getulio Vargas Foundation (high-level education and research) Free on Board Fundação Centro de Estudos do Comércio Exterior – Foundation for Foreign Trade Studies Grupo Coordenador da Operação Interligada – Grid Coordinating Group (extinct, superseded by ONS) Grupo Coordenador de Planejamento do Setor Elétrico – Coordinating Group for Planning of the Electric System (extinct) Gross domestic product Global-Environment Facility

List of Acronyms and Abbreviations xxi GNC GTA GTB IAEA IBAMA

ICMS IEA IEN IGP-DI IMF INB

INEE INMETRO INPE IPCC IPEA IPEN IPI IRDB Itaipu Binacional IUCL IWRA

Gás natural comprimido – Compressed natural gas Grupo de Trabalho Amazônico – Amazon Working Group Gas TransBoliviano S.A. (Bolivian transportation company) International Atomic Energy Agency Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais. Renováveis – Brazilian Institute of Environment and Renewable Resources (operator for the MMA) Imposto sobre a Circulação de Bens e Serviços – Commodities circulation tax International Energy Agency Instituto de Engenharia Nuclear – Nuclear Engineering Institute (research) Índice Geral de Preços – Disponibilidade Interna – General Price Index – Internal Offer International Monetary Fund Indústrias Nucleares Brasileiras S.A. – Brazilian Nuclear Industries (mining and nuclear fuel cycle) Instituto Nacional de Eficiência Energética – National Institute of Energy efficiency Instituto Nacional de Metrologia – National Metrology Institute Instituto Nacional de Pesquisas Espaciais – National Institute for Spatial Research Intergovernmental Panel on Climate Change Instituto de Pesquisa Econômica Aplicada – Institute for Applied Economic Research Instituto de Pesquisas Energéticas e Nucleares – Energy and Nuclear Research Institute Imposto sobre Produtos Industrializados – Tax on industrialized products International Reconstruction and Development Bank Itaipu Binational (utility jointly owned by Brazil and Paraguay) Imposto Ùnico sobre Combustíveis Líquidos – Sole tax on liquid fuels International Water Resources Association

xxii

Energy in Brazil

Light LPG Macrotempo MAE

MAPA

MCT MERCOSUR MMA MME MW MWh NGO NUCLEBRÁS

OECD ONS PCH PDVSA PETROBRAS PNF ppm ppp PROCEL

Light Serviços de Eletricidade – Light Electric Services (utility) Liquified Petroleum Gas Macrotempo Consultoria Econômica – Macrotempo Economic Consulting Mercado Atacadista de Energia Elétrica – Wholesale Energy Market (superseded by the Chamber of Electrical Energy Commercialization) Ministério da Agricultura Pecuária e Abastecimento – Ministry of Agriculture Livestock and Food Supply Ministério da Ciência e Tecnologia – Ministry of Science and Technology Common Market of the South Ministério do Meio Ambiente – Ministry of Environment Ministério de Minas e Energia – Ministry of Mining and Energy Megawatts Megawatt-hours Non-governmental organization Usinas Nucleares Brasileiras – Brazilian Nuclear Power Plants (extinct, superseded by ELETRONUCLEAR) Organization for Economic Cooperation and Development Operador Nacional de Sistemas – Grid Operation Agency Pequenas Centrais Hidroelétricas – Small Hydroelectric Plants Petróleos de Venezuela S.A. Petróleo Brasileiro S.A. – Brazilian Petroleum Company (listed company under state control) Programa Nacional de Florestas – National Forestry Programme parts per million purchasing power parity Programa Nacional de Conservação de Energia – National Programme of Energy Conservation

List of Acronyms and Abbreviations xxiii PROCONVE

PRODES

PROINFA

PPT PT PWR RAP RAR RELUZ

RE-SEB REVAP REVISE

RIMA SBS SEMA SIVAM SWU TBG

TEP TNP

TOE

Programa de Controle de Emissões de Veículos – Programme to Control Air Pollution by Automotive Vehicles Projeto de Monitoramento da Floreta Amazônica por Satélite – Amazon Forest Satellite Monitoring Project Programa Nacional de Incentivo a Fontes Alternativas de Energia – National Programme of Incentives to Alternative Sources of Energy Programa Prioritário de Termoeletricidade – Priority Programme of Thermoelectricity Partido Trabalhista – Labour Party Pressurized Water Reactor Receita Anual Proposta – Annual Required Income Reasonably Assured Resources Programa Nacional de Iluminação Pública Eficiente – National Programme for Efficient Public Lighting Reestruturação do Setor Elétrico Brasileiro – Restructuring the Brazilian Electric Sector Refinaria do Vale do Paraíba (Francisco Lage) – Vale do Paraíba Refinery (Francisco lage) Revisão Institucional do Setor Elétrico – Institutional Revision of the Electric Power Sector Report of the EIA Sociedade Brasileira de Silvicultura – Brazilian Forestry Society Secretária Especial do Meio Ambiente – Special Environmental Secretariat Sistema de Vigilância da Amazônia – Amazon Vigilance System Project Separative Work Unit Transportadora Brasileira Gasoduto Bolívia– Brasil (owner of the Brazil–Bolivia gas pipeline in Brazil) Ton Petroleum Equivalent Tratado de Não-Proliferação de Armas Nucleares – Treaty for Non-Proliferation of Nuclear Weapons Tons of Oil Equivalent

xxiv Energy in Brazil

TPES TPS TUST TVA TWh UFMG UFRJ UNDP UNEP UNICA USP WEC WMO YPFB ZEE

Total Primary Energy Supply Tecniska Processor AB Tarifa de Uso do Sistema de Transmissão – Rate of Use of the Transmission System Tennessee Valley Authority Terawatt-hours Universidade Federal de Minas Gerais – Federal University of Minas Gerais Universidade Federal do Rio de Janeiro – Federal University of Rio de Janeiro United Nations Development Programme United Nations Environment Programme União da Indústria de Cana-de-Açúcar – Sugar Cane Industry Union Universidade de São Paulo – University of São Paulo World Energy Council World Meteorological Organization Yacimentos Petrolíferos Fiscales Bolivianos (Bolivian state-owned oil company) Zoneamento Econômico Ecológico – Economic Ecological Zoning

Chapter 1

Historical Overview of the 20th Century

Brazil before 1900 Europe heard of Brazil’s existence in the year 1500, after Portuguese navigators reported to Lisbon that they had discovered and landed in a region of the American continent today known as Brazil. They said that the land was vast and sparsely populated but for a number of isolated Indian tribes, who were primitive when compared with the cultural level already achieved by European countries. No reliable population estimates exist for that time. Since then, the political structure of the country may be divided into four stages: 1 Until 1807 it was a colony of the Portuguese crown, which had a monopoly on foreign trade, controlled immigration and prohibited the building of factories. 2 The short period (1808–21), when D. João VI, Regent of the Portuguese monarchy, threatened by the Napoleonic forces, moved from Lisbon to Rio de Janeiro and proclaimed it the capital of the Portuguese Empire. The opening of the ports to international trade, unrestricted immigration, suppression of the prohibition against factories, installation of the first schools of higher learning and the transformation of the city of Rio de Janeiro into a true capital all date from this period. 3 The Brazilian monarchy came into existence shortly after D. João VI returned to Portugal, leaving his son as Regent. Political independence, proclaimed in 1822 by the Regent who was later to be crowned D. Pedro I, Emperor of Brazil, continued under the reign of D. Pedro II. 4 The Republic was proclaimed in 1889. Portugal was a small country that did not have sufficient emigrants for an effective occupation of a vast territory of 8.5 million km2 (larger than both Europe and America). An attempt to adapt the native population to

2

Energy in Brazil

Portuguese ways and work methods was not a success. The trafficking of slaves from Africa, then common in the European colonies of the Americas, met the Colony’s need for a labour force. The influx of slaves was to reach 600,000 during the first 200 years. It intensified in the 18th century (1.8 million), doubling this figure by 1852, when it stopped, although slavery was only officially abolished in 1888. The immigration of Europeans in significant numbers began in 1808, and it is estimated that 1.3 million entered the country during the period of the monarchy. Immigration underwent a further impetus after the abolition of slavery and proclamation of the republic. It consisted mainly of Italians, Portuguese, Spaniards and Germans. Traditionally, successive cycles of the economic evolution are characterized by predominant activities, some temporary, others consolidated. The first cycle consisted of exploiting Brazil wood, the pau-brasil used in Europe for dyeing cloth. Before long, the cultivation of sugar cane was initiated and sugar mills were built, an activity that would permanently occupy an important position. The cultivation of coffee started in the 18th century; it continues today and has dominated the economic history of the country for a long time. Extractive activities, after the extinction of the use of pau-brasil, included gold mining and the harvesting of rubber in the Amazon region, both of limited duration. Industrialization was given its first boost after the declaration of independence and a more significant impetus in the second half of the 19th century. But technological innovations took time to be adopted, especially where energy was concerned.

Brazil in 1900 Due to slow colonization, Brazil had, at the beginning of the 20th century, a predominantly rural population: 17.4 million inhabitants living along its extensive coastline. Concentrated urban areas were still in their infancy. Some of them housed industries founded at the end of the previous century. In 1907, industry employed 150,000 workers, corresponding to less than 1 per cent of the population. Land in economic use barely occupied a territory at a distance of 500 km from the coast and was served by 14,000 km of railways used for the export of basic products. At that time, the USA already had 70 million inhabitants and more than 200,000 km of railroads. Within the context of new energy sources, the use of gaslight continued to be restricted. Only ten small generating plants for local consumption provided electric power.

Historical Overview of the 20th Century

3

Notwithstanding the limited dissemination of the benefits and the comfort provided by new forms of energy, there did not appear, at that time, to be any significant popular movements for the immediate expansion of gas and electric power services. With industry still taking its first steps and the abundance of firewood, it was also natural that the government was not greatly motivated to supply energy. The transition from empire to republic did not lead to new economic concepts regarding the role of the state, whose attitude was in general predominantly liberal. Concessions of public services and the exploitation of natural resources continued to be granted without distinction to national and foreign private enterprise. The first Constitution of the Republic, in 1891, left the matter of concessions for public services in suspense. For many years two provisos defined the bases for the survey and exploitation of mineral and energy resources. One determined that mines belonged to the owner of the land. This stipulation was not regulated and, as a result, private efforts to undertake surveys for minerals were relatively insignificant. The other strengthened the decision-taking power of the states in the matter of mineral surveys in detriment to the federal government by transferring to the former the ownership of most unoccupied lands. The Constitution made no reference to the exploitation of hydro resources. The draft legislation for a Water Code prepared in 1909 was not approved at that time. Congress delayed it until the 1920s. However, in the 1930s it served as a basis for a new draft bill. The official beginning of geological surveys of the country’s mineral resources was the creation of the Geological and Mineral Service of Brazil in 1907, headed by Orville Derby, an American geologist who was a longterm resident of Brazil. In spite of imported mineral coal, the progressive inflow of petroleum by-products and initiatives in the field of hydroelectric power, firewood had practically no competition. There was a regular supply, mainly based on the exploitation of the heterogeneous Atlantic rainforest. It encompassed a selective extraction of hardwood and the felling of other kinds of timber, as well as, in many cases, of the former also, for the production of firewood, mainly for the railways running on steam locomotives, the incipient vegetal-coal-driven metallurgy and other industries, aside from its domestic use. Since deforestation was carried out in an extremely varied manner, with total individual freedom, there is very little statistical information available. The firewood culture prevailed in Brazil for much longer than in any of the leading industrialized countries. Coal, the second source of energy, was imported on a regular basis until the beginning of the First World War, when the United Kingdom’s

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Energy in Brazil

shipping capacity lessened. Between 1900 and 1913, regular importations had increased at a rate of 8 per cent per year. During that time, a little coal was already produced in the south of Brazil. There is no statistical information available on this activity, which was carried out on a very small scale by private enterprise. Despite the position this raw material had acquired on the national scene, the level of consumption was insignificant when compared with the role played by coal worldwide. At the beginning of the 20th century, Brazilian consumption of 900,000 metric tons amounted to only 0.1 per cent of the world total. During the administration of President Prudente de Morais (1894–98), an attempt was made to foster coal mining by exempting equipment from import duties and effecting a change in the duties levied upon imported coal. During the Rodrigues Alves government (1902–06), a technical mission headed by Israel Charles White was contracted to investigate the potential of national coal in the south of the country. The mission’s report was published in 1908, giving rise to lengthy discussions.

Hydroelectric power makes its entrance In the absence of specific legislation, electric power services, from generation to distribution, were ruled by concession terms and a corresponding contract between the utility and the government. The latter was represented by the federal government or by state and municipal governments, depending on the nature and the scope of the contract. Each case was different and different solutions were applied. At the turn of the 20th century, several private projects for generating power were underway, strictly for localized interests, especially in the states of São Paulo, Rio de Janeiro and Minas Gerais. The majority of these were being undertaken by entrepreneurs whose agricultural, commercial, industrial or financial activities were connected with the communities who benefited from the introduction of this service. At that time, there also appeared entrepreneurs and promoters of big business from abroad who were interested in participating from the start in the modernization and industrialization phase which was presumed to be imminent in the capital of the Republic and, especially, in São Paulo. These interested parties included some who jointly in 1897 started an enterprise that was of the greatest importance to the development of electric power in Brazil and the area of São Paulo. There were people of importance in this undertaking: entrepreneurs and technicians based in Canada, as well as prestigious Brazilians from São Paulo, well known in the world of business and politics. This group obtained the concession

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for the service of urban transportation in electric vehicles from the Municipal Chamber of São Paulo and promoted the creation, in Toronto, Canada, of the São Paulo Railway Light and Power Co. Ltd., with the participation of other Canadian capitalists. In order to meet the needs of the services that it had just contracted for, the new company built the Parnaíba hydroelectric plant on the Tietê River, inaugurated in 1901, whose capacity of 2,000 kW was soon doubled. In 1904, these same Canadian entrepreneurs started negotiations with Pereira Passos, the mayor of Rio de Janeiro, and with President Rodrigues Alves concerning an enterprise similar to that of São Paulo to be installed in Rio. Since the reaction of the authorities was favourable, the Rio de Janeiro Tramway Light and Power Co. Ltd. was founded in Toronto that same year. Similarly to what had occurred in São Paulo, the concessions for the supply of electricity in the Federal District and the utilization of the hydro power of the Ribeirão das Lages and the Paraíba do Sul River were granted, respectively, by the municipal and state governments. The erection of the Fontes hydroelectric plant began in 1905 and was completed in 1908, with an installed capacity of 12,000 kW, soon to be expanded to 24,000 kW. It was the largest plant in Brazil and one of the largest hydroelectric plants in the world. The entry of Light in the country’s two main urban centres was not always smooth. Several conflicts of interest arose with national kindred companies. In Toronto, however, the group became one when Brazilian Traction, the holding company, was founded in 1912. While the two Light companies ended up taking over Brazil’s main markets and carried out projects whose scope was large for those times, a number of local smaller projects entered the scene. In general, each one dealt with the supply of energy to a specific location, due to a municipal concession. The convenience of organizing bigger companies with a larger scope of action soon became clear. This resulted in a number of mergers and incorporations that were reinforced in the 1920s. Even if the major growth between 1885 and 1895 is only considered to be a starting point, it was sound and continuous in subsequent periods. The installed capacity was multiplied seven times between 1895 and 1905, and another seven times between 1905 and 1915. The growth of the generating capacity of electric power and the scope of the services by various means was noteworthy. At the same time, the supremacy of hydroelectric power, which reached 84 per cent of the total energy matrix in 1915, was being consolidated. Once again this differentiated the evolution of the energy economy in Brazil from that in the forefront industrial nations, where mineral-coal-driven thermoelectric power predominated.

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Energy in Brazil

Little interest in surveys for oil The evolution of the oil economy in Brazil differs somewhat from that of the electric power services. While the latter was already in full development at the beginning of the 20th century, local production of oil and its industrialization only became a cause for concern in the 1930s. Prior to that, theoretical debates upon the publication of the White Mission Report on the prospects of coal in the south of the country were of historical significance, but the Report was not favourable towards the use of oil. With no national production, all petroleum by-products were imported. The official record of importations starts with kerosene, in 1901. Petrol is mentioned in 1907, due to the need to fuel the first motor cars. The importation of fuel oil only begins in 1913, when it starts to compete with coal, although only on a modest scale, at least until 1920. Diesel oil appears later, in 1938, when the first three 450-CV diesel–electric locomotives, belonging to the Viação Férrea Leste Brasileiro in the state of Bahia, began operating. Consumption of petroleum by-products quadrupled between 1905 and 1915. Total Brazilian consumption in 1915 amounted to 355,000 m3 and corresponded to 0.6 per cent of the world consumption of 62 million m3. Although this figure was still small, petroleum by-products already occupied a more significant position than the coal market.

Industrialization, the First World War and the financial crisis of 1929 In the first few years of the 20th century, industrialization required major importations of equipment. With it came new technologies, most of which needed, on an increasing scale, new forms of energy, with emphasis on steam engines and electric power. With the eruption of the First World War, the importation of equipment for the construction of electric power plants suddenly became precarious. Nevertheless, prior to and during the war, there was a continued surge of industrialization in the country. It was sustained in three ways: the migration from the farmer’s capital funds to the cities; the substitution of imports, which had become more complicated; and, finally, the entry of immigrants, in their great majority without substantial financial resources, but with an industrial culture which was already consolidated in their countries of origin. Industrial production grew 44 per cent over the five-year period 1915–20 and, respectively, 35 per cent and 9 per cent in subsequent five-year periods, the latter affected by the 1929 financial crisis.

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After the First World War, these three events jointly caused the supply of electric power to change into a national and governmental concern, although there was much discussion and little practical action. Brazil lagged somewhat behind the leading countries and even behind some in Latin America.

A liberal policy and nationalistic demonstrations In principle, the national economic policy continued to be liberal during the governments of Wenceslau Brás and Epitácio Pessoa (1914–22). Agricultural and coffee export interests predominated. New and revolutionary political ideas gained weight at the beginning of the 1920s. Nationalistic demonstrations, though scarce, gathered strength and led to two relevant occurrences: one in the business sector and the other in the military. On the military scene, a movement known as lieutenant-ism was ostensibly initiated in 1922 and relied on the participation of the majority of young army officers. In political terms, the predominant thinking of this group was to bring about the end of oligarchic power that had existed since the beginning of the Republic, and establish a valid electoral system. In the economic field, they advocated government protection of domestic products, especially for industry, and less foreign dependence caused by foreign capital and foreign debts. These discussions led for the first time to the inclusion of nationalistic restrictions to economic activities in a constitutional amendment voted in 1926, by determining that ‘mines and mineral deposits essential to security and national defence and the lands on which they lie cannot be transferred to foreigners’. This was also the first time that the economic issue was officially linked to security and national defence. This attitude gained force later and took on dramatic aspects in the debate on oil policies. In practice, and within the electric power sector, national pioneer companies fell under the control of foreign capital and, in the oil sector, initiatives were on a moderate scale when compared with the tasks to be undertaken. The weakness of national private enterprise in meeting the challenge of the expansion of new forms of energy required – electric power and oil – reinforced the theory of state intervention.

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Energy in Brazil

The 1930 Revolution and political, economic and energy policies The worldwide financial crisis (1929) and the Brazilian political Revolution of 1930 resulted in huge changes in the nation’s political, economic and social makeup. Using the argument that the oligarchy was guilty of electoral fraud, the National Congress was closed and a provisional government, under President Getúlio Vargas, took over in a coup d’état. Under the Vargas administration, extremely nationalistic lieutenants were given substantial power and made themselves strongly felt. The state apparatus underwent a modernizing reform of a centralizing and regulatory nature. When Congress was reopened, the 1934 Magna Carta was approved, but later substituted by a Constitution, introduced in 1937, as a result of a new authoritarian coup d’état by President Vargas. Both constitutions contained the principle of progressive nationalization of productive activities that would only be dropped in the 1946 Constitution. After abandoning the former liberal policy, the government formulated draft bills on projects of industrialization, the majority of which were drawn up on a technical basis. They concerned the creation of an infrastructure for transportation and electric power plants, oil prospecting and the implantation of basic industries. Less efficient attempts to apply the same criteria to the social scenario received little attention due to greater political interference and did not have much success. Environmental issues had not yet gained any importance. The strategy of those days included a policy of substituting imports. It had a certain continuity, but erred at times by committing excesses. In Brazil, the first definitions for an energy policy were established in the 1930s. Formerly, the government had abstained from defining general rules and from intervening directly in productive activities. The Water and the Mine Codes were formulated at that time. They introduced the innovation of a distinction between property rights to the land on the one hand, and the hydro resources and mineral wealth existing on the surface or below the surface on the other. The latter could thus be exploited by means of concessions and controlled by the government. A Forestry Code of little practical significance was also approved. The ‘gold clause’ included in electric power and gas service contracts signed at the beginning of the 20th century was also abolished. The purpose of this clause had been to protect invested capital against the risks of devaluation of local currency. In parallel to these changes, the principle of predominance of the government in the taxation of mineral resources was established, as well as, in a still incipient form, in taxes that would

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later become the backbone of the state-owned system of electric power companies. The Water Code was not immediately implemented, creating a climate of uncertainty among the electric power utilities. Higher inflation during the war years, the difficulty of importing equipment and the emerging national equipment industry contributed to a drastic reduction in the rhythm of investment in expansion and in spending on the maintenance of existing installations. As the demand grew, a critical electric power-supply situation arose, leading to rationing in various parts of the country. The federal government appointed two councils (1938–39), which were made responsible for proposing and conducting the electric power (National Water and Electric Power Council, CNAEE) and the petroleum (National Petroleum Council, CNP) policies. The CNP was created concurrently with the start of a major debate on the oil policy that, at the time, was still inconclusive. The CNP trained personnel at all levels and intensified exploratory drilling. The latter resulted in the discovery of Brazil’s first productive well (1938) in Lobato. Firewood continued nevertheless to be by far the most important energy resource in the country. Since existing, inferior-quality coal was being mined on a small scale, consumption needs were, on the whole, met by imports. At the time of the Second World War, the insignificant coal mining efforts received a boost from the government’s decision to build the country’s first integrated metallurgical plant with US technology and funding. It used mineral-coal coke to valorize Brazil’s large reserves of iron ore. As a result, a great effort was made to promote the mining and industrialization of coal from Santa Catarina, the state producing the only coal considered to be of a quality good enough for making coke. Its by-product was coal that could be burned in boilers for generating electric power. This scheme lasted for approximately 40 years in Santa Catarina, while small thermal plants driven by local coal were gradually installed in the state of Rio Grande do Sul. Petroleum surveys still did not attract national or foreign investors. Brazil imported all the petroleum by-products it consumed. Major electric power projects continued to focus on hydroelectric power. For reasons unrelated to the energy policy, but rather resulting from the instability of the international sugar market, a programme for the production of anhydrous alcohol from sugar cane was implemented, the alcohol to be added to petrol used in motor cars in a proportion inferior to 10 per cent. This experiment with what became known as ‘motor alcohol’ would, years later, facilitate the gradual introduction of an extensive National Pro-Alcohol Programme funded by fiscal incentives.

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Energy in Brazil

Political reform, the atomic bomb and an oil monopoly After the Second World War, 15 years of an almost always arbitrary government under President Vargas came to an end. General elections were called and the Constitution (1946) was again reformed. President Dutra was elected, a discreet man, less centralizing and less of an interventionist. At the end of Dutra’s mandate, President Vargas returned to power, this time by means of direct elections. The concept of the need for economic planning, initially with a view to organizing the country after the war years, was consolidated during the Second World War. Economic planning continued for a long period. The atomic bomb dropped on Hiroshima that ended the Second World War on 6 August 1945 brought about a revolution in the field of energy and a reshuffle of power on a world scale. It was believed at that time that nuclear energy used for peaceful purposes would create new opportunities for humanity, especially in developing countries, but this was unfortunately not the case. In Brazil, there was great interest in this matter, especially on the part of scientists connected with theoretical physics and in circles involved in international relations. The nation sought to draw up a domestic policy that was coherent with the stand taken internationally in order to gain access to the new technology that was in the hands of a very few countries which were gradually forming the ‘Nuclear Club’. The country was heading for a corporate structure in electricity services under direct control of the state. In the sphere of oil, where only incipient activities were taking place, the political debate intensified and ended up moving from Congress to class associations and the general public. So far, there had been no foreign projects for oil surveys within the country. The events that were presumably linked to the interests of international oil companies and culminated in the expropriation of oil companies in Mexico and the Chaco war (between Bolivia and Paraguay) were fairly recent. In Brazil’s controversial scenario only a few advocated freedom of action in the matter of oil. Opinions, however, were divided as to the form state actions should take. The government’s proposal, submitted to Congress in 1951, was moderate, but, after two years of debates, the approved legislation was radical, establishing a state monopoly on all activities related to oil, with the sole exception of the distribution of derivatives which had for a number of years already been carried out by private enterprise, subsidiaries of the large international oil corporations. PETROBRAS, a mixed-economy company, was founded in 1953 under this law and assigned to take charge of monopolistic activities. This extreme solution

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was the outcome of an emotional debate and gave PETROBRAS and its staff the impression that they were representatives of Brazil’s oil policy. The power PETROBRAS had acquired also caused a conflict between it and various governments that were involved in petroleum issues. In the post-war years, analyses and long-term plans followed each other. Among them was the Mixed Brazil-United States Commission (1951–53), which had the great merit of forcing those responsible for specific economic development projects to prove the technical feasibility of such projects and to study their economic and financial viability. Funding included in the programme approved by the mixed commission was granted by the International Reconstruction and Development Bank (IRDB) and the American Eximbank under exceptionally favourable conditions of maturity dates, grace periods and interest rates. The loans made no distinction between public and private ownership, national or foreign. They were mainly focused on electric power and transportation. The US section of the mixed commission took the stand that the oil sector did not involve funding problems since transnational companies would have been prepared to make risk investments if state monopoly had not been a closed issue in Brazil. The counterpart for international funding was provided by a fund of public resources and the creation of the Brazilian Development Bank (BNDES), as the investing agency and administrator of the programme. US integrated hydrographical basin programmes such as the Tennessee Valley Authority (TVA) influenced similar activities in Brazil. The most notable enterprise concerned the São Francisco River. The Companhia Hidroelétrica do São Francisco (CHESF), founded in 1948 and given the mission to build the Paulo Afonso plant, was an example of direct state intervention in the electric power sector. During its first stage alone, this plant doubled the installed capacity in the entire Northeast. There followed other state promoted projects by the federal government and several state governments. From a strictly political angle, however, the situation became so complex that it generated a crisis that culminated in the suicide of President Vargas. Several provisional governments followed upon his death until 1955, when Juscelino Kubitschek won the presidential elections.

An era of development President Kubitschek skilfully reinstated political calm and launched an economic development project under the slogan ‘fifty years of progress in five years of government’. The path he took considered pragmatic

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Energy in Brazil

solutions with the participation of national and foreign private enterprise, as well as of companies controlled by the state, and avoided radical ideological stands. A Development Council, whose secretariat was installed within the BNDES, was put in charge of planning. The energy sector absorbed nearly half the overall budget for this plan. At the end of his term of office, Kubitschek founded the Ministry of Mines and Energy (MME). In keeping with the objective to expand the supply of electric power, funding was raised from the United Nations Special Fund to carry out a survey of the hydro resources of the Southeast Region, the most progressive in the country. The World Bank, in this case the executor of the fund, granted financing for this purpose. The engineering firms chosen to carry out the work formed a consortium under the name CANAMBRA that comprised the Canadian Montreal Engineering Co. and G.E. Crippen and Associates, as well as the American Gibbs and Hill. Thus their headquarters were in countries that had large hydroelectric resources similar to Brazil’s. On the other hand, the Coordinating Committee for Energy Studies of the CentreSouth Region, created in 1963, contracted local consultants. CANAMBRA’s work was based on making an inventory and organizing possible projects, while at the same time drawing up a methodology to be adopted for this purpose. The project became an initiative of long duration. In practice, a relevant fact at that time was the decision to found the Central Elétrica de Furnas, which was inaugurated in 1964, with an installed capacity of 1,100 MW. This move changed the scale of the hydroelectric projects in the country. After many years of waiting and discussion, the Water Code was finally regulated in 1957, by Decree 41,019. With only minor changes, it ruled the life of electric power utilities for more than 30 years. The Water Code did not include explicit recognition of the persistent inflation that was only to be solved later (1964). The sole tax on electricity bills was introduced and improved at the same time. It was earmarked for increasing the investment capacity of state-owned electric power companies. Private companies, still of major importance at that time, achieved stability although they had a smaller investment scope, either because they did not have easy access to funds of fiscal origin or because there was no longer a significant influx of foreign capital. As a result, they ceased to invest in new generating units, and this task became the responsibility of the state. After PETROBRAS was founded, a technically competent structure was progressively implemented in the oil sector. Activities were considerably expanded when compared with those that had been carried out under the government’s direct administration. Exploration results, however, were

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disappointing, giving origin to a new controversy, this time on a technical issue. Surveys had been entrusted to Walter Link, a well-known international expert, previously connected with Standard Oil. He was responsible for drawing up a scheme for survey and prospecting services, personnel training and for drafting plans and work methods. At the end of his contract (1961), Link submitted an extensive report. In his opinion, the existence of large oil reserves on Brazilian territory was improbable. No thought had as yet been given to a survey of the continental shelf. The report gave rise to all kinds of criticism, much of which were without technical foundation. There ensued a momentary loss of direction and it took a number of years before new directives were established for the continuation of work on land. Since the industrial segment was not subject to risks, the implantation of terminals, pipelines and refineries continued without major hitches. While the energy infrastructure in Brazil was growing rapidly, the peaceful use of nuclear power for producing electricity was beginning abroad and, in 1956, the National Nuclear Energy Commission (CNEN) was founded in Brazil. A number of minor incursions into geological surveys of atomic minerals were made at that time without much success in finding uranium, which was the only mineral used in the reactors in operation. However, substantial reserves of thorium were discovered, a fertile material for which no processing technology existed. This led to the start of a programme to develop a prototype of a special reactor for a cycle in which thorium played a major role.

Temporary political upheaval After the inauguration of Brasília, Kubitschek passed the government to Jânio Quadros, elected in 1960 by a large majority. The new administration did not have the same majority in Congress. It also seemed that it did not know where it was headed. Nevertheless, in 1961, it succeeded in finalizing the lengthy process of creating ELETROBRÁS as a holding company for federal government investments in electric power. For reasons without a satisfactory explanation, Jânio Quadros resigned, plunging the country into a new institutional crisis. Eight months were lost. The succession of Vice-President João Goulart was also troubled and contested. There followed several ministries under the new president, including a parliamentary interregnum followed by a return to the presidential system. These were two periods with little action in the economic sphere, the country surviving from the impetus provided by the previous government.

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Energy in Brazil

Nationalists renewed their pressure, this time in close association with a populism whose objectives were strictly of an electoral nature and came very close to radical leftist stands. The political and administrative instability which dominated the national scenario at the beginning of the 1960s, the escalating and explosive inflation in 1963, when it reached 90 per cent per year, as well as the ambiguity as to where the government was leading the country, created such a confused cultural mixture that civilians and the military joined forces and launched a coup d’état in 1964, initiating an authoritarian era that would last 20 years.

Military governments, institutional and economic reform It is important to make a distinction between the two phases of military rule: the first, from 1964 to 1973, was financially stable, made economic and administrative reforms and promoted development based mainly on domestic savings; during the second phase, starting at the time of the first oil crisis and continuing until 1985, an attempt was made to maintain the country’s rapid growth by implementing a programme of investments in infrastructure based on foreign loans and the substitution of imports. During the first phase, a strategy based on the use of large, state-owned companies for promoting economic growth and dragging industries in the private sector along this path was combined with an efficient administration of public resources, especially while Minister Delfim Netto was in charge of a pragmatic administration of the Treasury. Major changes in energy policy were introduced during this period. From the beginning, a norm was established to implement a tariff based on the concept of a fixed return on historical investment, including protection against inflation. A key measure was to extend to the electric power utilities, and adapt to them, the norms for the monetary correction of assets and the periodic updating of the monetary expression of the historical cost of the investment. The acquisition of American and Foreign Power Company (AMFORP), the second-largest electric power distributor in Brazil, was concluded in a deal that had been negotiated during the turbulent former government and could no longer be reversed despite the new stable conditions offered to both private and public utilities. Only the sector’s pioneer, the Light Company, remained and continued to be responsible for a large market.

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Centralized investment planning in the electric power sector was intensified. On the other hand, however, the operation of electricity services became decentralized when the federal government transferred subsidiaries recently acquired from AMFORP to the states. In the Northeast, all secondary transmission lines of CHESF were passed on to the distribution utilities. This move consolidated the position of a number of sometimes very unsound state companies and restricted ELETROBRÁS’s control to regionally integrated corporations. At that time, the concept of integrated companies predominated, except in the Northeast, where the entire generation operation was concentrated at CHESF. The vertical integration of the companies greatly strengthened their expansion capacity and the organization of competent technical teams. It was, however, criticized at the end of the 1990s when the energy policy was revised, as it intensified the state monopoly and restricted competition. Brazil’s traditional preference for hydroelectricity continued in plans for new plants since this option offered the most opportunities; thermoelectric plants were considered strictly complementary. After years of indecision, Brazil began to build its first nuclear plant, acquired abroad (1967) mainly to familiarize national engineers with its construction and operation. The choice fell on a uranium-enriched and light water-cooled reactor, and on a bid submitted by Westinghouse, as this company was the most experienced in the world in building the reactors that later predominated in the market. Unfortunately, the objective of this choice, namely to reduce the technical and economic risks of the first installation, was not attained: some similar equipment from the same manufacturer installed in other countries had serious defects, even before the Angra I plant went on line and, in its turn, was found to be flawed. This resulted in the turbulent entry of Brazil into the field of nuclear power generation, with frequent interruptions, legal issues with Westinghouse and public discredit.

Inadequate oil prospecting While the expansion of electricity services took place safely and with increasing efficiency, the same did not apply to the critical need for oil prospecting. Reserves stayed stable and were insufficient to ensure a minimum of security for the country since production did not even cover one-third of consumption. PETROBRAS suffered the direct impact of the upheaval in the government at the beginning of the 1960s and needed time to reorganize. It was uncertain whether the problem was a result of inadequate discoveries, or if it was due to insufficient risk investment,

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Energy in Brazil

lack of initiative, confirmation of Link’s diagnosis or simply bad luck. Findings were unsatisfactory. Consumption increased, but reserves remained stagnant. It was nevertheless undeniable that PETROBRAS was too cautious in regard to work related to the recently discovered traces on the continental shelf. The extremely low oil prices on the international market discouraged prospecting for new reserves. A debate ensued in the very core of the federal government, this time with no leaks, not even to Congress, as to what procedure to follow. In 1970, the signing of risk contracts with international companies was suggested on a ministerial level, with a view to expanding activities and, more importantly, to diversify the concepts of surveys. Political pressure, however, was unable to overcome the company’s refusal with the backing of the nationalistic military. As a result of criticism of insufficient action, surveys on the continental shelf were finally intensified, funded by national financial resources, until the first oil crisis caused international oil prices to spiral. PETROBRAS concentrated its resources on transportation, terminals, refining and, principally, petrochemicals, relegating its mission to reduce the nation’s dependence on oil imports to a secondary position. This strategy would later, when the second oil crisis occurred, prove its weakness.

Itaipu Binational hydroelectric plant After lengthy and difficult negotiations with Paraguay and Argentina, the Itaipu Binational Company, controlled equally by Brazil and Paraguay, was founded in 1973. It was assigned the specific mission of building the Itaipu Hydroelectric Plant, with an installed capacity of 12,000 MW. When completed, it represented almost one-third of the integrated South–Southeast system and was, at that time, the largest hydroelectric enterprise in the world. In keeping with an agreement with Paraguay, the Brazilian government submitted a draft bill to Congress that gave priority of use of Itaipu energy to the Southern and Southeastern utilities. The price foreseen was relatively advantageous, decreasing over a period of time. Unfortunately the construction of the plant came up against the Brazilian government’s financial problems, causing delays. Consequently, the investment in its construction increased substantially, a circumstance that would subsequently lead to a number of issues with the utilities. The first two generating units went into regular operation in 1984.

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Response to the oil crises of 1974 and 1979 During the second stage of military governments, it was decided in 1973– 74, after the first oil crisis, that among the possible adjustments in macroeconomic policies it would be good to make a major effort of economic expansion based on foreign loans at market interest rates, considering that the World Bank and the like had suspended funding. It was intended to substitute imports and complete the infrastructure and industrialization, in the hope that this would result in a trade balance capable of permitting the future redemption of loans. The industrialization plan was, however, too ambitious and had several negative corollaries. Expecting continued economic growth and the resulting greater demand for electricity, it was forecast that the shortage of electric power would require nuclear complementation of the hydroelectric park and would justify a major nuclear programme. Under these circumstances, and according to the supposition that nuclear autonomy depended on a new industry for the manufacture of reactors, it was concluded that it would be necessary to order a minimum of eight 1,300-MW reactors. This led to a huge programme, submitted to the government of the Federal Republic of Germany with a proposal for co-operation. As was to be expected, this solution resulted in protests from the USA. Due to the decline in national investment capacity and the consequent financial problems, the project could not meet the established timetable and was finally stopped. There remained one plant under construction, the first of a series of eight. From the point of view of electricity supply, the others were not missed because, faced with the ensuing economic crisis, demand did not increase as expected. The second oil crisis and consequent price hike generated great uncertainty regarding its impact on the nation’s economy, especially on the trade balance. In 1983, oil imports amounted to as much as 55 per cent of the overall value of importations. In order to face the oil crisis, programmes for replacing petroleum by-products were launched. Another consequence of the first oil crisis was taking advantage of the experience acquired earlier with alcohol. A much more ambitious programme to replace petrol with alcohol than that in effect in the 1930s was launched. As of 1982, a programme known as Pro-alcohol sought to replace petrol with hydrated alcohol. It was implemented with official financing for the construction of distilleries at subsidized interest rates. Alcohol was known to be non-competitive despite the high prices that oil had already reached at that time. It was hoped that they would remain high, but this only happened years later. On the other hand, it was also hoped that the sugar cane agro-industry would become more efficient than

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Energy in Brazil

it actually did. It was thus a long-term policy directed to expanding the participation of renewable energy in the national energy matrix that led to a temporary expenditure of subsidies. Domestic mineral coal as a substitute for fuel oil began to receive a subsidy for transportation, when used outside the production region. Various industries converted from fuel oil to mineral coal. The programme was to last approximately ten years. Few of the converted industries continued using coal once the subsidies were abolished. A change in the direction taken by PETROBRAS investments had a major long-term effect: exploration concentrated on the continental shelf predominated and a successful deep-water prospecting technology was developed. The quantity of reserves discovered on the continental shelf increased rapidly.

The electric power sector loses its way The electric power policy took the wrong turn. The calculation of rates was altered by incorporating a uniform tariff on a national level. Besides the gigantic nuclear programme, a second large-scale enterprise was undertaken: construction of the Tucuruí plant on the Tocantins River began in 1975, with an expected capacity of 3,960 MW. Its construction was added to that of the Itaipu plant that had already been programmed, and its first units went on line in 1984. The investments forecast for these programmes were clearly higher than the resources available. Loans were raised at market rates over a medium term to meet the time schedules for long-term work. This aggravating circumstance caused an increase in interest rates that, in conjunction with the sole tariff, ruined the financial equation that had served as a basis for the development of the state electricity system.

Political opening, the 1988 Constitution and macroeconomic deterioration After the authoritarian governments, political opening culminated in 1985 with the transfer of power to a civilian government by means of indirect elections. This transfer was complicated due to the illness that led to the death of the president elect, Tancredo Neves, prior to his investiture. In this unusual scenario, Vice-President José Sarney took office and maintained the government structure that had already been defined. One of the first decisions demanded of the new administration was the formulation of a new Constitution to substitute that of 1967. It was to be

Historical Overview of the 20th Century

19

in line with the political commitment to reform the authoritarian regime and, reacting to the feared excesses of a central power, lead to a parliamentary regime. At the last minute, however, there was a return to the presidential regime that gave Congress considerable power. By means of numerous, mostly innocuous declarations, the tutelary state, whose validity had already been placed in doubt in many countries, was expanded. In the sphere of the economy and, especially, in that of natural resources, the most exacerbated level of nationalism since the 1920s was reached when this matter was included in texts of the Constitution. There were those who claimed at that time that the 1988 Constitution, intrinsically contradictory, would become an obstacle to the nation’s development. Its revision was already considered inevitable at the time of its promulgation. Even the constituents acknowledged these contradictions, as well as the weakness of the Magna Carta, when they approved the date of 7 September 1993 for the electorate to decide, by means of a plebiscite, whether they wanted a parliamentary or a presidential government system. It was also determined that the Constitution would be revised five years after its promulgation. In the field of energy, the 1988 Constitution established the principle of tenders for granting concessions for public services, eliminating the sole tax on electric power and fuels whose revenues were linked to investments in the energy sector itself. It also delegated to the states the concession for distributing piped gas, at that time still in its infancy. It redefined the concept of a Brazilian company in order to open space for the participation of foreign capital, revoking former restrictions in concessions for the utilization of mineral resources and the hydro energy potential. The constitutional provision concerning the oil monopoly was made slightly more flexible, the government now being allowed to contract the services of state or private companies to carry out the activities included in the monopoly under conditions to be determined under a law to be enacted. Therefore, the transition process became extremely complex. It included simultaneous discussions regarding legislation resulting from the provisions of the 1988 Magna Carta and the revision of that Constitution. Moreover, a concept started to take shape at the end of the 1980s concerning the privatization of public services that had so far been the sole responsibility of companies under state control. The ideological foundation of this movement was to reduce involvement of the state in productive activities, contrary, therefore, to the core of the 1988 Constitution. In practice, pragmatism predominated, because the exaggerated growth of the number of companies under state control, principally during the last authoritarian years, was an acknowledged fact.

20

Energy in Brazil

In parallel to the constitutional crisis, the country’s economic situation, which was facing a potentially explosive inflation, continued to worsen. There followed plans for economic stability, none of them successful. In these, the battle against inflation was an absolute priority over any other objectives of public interest, including those related to energy policies. Public service rates, including those for electric power, were used as an instrument for price control, resulting in a reduction of the companies’ capacity to generate resources for investment.

Return to direct elections for President of the Republic In 1991, in direct elections for the first time since 1960, the electorate chose candidate Fernando Collor de Melo for president, with an absolute majority of votes, more than those obtained by Jânio Quadros. Both were elected without majority support in Congress, which caused many of the difficulties that they faced. The short-lived Collor government was deposed in October 1992, as a result of a highly controversial impeachment process resulting from the institutionalization of a widespread corruption scheme on the level of the federal government. This result was made possible due to the difference between the votes received by the candidate and those that supported him in Congress. The Collor administration had two lasting consequences: one positive, namely a thrust in a direction opposed to the 1988 Constitution, stopping spuriousness, reducing traditional protectionism and fostering economic competition; the other negative, due to the cataclysm resulting from the joint action of Collor’s ministers who destroyed what was left of a weakened public federal administration without leaving anything in its place. The impeachment of a President of the Republic generated another political crisis until Vice-President Itamar Franco took over. Although the majority of public opinion found the long period of 26 months of the new presidency extremely difficult, it was left to him to implement, with strong support from his Ministers of Finance, Fernando Henrique Cardoso and Rubens Ricupero, the financial austerity promised eight years earlier by Tancredo Neves. The plebiscite held during this period resulted in a clear preference for a presidential system of government.

Reorganizing the state Despite the difficulties that had accumulated in the financial sphere, including those resulting from the confiscation of personal savings, the

Historical Overview of the 20th Century

21

disorganized administration and traumas in the political sphere, the second direct election for President of the Republic occurred in a peaceful climate, with a clear-cut victory, in the first round, for Fernando Henrique Cardoso. No problems in economic policies arose in the transition period because the majority of the executive reforms became more systematic. Since the previous decade, a theory originating in the world’s main economic centres had been taking hold, namely that regardless of the level of their economic development, countries should adopt a strict market economy with the corollary of reducing state interference, particularly in the economy. This change in thinking occurred simultaneously with the globalization of the economy, strictly financial transactions predominating over the trade of goods and services, a remarkable acceleration in communications, the introduction of information technology and the automation of productive activities. In the scenario of domestic politics, an avalanche of legislative obligations was thrust at the National Congress in keeping with the regulatory 1988 Constitution, which was full of ambiguities. With its 245, sometimes contradictory, articles and proposals cross-current to the trends predominating at the time of its promulgation, the Constitution also contained the strange proviso that it was to be revised within a period of five years. This revision actually took place in 1995 and was based on the triple objective of eliminating the state from entrepreneurial activities, abolishing restrictions to foreign capital and establishing competitive markets in formerly monopolistic areas, by right and in fact. These guidelines also had pragmatic motives: to correct flagrant deficiencies in the government’s practical ability to function on its own or through its companies, which were difficult to remedy in any other fashion, and the federal and state treasuries’ need for cash. The revision also included an opening of the economy in areas such as oil and natural gas, mining and hydro resources, transportation and telecommunications, all of great significance to the development of the country. Draft bills for reforming public administration and social security were dealt with more slowly and were not well received by Congress. The draft bill for social security was not proportional to the seriousness of the imbalance. Unfortunately, the regulations of party politics drawn up by the 1988 Constitution were not revised, resulting in a proliferation of minor parties. An opportunity was lost to ensure that issues relevant to the country were submitted to Congress responsibly and on a large scale, the very existence of these parties making it difficult to find a solution. Besides continuing to revise policies implemented by the previous government, President Fernando Henrique Cardoso, who remained in office

22

Energy in Brazil

for two terms, from 1995 to 2002, gave priority to consolidating Brazil’s victory over inflation. The bases of the Real Plan, introduced in 1994, proved efficient in the effective eradication of the inflationary spiral, leading to a reduction in the price index rate from 66 per cent p.a., in 1995, to 16 per cent in 1996. Inflation continued to be contained in the following years, but economic growth rates remained unsatisfactory. The strategy adopted was based on the principles of opening trade and implementing an administered and overvalued currency exchange rate. It favoured the importation of consumer and durable goods in order to intensify competition in the domestic market and thus restrict price increases. Its results paid off. The importation of capital goods at moderate prices contributed to modernize industry. However, the continuing, ever more overvalued currency exchange rate, resulting from residual inflation produced as a corollary, caused an increasing imbalance in foreign trade. The negative trade balance had been very high since 1995, but was compensated by the ongoing entry of foreign capital that, under a regime of financial freedom, was mainly short term. This phenomenon accentuated Brazil’s weak position in foreign negotiations dating back to when it adhered to globalization. After the financial crises of Mexico in 1994, the Asiatic Southeast in 1997 and of Russia in 1998, there was in 1999 a foreign raid on the real, with immediate and serious consequences. Decisions in the sphere of the federal government regarding the currency exchange rate were taken amid turmoil and misunderstandings that culminated in a new team in the Central Bank. Devaluation, accepted and recognized as being inevitable, corrected the mistakenly too-lengthy continuation of the overvalued currency exchange rate used as an anchor. A flexible exchange rate regime followed which, although it had merit, impacted negatively on the companies recently acquired by foreign investors. In return for significant funding received from the International Monetary Fund (IMF), Brazil assumed a firm commitment to adopt a satisfactory fiscal conduct. On the positive side, opening trade and implementing a flexible exchange rate made the national economic structure more realistic, demanding relative price readjustments, as well as new bases for exports, to which the country rapidly adapted. For eight years, extensive financial remedial action was taken in both federal and state governments. Innumerable liabilities had been accumulated during the 1980s. Some were settled, while some were ill-timed, and others continued to be threatening. The state was removed from activities that did not concern it; banks in danger controlled by the states were sold and fiscal responsibility was

Historical Overview of the 20th Century

23

implemented in public administration. The latter was generally accepted, despite ever-increasing aversion to the resulting restrictions applied to the administrators of Treasury resources concerning the freedom to spend. The administration of public budgets was greatly improved. In the social field, efforts to provide general basic schooling were made for the first time, although there was not sufficient time for a significant improvement in its quality. In the electric power sector there was an institutional reform and simultaneous privatization of state-controlled companies with the objective of introducing competitive markets. Insufficient new generation capacity, together with negative natural factors and the implementation of institutional changes, resulted in a supply crisis in 2001. This crisis, in turn, quashed any possibility of economic growth during that and the following year. In the oil sector there was a small breach in the monopoly centred on prospecting activities that were the object of tenders. Both sectors will be considered at length in Chapters 3 and 4.

Calm transition in 2002–03 and intrinsic contradiction of the new government Elections were held at the end of Fernando Henrique Cardoso’s second term of office. They were won by opposition candidate Luiz Inácio Lula da Silva of the Labour Party, after three previous, failed attempts. He officially adopted his nickname ‘Lula’ for popularity reasons. His election had caused fear, especially in national and international financial circles, of a possible disruption in the conduct of the country’s macroeconomic policy. The new government, however, adopted the cautious and pragmatic stand not to change it, which resulted in an unexpectedly peaceful transition. At least at the start, this attitude was appreciated by politically antagonistic currents, who agreed to the appointment of a representative with orthodox economic views to the presidency of the Central Bank. This calmed international financial agencies and economic operations rapidly returned to normal. This attitude, however, had the political effect of dividing the Labour Party. Therefore, the government, faced with insufficient support in Congress, had to form alliances with factions of different political leanings in order to carry out its plans. Intrinsic contradictions were thus established: on the one hand the orthodox Labour Party, originating in the labour unions, and on the other the theoretical and ideological Labour Party; two pragmatic wings, one aimed at the perpetuation of power in the

24

Energy in Brazil

hands of the Labour Party on a national scale, and the other sustaining an orthodox economic-financial policy. Within the peaceful environment resulting from the continuity of the economic policy, the new government started out with inflation under control and a strong export drive, benefiting from the expansion of international trade. There were no indications, however, of picking up sustainable economic growth. The composition of the government’s administration was unfortunate; it had an excessive subdivision of responsibilities and created agencies inadequately organized to carry out their tasks. Difficult coordination was accentuated by the state apparatus, which created thousands of positions of trust. The internal governmental subdivision concerned with environmental issues continued, divided between an emotional green section and a section searching for a possible reconciliation of economic, social and environmental objectives. Opportunities arose for the dissemination of new forms of renewable energy. The economic policy carried out with continuity and even obstinately was benefited by what were to a certain extent independent and mainly favourable factors. Domestically, the progress of agricultural business was a highlight. It had begun in former years and became the major generator of trade balance surpluses. Internationally, the scenario was extremely favourable. There was a wave of expansion of international trade similar to that which resulted in China’s sustained growth and its powerful entry into international markets. In international economic relations, the successive trade balance surpluses strengthened the country’s finances, propitiating a continued reduction in its risk rating. Because Brazil’s economic policy constantly met its financial targets, it increasingly received the approval of international markets. Nevertheless, some of the economic policy directives were consistently controversial, similarly to what had happened in the previous government. Efforts to implement a regime of fiscal responsibility met the approval of informed public opinion. But the system of inflation targets and of sustaining a high primary surplus was contested. Continuing, extremely high interest rates, the second highest in the world, were repeatedly criticized by different currents of opinion. The federal government’s large domestic debt, fed by exorbitant interest rates, absorbed personal savings, leaving little space for productive investments. The economy grew very little up to 2006, less than the world average. Internationally, the government returned to a certain extent to a position of independence, according to the principles of traditional Brazilian diplomacy. Yet it slowly began to assume unrealistic and essentially

Historical Overview of the 20th Century

25

ideological stands, with traces of South Americanism and surges of antiAmericanism. In the Common Market of the South (MERCOSUR), which was already facing problems, it became even more difficult to achieve basic objectives. The policy of Latin-American integration, which was stressed in official speeches, passed through a number of reversals, mainly as a result of some traditional and other new bilateral misunderstandings. Both the MERCOSUR and the Andes Community were weakened by dissention concerning a free economy, exacerbation of conflicts of material interest, and misunderstandings of a material and political nature. Brazil’s stand was not comfortable in this context. Relations with Argentina in the energy field were hampered by a supply crisis, and those with Bolivia, where Brazil had made major investments through PETROBRAS, were not doing well. In a countercurrent, the theme of South American integration was reactivated, but in turn underwent a major reversal due to the unilateral intervention of Venezuela in a number of domestic issues of other countries. Social projects were of course ambitious. Their progress maintained a positive trend over the long-term that was reflected in the decline of infant mortality rates and higher academic levels. Comparisons of the respective qualitative results, such as school attendance and health benefits, were relegated to second place. Specific actions, together with the systematic increase in the real value of the minimum wage and the income transfer policy rapidly increased the portion of the population served. The Family Grant programme resulted in a one-degree increase in the income level of needy populations. Strictly from an income point of view, the impact of the extensive coverage reached by these programmes had a quantifiable distributive effect. Some of the social programmes restricted to actions of assistance were compromised by the fact that the respective administrations were unprepared. Several specific policies followed each other in the domain of energy and had continuity despite all kinds of damage caused by the turmoil resulting from the electricity supply crisis of 2001, together with the corrective measures then adopted. The previous organization of the electric power sector was again partially reformed with significant changes, which will be reviewed at length in Chapter 3. The earlier directive for partial privatization in the petroleum area was inverted with the return of PETROBRAS to petrochemicals. A movement that can be defined as a counter-reform will be reviewed at length in Chapter 4. The indecision concerning the entry of natural gas continued without an institutional solution. The issue of gas-driven thermoelectric plants continues without any prospect of a return to a balanced position.

26

Energy in Brazil

After a long period of uncertainty, the first step for reinvesting in nuclear energy was taken with the decision to proceed with the installation of Angra III. The progressive institutional progress expected from the Regulating Agencies of public services appointed by the previous administration was interrupted due to the reduction of their respective powers and resources. In 2005, the Lula administration was negatively affected by the eruption of an ethical crisis on the stage of the National Congress, involving the Labour Party and the government itself in illicit transactions. Several reforms and government programmes were hindered by the temporary paralysis of the Congress. President Lula’s first four years in office ended with his re-election for a second term, during which he intends to give greater importance to infrastructure and economic growth without disrupting income distribution policies. At the beginning of his second term, there continued to be a significant surplus in current foreign trade and foreign reserves remained at a comfortable level. However, due to an overvalued currency exchange rate, the positive margin between exports and imports decreased. The Central Bank did not reduce the referenced interest rates sufficiently, so Brazil continued to practise one of the highest interest rates in the world, keeping the government’s domestic debt at 47 per cent of the GDP. Inflation was contained. The stock market expanded and the stock exchange became stronger, which, together with substantial direct foreign investments, gave new life to the expansion of productive projects. At the end of 2007, there were clear signs of sustained economic growth, but at the same time some critical financial issues had to be faced at the federal government level, such as increasing current expenses and a social security deficit. An important feature was the improvement of all income distribution indicators, both at the personal income level and among regions. The proportion of an officially contracted labour force also increased.

The concentrated geography After four centuries of development, the Brazilian economy is concentrated geographically, both in terms of population density and economic activities. This is shown in Figure A1.1 (see Appendix 1), which represents the administrative subdivision of the country into states and regions. Figure A1.4 shows distribution of the population and Figure A1.5, industry. The Southeast and South enjoy the greatest development. The Northeast, although densely inhabited, suffers climate difficulties and

Historical Overview of the 20th Century

27

displays the lowest level of development. The Central-West has been the scene of rapid population growth since the second half of the 20th century, and the Northern Region, almost coincident with the Amazon biome, is the object of a new form of occupation with contradictory aspects of development and environment.

Chapter 2

Energy and Economic Growth: A Statistical Abstract

A retrospective of Brazil’s economic development Systematic and compatible unified economic statistics of domestic financial records related to national accounts, balance of payments and price indices only became available in Brazil as of 1947, when the Getulio Vargas Foundation (FGV) was founded. Since then, debates on economic development and objective formulas have been more consistent, although there existed less concrete information on the nation’s economic organization and the living conditions of the population than there is as of 2009. Only in 1970 were systematic and compatible surveys carried out and an appropriate methodology established for regular studies of the supply and demand of the various forms of energy. These limitations did not stop evaluations of the magnitude of the evolution of some financial and energy indices since the beginning of the century. Figure 2.1 shows the evolution of the key indices of the entire economic process. Figure 2.1 shows that, until the 1940s, the country’s economic growth was sustained at a moderate rate and faced some temporary difficulties. It then took a new impetus until 1980, with a brief interruption between 1962 and 1964. At the end of the last century and at the beginning of the new, evolution was moderate and suffered a number of interruptions. Keeping in mind that there has always been inflation in Brazil to a greater or lesser degree, and that its relationship to economic growth has been the object of incessant debates both here and abroad, it seemed appropriate to prepare a synoptic table covering the evolution of the actual product and of the price index as of 1947, when more information became available. Table 2.1 is a much-simplified presentation of the data, which nevertheless allows us to note two very distinct periods in the economic history of the country: •

from 1947 to 1980, when accentuated sustained economic growth took place, accompanied by persistent, although moderate, inflation, with highs and lows;

30

Energy in Brazil

500

450 Interruption of growth 400

350

300 Discontinuities Temporary difficulties 250 200

150

100 50

0 1902 1907 1912

1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992

1997 2002 2007

Years

Source: Brazilian Institute of Applied Economic Research (IPEA). Series GDP per capita, US$, 2007

Figure 2.1 Per-capita economic growth, 1902–2007 (Index, 1949 = 100)

Table 2.1 Economic growth and inflation, 1948–2007 (mean annual growth rates in percentages) Period

Years Gross domestic product

1948–61

14

1962–64 1965–67

3 3

1968–74

7

1975–80

6

1948–80 1981–94

33 14

1995–2002

8

2003–2007

5

1981–2007 27

Mean growth 7.6% and per capita 4.6% Abrupt drop Modest recovery Mean 4.4% and per capita 1.5% Strong growth, mean 10.7% and per capita 7.9% Fluctuating growth, mean 6.9% p.a. and per capita 4.4%p.a. Mean 7.5% and per capita 4.6% Stagnant. Mean 2.0% and per capita 0.5% Stagnant. Mean 2.3% and per capita 0.7% Modest recovery. Mean 3.5% and per capita 1.8% Mean 2.3% and per capita 0.8%

Inflation Increasing from less than 10% to >30%, more than 30% Rapid increase up to 90% in 1963 Decreasing. Returns to 30% Decreasing to 15.5% in 1973 Increase reaches 110% p.a. in 1980 Median 34% Hyperinflation. Maximum of 2,708% and median of 444% Stabilizing. Median 10% Stabilizing. Median 6% Means and medians have no meaning due to the hyperinflation period

Source: IPEA. For gross domestic product (GDP): Series – Gross Domestic Product (PIB), Annual Real Variation. For Inflation: Series IGP-DI, variation (% p.a.)

Energy and Economic Growth: A Statistical Abstract •

31

from 1981 to 2007, when sustained growth ceased, inflation went completely out of control and soared during a first stage, requiring a second stage of considerable effort to accomplish recovery until it gained relative monetary stability.

The years of sustained economic growth until 1980 Prior to 1950, and after the 1930 Revolution, the nationalistic strategy was based on the concept of national security and the need to reduce foreign dependence on basic imports considered to be strategic. There was an avalanche of sector plans including a major involvement of the state. After that, during the first of the periods under consideration, namely from 1948 to 1980, the federal government’s plans for industrialization were invariably based on specific physical projects, the majority of which were drawn up on a technical basis. Direct state action was always included, along with national and foreign private enterprise in different proportions, according to the times and the intensity of nationalistic or pro-state beliefs. The integration of these initiatives in an already more quantified global development project occurred during the government of President Kubitschek, who issued the Targets Plan (Plano de Metas) that was primarily aimed at strengthening the transportation and energy infrastructure. Less-efficient attempts to apply the same criteria to the social scenario received little attention due to greater political interference and did not have much success. Environmental issues had not yet gained any importance. As a result of good decisions, and despite mistakes and distortions, as well as a break in the development momentum between 1962 and 1964, Brazil achieved a noteworthy average economic growth of approximately 7.5 per cent per year over 33 years. The ever-present inflation, together with a growth rate of 10–30 per cent per year, spiralled in 1963 to more than 90 per cent. The economic and political crisis ended with the fall of the civilian government, which was replaced by a series of authoritarian administrations that lasted 15 years. The first military government after this crisis dealt with curbing the inflationary spiral, reorganized public finances mainly to achieve monetary stability and reduced inflation back to the 30 per cent level. At the same time, significant steps were taken to modernize Brazil’s administration and economy. Growth targets continued to predominate in subsequent governments and National Development Plans were drawn up with an ever increasing scope. These helped to consolidate the strategy for building a solid

32

Energy in Brazil

infrastructure and for industrialization founded on the substitution of imports, although the latter continued without much change until the end of the 1970s. Domestic savings were on the increase, rising from 13 per cent of the GDP in 1948 to 21 per cent in 1969; thereafter, they remained fairly stable at this level. The balance of government finances continued positively until 1982, but for the 1962–69 period of crisis and recovery. The government’s capacity to save was decisive for the country’s economy, together with the decision to use it to promote growth. No information on the social sector exists prior to 1960. Thereafter, major population growth, the continued increase in per-capita income and the creation of jobs propitiated the inclusion of a significant portion of the population who had previously been excluded from the market economy. Poverty was greatly reduced between 1970 and 1980, but the traditional unsatisfactory distribution of income was not solved.

The troubled years from 1980 to 1994 The 1980s commenced under the impact of the second oil crisis and the consequences of an overly ambitious development strategy. Inflation accelerated and spiralled to a new high, around 100 per cent. Government accounts toppled, reaching negative figures. Public administration and the majority of companies under state control deteriorated, weakening the economy, which faced serious difficulties that continued until the 1990s. Recovery plans followed each other, envisaging growth, which was, as always, a national objective. From a strictly economic growth point of view, the 1980s, during which the domestic economy fluctuated, were lost. With a drop in production lasting several years and other years with good results, the average domestic growth rate dropped to 2 per cent p.a. in the period from 1981 to 1994, so that the per capital income (0.5 per cent) was very close to stagnation. Inflation was the dominant feature in the domestic economy, always situated above 50%. Its first explosive upsurge occurred at the beginning of the 1980s, and was followed by another that started relentlessly in 1987. By 1989, inflation had spiralled out of control, reaching previously unimaginable levels. The social scenario remained relatively stable, both regarding inequality and poverty. The end of that period was also marked by important, predominantly political events: the 1988 Constitution, with its ambiguities and regulatory nature; the plebiscite, in which the population voted to confirm the

Energy and Economic Growth: A Statistical Abstract

33

country’s traditional presidential regime; the turbulent substitution of the president of the republic by his vice president; and, finally, the constitutional revision of 1993, based on the triple objective of eliminating the state from entrepreneurial activities, abolishing restrictions to foreign capital and establishing competitive markets in areas previously occupied by monopolies, by right or in fact. It also appeared that Brazil’s traditional and long trade protection barriers contributed to a generalized accommodation and inefficiency in national industry. It therefore became necessary to intensify the process of opening Brazil to imports, which had already been initiated. Aside from institutional reforms, the government elected in 1989 was unsuccessful in implementing a financial programme in keeping with the challenge posed by the hyperinflation that continued its unmitigated ascent, until it reached the unbelievable peak of 2,708 per cent in 1993! The succeeding government had to concentrate its attentions on the task of defeating inflation and establishing, in the short-term, a minimum of economic order so that production activities could revert to normal. The Real Plan (Plano Real) drawn up by the Minister of Finance, who was subsequently to be elected president, was of major importance.

In search of a new strategy, from 1995 Besides continuing and expanding the political reforms of the previous government, President Fernando Henrique Cardoso, who remained in office for two terms, from 1995 to 2002, gave immediate priority to consolidating the victory over inflation. The foundations of the Real Plan introduced in 1994 proved to be efficient in the effective reduction of inflation, leading to a drop from 59 per cent in 1995 to 6 per cent in 1996. Inflation was truly contained, fluctuating between a minimum of 3.6 per cent, in 1998, and a maximum of 12 per cent, in 2001. The median rate for the period 1995–2001 was 10 per cent. Notwithstanding a minor surge in 2000, growth continued at the modest level of 2.4 per cent. In the social sphere, the Real Plan led to a strong and immediate reduction in poverty and some improvement in the distribution of income. The basis of the strategy adopted consisted of allowing more imports and establishing a fixed and overvalued currency exchange rate, to allow the importation of consumer and durable goods for fomenting competition in the domestic market and thus containing price increases. The permanence of a fixed exchange rate, becoming increasingly overvalued as a

34

Energy in Brazil

consequence of residual inflation, produced, however, as a corollary, an increasing imbalance in the trade balance. After the financial crises of Southeast Asia in 1997 and of Russia in 1998, there was in 1999 an attack on the real that led to a change in the exchange policy of the Real Plan. Under this change, confused decisions were taken amidst misunderstandings within the federal government. These issues culminated in a change in the hierarchy of the Central Bank. Exchange devaluation, accepted and recognized as inevitable, corrected the mistake of a too-lengthy permanence of the exchange anchor through an overvalued currency. The exchange rate established at R$1.00 for US$1.00 was soon altered, reaching R$3.00 in 2003–04. It then declined continuously until 2007, when it remained just below R$2.00. Due to the alteration in the exchange rate policy in 1999, the national economic structure became more realistic and required new readjustments in relative prices and new bases for exports, to which the country quickly adapted. At the beginning of the 21st century, the annual inflation rate varied little, fluctuating between 6 per cent and 8 per cent p.a., except in 2003, when a momentary increase occurred. The exchange rate had been kept fairly steady since the Real Plan (R$1.00/US$) until 1998. It changed significantly in 1999, when the flexible exchange rate was implemented (R$1.80/US$). The real suffered constant devaluations until 2004 (R$3.10/US$), when it began to strengthen until it reached the level of R$1.80/US$ at the end of 2007.

The foreign scene Since the 1940s the world economic scenario had been favourable to the country’s development, and funds from international agencies were provided under excellent terms, although in moderate amounts when compared with the size of Brazil’s economy. Foreign capital did, however, have major qualitative impacts on the country’s industrial diversification. Traditionally, the domestic economic strategy included with some continuity a policy of substitution of imports that was usually cautious and moderate, but, at times, nationalization efforts were exaggerated. Exports were of little concern. Foreign transactions, usually resulting in deficits, fluctuated around –1 per cent of the GDP until 1975, when the oil crisis led to a price imbalance of 6 per cent of the GDP. The deficit remained very negative and worsened even more due to the impact of the second oil crisis in 1979. After the effects of the second oil crisis had been absorbed, balances of current transactions remained between –2 per cent and +1 per cent

Energy and Economic Growth: A Statistical Abstract

35

2% Moratorium

Oil price crises

‘Real’ Plan

1% Flexible Exchange 2007

2003

1999

1995

1991

1987

1983

1979

1975

1971

1967

1963

1959

1955

1951

1947

0%

( )

–1% –2% –3% –4% –5% –6% –7%

Source: IPEA, Series: Current Transactions (% of GDP), 2008

Figure 2.2 Current foreign transactions

(Figure 2.2). Under the Real Plan, Brazil suffered the impact of the Mexican moratorium and the subsequent crisis of the Latin American foreign debt. As a result, balances became once again very negative and remained thus until the introduction of a flexible exchange rate in 1999. The foreign debt, which had been kept at a moderate level until 1969 when compared with the GDP, proceeded to increase until 1986, coincidentally with the impetus of the country’s economic growth. Due to the ensuing difficulties, the government decided to decree a moratorium on the foreign debt. Foreign financial transactions came practically to a halt until extensive and successful negotiations in 1993 resulted in the country’s financial opening in 1994. The introduction of the flexible exchange rate not only had an impact on the balance of current deals; it also paved the way for a positive inflow of foreign capital. Together these two factors caused a dramatic reduction in the foreign debt (Figure 2.3).

Sources of primary energy up to 1970 Simultaneously with the economic evolution described above, major alterations took place in the energy field. The change in relative positions can, however, only be quantified as of 1940, when reliable surveys were carried out in Brazil. But the difficulties in relation to firewood, with its scattered production and consumption, were known and are calculated to

36

Energy in Brazil 600% Flexible exchange

Moratorium 500%

Exports (%)

400%

300%

200%

100%

2007

2004

2001

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

1968

1965

1962

1959

1956

0%

Year

Source: IPEA, Series: Foreign Debt and Exports FOB, 2008

Figure 2.3 Foreign debt correspond to well over 80 per cent of the domestic supply at the beginning of the 20th century. An approximate picture of the relative positions occupied by the different primary sources in the domestic energy supply between the years 1940 and 1970 is shown in Table 2.2. The basic change was the increase in the use of oil and the fall in the proportion of firewood, even though the latter continued at a high level at the end of the period.

Energy balance since 1970 At the beginning of the 1970s, a number of national consulting companies were founded in order to jointly evaluate the country’s energy matrix in 1970. Work was completed in 1973, and its results served as a basis for subsequent assessments that were published under the title of National Table 2.2 Total primary energy supply in Brazil by source (%) Source

1940

1950

1960

1970

Coal Oil Hydro Wood Sugar cane

6.4 6.4 1.5 83.3 2.4

4.8 12.9 1.6 78.1 2.7

2.9 25.7 3.2 63.9 4.3

3.6 38.0 5.1 47.6 5.7

Source: MME. Balanço Energético Nacional (BEN) 2007, Table 1.12a

Energy and Economic Growth: A Statistical Abstract

37

Energy Balance (BEN). The relationship between income and energy is depicted in Figure 2.4. It should be noted that the division of the periods in this figure, taken from the BEN, do not exactly match those adopted in Table 2.1. The fluctuations in the use of energy result not only from the growth–stagnation phases of the economy, the hyperinflation–monetary recuperation, but also from the favourable–unfavourable hydrological events, international oil prices and the 2001 crisis, which was due to various causes. In physical terms, domestic energy supply exceeded 67 million tons of oil equivalent (TOE) in 1970, reaching 226 million in 2006. During this period of strong economic growth (1970–80), the increase in the supply of energy was significantly below that of income. Before long, however, in the first economically difficult years that followed (1980–85), increases in the use of energy were much superior to those of the GDP. Due to the continuing economic difficulties (1985–93), both were reduced to much lower levels, less than 2 per cent p.a. After the hyperinflation, when the domestic economy began to be reorganized (1993–97), energy increased more than the GDP, tending to follow (1996–2006) the same fluctuations, both low. Average annual growth rates in the 36 years were 4.5 per cent for the GDP and 3.4 per cent for energy, in a ratio of 0.85 per cent. In 2005, primary energy supply in relation to the GDP was on a level of 0.31 TOE/GDP (in US$1,000) and 0.15/GDP purchasing power 10 9 GDP

TPES

8

Annual growth (%)

7 6 5 4 3 2 1 0 1970–80

1980–85

1985–93

1993–97

1997–2007

1970–2007

Sources: MME, BEN 2007, Graph 18; and BEN 2008, Table 7.1

Figure 2.4 GDP and total primary energy supply (TPES) (mean annual growth, %)

38

Energy in Brazil

Table 2.3 Total primary energy supply and CO2 emissions Indicator TPES/Population (TOE/capita) TPES/GDP (TOE/US$1,000) TPES/GDP, ppp (TOE/US$1,000) Emissions (tCO2/TPES)

World

OECD

Brazil

1.80 0.31 0.20 –

4.70 0.19 0.18 2.32

1.18 0.29 0.15 1.48

Source: International Energy Agency (IEA) Key World Energy Statistics. Selected indicators for 2006

parity (ppp). Energy per capita consumption was 1.12 TOE/inhabitant, a moderate figure when compared with international indices. CO2 emissions per unit of energy utilized are very much lower in Brazil than in the Organization for Economic Cooperation & Development (OECD), and in the world as a whole, in keeping with the use of renewable energy (Table 2.3). The composition of the energy supply in Brazil shows gradual deviations between relative positions of the majority of primary sources, notwithstanding major institutional changes, the impact caused by oil discoveries, the electric power crisis and the entry of natural gas. The changes in position are gradual because they result mainly from the long period of maturation of investments in energy. Figures 2.5 and 2.6 depict the participation of primary sources of renewable and non-renewable energy between 1970 and 2006. Relevant changes took place. The firewood–vegetal-coal mix, whose participation dropped by 50 per cent during the 1970s and another 50 per cent by 2000, recovered a little in 2005. Natural gas doubled between 2000 and 2006 with imports from Bolivia, having started at a very low level. Lesser changes occurred in oil, which fluctuated between 47 per cent and 37 per cent. Hydroelectric power increased greatly until 2000, but declined slightly up to 2007. The share of sugar cane derivatives grew between 1970 and 1990, fluctuating later, with a steady increase in 2005– 07. Mineral coal, besides being relatively less important, remained stationary since the 1990s. Uranium started to make a modest appearance after Angra II entered into operation. Although they grew constantly, the sum of new sources enjoyed only a moderate increase, reaching 3.2 per cent in 2007.

Renewable energy in Brazil and worldwide The high proportion of renewable energy, 45 per cent of the Brazilian energy matrix in 2006, places the country in an unusual position within the world scenario, as can be seen in Figure 2.7.

Energy and Economic Growth: A Statistical Abstract

39

50% Hydro Wood Sugar Cane Others

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1970

1980

1990

2000

2007

Source: MME, BEN 2008, Table 1.12b

Figure 2.5 Total primary renewable energy supply in Brazil (%)

60% Oil Natural Gas Coal Uranium

50%

40%

30%

20%

10%

0% 1970

1980

1990

2000

Source: MME, BEN 2008, Table 1.12b

Figure 2.6 Total primary non-renewable energy supply in Brazil (%)

2007

40

Energy in Brazil

100% 90%

Renewables Non-Renewables

80% 70% 60% 50% 40% 30% 20% 10% 0% Brazil

OECD

World

Source: MME. BEN 2007, Graph 7

Figure 2.7 Primary energy supply – renewable and non-renewable (%) (Brazil, the OECD and the World) The predominance of renewable sources in Brazil is even more accentuated when it comes to energy for generating electricity. The electric power system, notwithstanding the introduction of new sources of primary energy, continues to depend mostly on hydro sources which, in 2007, contributed 84 per cent to electricity generation. The expansion of hydro power was supported by the natural conditions prevailing in the coastal regions where rivers run to the interior with significant falls and rainfall is abundant (see Appendix 1, Figures A1.2 and A1.3). Other renewable sources, with emphasis on sugar cane, contributed 3 per cent, so that the total of renewable sources used in the generation of electricity reached 87 per cent.

Total energy consumption Major changes have taken place in the relative participation of the various sectors in the total consumption of energy from all sources during the last 34 years (Table 2.4). Concentration of energy consumption in industry and transportation, predominantly related to highways, has continued.

Energy and Economic Growth: A Statistical Abstract

41

Table 2.4 Total energy consumption in Brazil by sector (%) Sector

1970

1980

1990

2000

2007

Non-energy uses Energy Households Commerce and government Agriculture Transportation Industry

2.4 2.5 35.5 2.0 8.6 21.2 27.7

5.4 5.6 20.1 2.8 5.5 24.6 35.9

7.8 9.4 14.1 3.7 4.7 25.8 34.1

8.3 7.5 12.0 4.8 4.3 27.6 35.6

6.6 9.8 10.3 4.4 4.2 26.7 38.0

Source: MME, BEN 2008, Table 14b

Residential consumption has remained stable after losing its relative importance in the 1970s and 1980s.

Dependence on foreign energy An issue that has always been cause for concern in view of the persisting difficulties in the balance of payments has been dependence on foreign energy, especially on oil. There occurred a considerable change in this sphere. In Table 2.5 foreign dependence is calculated in physical terms such as the ratio between net imports (imports less exports) and national consumption. On the whole, between 1990 and 2004, this dependence dropped from a maximum of 37 per cent in 1990 to 9 per cent in 2006. The decline in dependence on oil imports during this period was spectacular, dropping from 49 per cent to nil. Metallurgical type coal for steel mills is still all imported since Brazil does not have economically exploitable reserves of an appropriate quality. Since 1990, the insignificant consumption needs of natural gas have been entirely covered by domestic sources. The importation of electricity corresponds to Paraguay’s portion of energy from the Itaipu hydroelectric plant that is acquired by Brazil.

Table 2.5 Dependence on energy imports by source (% of Brazilian consumption) Source Total Oil Coal Natural gas Electricity

1990

2000

2007

37 49 67 0 12

32 24 79 13 13

8 0 71 45 8

Source: MME, BEN 2008, Tables 1.7 and 2.1–2.4

Chapter 3

Hydroelectric Power

Brazilian electric power system Since the end of the 19th century, the Brazilian electric power system has been based on hydroelectricity. Compared with other large electric power systems, Brazil is the third largest producer of hydroelectricity, ranking after China and Canada, and fourth in installed capacity, after America, China and Canada. It has maintained a unique position regarding the proportion of hydro in total electric power generation, approximately 85 per cent. The predominantly hydro basis derives, on one hand, from the favourable natural conditions of a rugged surface and abundant rainfall in the southeastern and south regions (see Appendix 1, Figures A1.2 and A1.3) and, on the other hand, from the limitations of coal use due to the small reserves and their poor quality. More recently the arrival of natural gas has been dependent on unreliable importations and small domestic reserves.

Construction of the hydro-based system The construction of the electric power system involved three stages: the first, from the beginning of the 20th century until the Water Code of 1934; the second, until the CANAMBRA studies of 1963; and the third, from 1963 until the recent reforms. In the first stage practically all utilities were privately owned. There was no specific federal regulation; state and municipal governments granted licences and signed service contracts. A large number of small companies were founded to serve limited markets during the initial years of the 20th century. The most significant of these were the local subsidiaries of Brazilian Traction, a holding company from Toronto, the Light companies serving São Paulo and Rio de Janeiro. They had a decisive role due to the scale of their hydro projects being amongst the largest and most economic in the world at that time. In 1905, the Ribeirão das Lages power plant produced 28 MW. From the local entrepreneurs there was an

44

Energy in Brazil

initiative to amalgamate several small companies into the Companhia Paulista de Força e Luz (CPFL; 1912). A little later the American and Foreign Power group (AMFORP) entered the country, setting up the Empresas Elétricas Brasileiras (1927), which became the second largest group in the country. The main feat was the construction by São Paulo Light of the Cubatão power plant (1926) conceived as a diversion to the coastal plain of waters running from the Serra do Mar range to the interior, with a drop of 700 m and a capacity of 76 MW. The second stage was marked by the Water Code of 1934, which distinguished the property rights of land from its hydro resources. The Water Code established a system of concessions and state regulation. The turning point, in 1945, was the creation of the Companhia Hidroelétrica do São Francisco (CHESF), a utility with the mission of building the Paulo Afonso power plant, with a capacity of 180 MW. It more than doubled the total existing capacity in the Northeast Region. Between 1953 and 1960, the foreign companies built two large plants: Nilo Peçanha, with 330 MW by Rio Light; and Peixoto, with 192 MW by CPFL (at the time a subsidiary of AMFORP). Later in the decade other significant events were the regulation of the Water Code and the founding of a federal governmentcontrolled company to build the Furnas project, producing 1,200 MW, with the first transmission line grid connecting the São Paulo, Minas Gerais and Rio de Janeiro systems. From there on, almost all new plants and transmission systems were federal or state owned. In 1961, the direct participation of the federal government in electric power was consolidated through the constitution of ELETROBRÁS, which became a holding of all federal government investments in the sector. The third stage resulted directly from studies and recommendations of the CANAMBRA, a group of consultants that worked closely with the staff of existing companies, centred in Furnas. The technical, economic and financial appraisal of individual power-plant projects was substituted by a global view of all projects available, which resulted in the definition of an ideal sequence of constructions. Centralized expansion planning and coordination of system operations marked subsequent developments until the partial privatization reforms of the 1990s, which will be analysed in detail in this chapter. The highlight of this period was the construction of the binational Itaipu power plant at the famous Sete Quedas natural waterfall, at the border with Paraguay, with a capacity of 12,000 MW. Brazil was again building the largest plant in the world at that time. It is relevant to recall that this system essentially differs from the thermal-based systems of industrialized countries, in which operational optimization is based on the physical demand of energy and the corresponding generation capacity, as well as on the value of energy at each

Hydroelectric Power

45

point in time. The plants are staggered according to their cost and go online sequentially, starting with the most economical. In a predominant hydro system, the operation is closely linked to the inflow to the plant reservoirs, which in turn depends on the meteorology, with annual and multi-annual cycles. Under these circumstances, optimization of hydro resources over the long-term requires a confrontation between present and future values, especially as regards the water accumulated in the reservoirs. Thermal and hydro plants play an important complementary part in making the best use of hydro resources and reducing risks resulting from adverse hydrology. To allow thermal plants to fully carry out their complementary mission, flexible operational units are needed, which restricts the choice of projects. These characteristics have a decisive influence on programming expansion. In Brazil, there is the additional national concern with continued economic growth, and the resulting increase in the demand for energy requires a spread of optimistic and pessimistic estimates in an inevitably subjective plan, regardless of how efficient the procedures adopted. The gap between projections expands over time and is widest in the basic hydro system due to the longer maturity time of the generating plants. As a consequence, decisions taken by those responsible for the execution of the programmes gain in importance. Detecting the risk of rationing over the long-term is a complex procedure. As a result, continued efforts had to be made to create systematic procedures and, later, mathematical formulas, to deal with the many variables involved in optimizing the electric power system.

Methods of optimization The search for a way to optimize the hydrothermal system in long-term expansion plans, as well as in operational programmes, progressed as experience was acquired. The methodology adopted at the beginning was based on the concept of the firm energy originating from each plant that corresponded to the generation possible in case of recurrence of the hydro dry period of 1952–56, the worst ever recorded. As probabilistic studies were made, based on the same hydrological data, it was later realized that this methodology meant risking a shortfall of around 3 per cent. The studies served as a basis for the power plant construction programme to be followed, as well as for drawing up operational directives, synthesized in a lower storage limit curve that showed the minimum level that had to be observed in operations at each period for each regulating reservoir or each hydroelectric cascade in the same basin. A drop below

46

Energy in Brazil

this limit would lead to the need for adding thermal generation. The time unit used was one month. These general conditions continued to be valid in subsequent programmes. Coordinating the operation of the plants that were in increasing numbers connected to the integrated system was, thus, an attempt to optimize the physical hydro resources. The system’s load factor was relatively low, so that the design of hydroelectric plants was based on a capacity that was double the respective firmgenerating capacity. In view of the large investment in capacity and the low running costs, the binary tariffs in use contained a large demand component and a low proportion of the energy parcel. With the growing industrialization of the country, the load factor rose and the energy portion gained in importance in programming the system’s operations. ELETROBRÁS appointed permanent, informal study groups to carry out planning and operating tasks which, in time, gained in importance. Planning was consolidated in the Coordinating Group for the Planning of the Electric Power System (GCPS), appointed in 1980. This group included ten public utilities under federal and state control and one private company, the Light, the country’s main distributor. Distinctions were made between regions in the North–Northeast, Southeast–Central-West and South. The Coordinating Committee for Grid Operations (CCOI), which were active in the southeast (1969) and south (1971) systems, were in charge of operations. When Brazil and Paraguay took the decision to build the huge hydroelectric plant of Itaipu, the respective legislation officially assigned to ELETROBRÁS the responsibility for drawing up a plan to meet demand up to 1990 in the South and Southeast regions of Brazil. This ‘Plan 90’ was the first to consider the expansion of these systems jointly, including also part of the Central-West Region whose interconnection was made possible through transmission lines from Itaipu. It was drawn up with the cooperation of the state companies and published in December 1974. There followed equivalent plans at five-year intervals. Plan 90, as well as the two subsequent plans, included demand projections based on prospects of strong economic growth. They turned out to be over-dimensioned when the pace of the country’s growth slowed down. On the other hand, the investments made resulted in an excess capacity that allowed the physical survival of the system for some years after financial difficulties assailed it. The Itaipu legislation included the concept of hydrothermal operation to be guided by the principle of ‘sharing the onus and the advantages resulting from the consumption of fossil fuels for generating electric power’. Another consequence of the Itaipu legislation was the appointment of the Group of Interconnected Operations Coordination (GCOI) within

Hydroelectric Power

47

ELETROBRÁS. It incorporated the two CCOI and was made responsible for defining the volume of power and energy supplies to be contracted yearly from generation subsidiaries of ELETROBRÁS, respectively Furnas and ELETROSUL, by companies in the Southeast and South. These two subsidiaries also took on the responsibility for the flow of energy output from Itaipu. Thereafter, taking advantage of the hydrological diversity of the south and southeast basins became important. This attitude was only extended to the regions in the north and northeast at a much later date, when the corresponding interconnection was made. GCOI was responsible for annually programming operations, coordinating the output of the plants in the integrated system and administrating the Fuel Consumption Account (CCC), through which the thermal plants were paid for their fuel, the coal and petroleum by-products used. The fuel cost was shared by all consumers of the integrated system. It was also the responsibility of GCOI to calculate and settle accounts referring to transfers between plants, as well as to transfers resulting from the CCC mechanism. As an instrument of physical optimization, this procedure brought about significant gains and caused moderate expenditures. An analysis of the cost of the CCC, represented by the expense incurred with all fuels in relation to the gross receipts of the South–Southeast–Central-West system between 1992 and 1997, shows that annual estimates varied between 1.2 per cent and 2.3 per cent and that actual expenditures varied between 1.0 per cent and 1.6 per cent. The CCC system was, nevertheless, criticized by the major utilities under state control. They were of the opinion that it would be sufficient to maintain a surplus in the installed capacity of the hydroelectric plants in relation to expected demand to ensure market supply, even in a situation of critical hydrology. The complementary role of thermoelectric plants in the system was frequently criticized because it included a subsidy awarded to producers of coal when a price was accepted that did not correspond to that which could have been achieved in an efficient operation of both the mines and the plants. The subsidy could, however, have been corrected without necessarily abolishing the mechanism, as was done when the sector was reorganized.

Evolution of mathematical models In the sequence of work carried out within ELETROBRÁS since the CANAMBRA project, those responsible for operational simulations

48

Energy in Brazil

looked for a way to ensure market supply at the lowest total cost for a specific period, while allowing for a predetermined risk of failing to meet demand. When this work was transferred to the Electric Power Research Centre (CEPEL), the Newave model was developed and, after testing, came into official use in 1999. A ten-year forecast, later reduced to five years with monthly stages, was maintained. The model continued to be applied at a 5 per cent risk level, although it allowed for the adoption of other more rigid criteria. Instead of simple utilization of historical hydrology, presuming that it might recur, a probabilistic model was adopted based on the same hydrological data, but taking two premises into account: 1 that the influx during a specific month and place depended on the influx of ‘p’ previous months; 2 that in view of the seasonality of the hydrological regime, for each month of a cycle the ‘p’ number of previous months that had a significant influence over it would vary. Bearing in mind Brazil’s extensive territory, it became necessary when drawing up models not only to subdivide the market, but also to take into account all the restrictions on transmission lines which limit the transfer capacity between sub-markets. Considering the purpose of the model, it was deemed appropriate to simplify it by aggregating all the reservoirs of each region in one equivalent figure in which the volumes of water stored were converted into power (megawatt-hours), taking into account in each case the respective useful head of water and the cascade effect of the plants in the same hydrographic basin. The practical use of the Newave model requires prior definitions regarding four fundamental factors: a forecast of demand; expansion of the system (generation and transmission); variable costs of thermal generation; and corresponding cost of possible future rationing. Immediate costs of current expenditures are simple and easy to estimate and result from concomitant decisions. Future costs are more difficult to predict as they involve economic losses caused by possible power rationing as well as fuel costs. These losses are estimated in macroeconomic terms generally based on the ratio between variations in revenue and energy consumption and translated into the value of energy-elasticity. Finally, it becomes necessary to calculate the current value of future costs to be added to current costs in order to reach the total cost, and this involves the choice of an inevitably arbitrary discount rate. A 10 per cent rate was adopted. The Newave model came into use together with a discussion on the reform of the sector at a time when there already existed a scenario of a

Hydroelectric Power

49

continued decline in reservoir storage, pointing to future insufficiency in the ability to supply the market.

The role of thermal plants in Brazil Carrying out its complementary role in the Brazilian hydrothermal system requires flexibility of operation and this restricts the choice of the type of thermal plant. For technological reasons, nuclear plants are inflexible, and this reduces their participation in the optimization process notwithstanding their relevance at the base of the system. Coal-driven plants, on the other hand, can operate under greater seasonal variations thanks to their temporary fuel storage availability in open-air deposits, provided the minimum limits for the regular purchase of coal are observed and make economical mining viable. Similarly, fuel oil-driven plants can rely on reserve deposits in tanks. Gas-driven plants, when supplied with fuel based on take-or-pay contracts for supplies or on ship-or-pay in pipeline transportation, such as those used for gas imported from Bolivia, have less flexibility. The portion of obligatory payment, especially for transportation, is more onerous when the plants are not required to operate at a high-capacity factor. When planning for expansion of the system, ELETROBRÁS always gave preference to hydroelectricity. Therefore, the share of thermal plants in the national generation capacity, including the quota of the Itaipu Binational plant assigned to Brazil, decreased as of 1972, until it reached a minimum of 13 per cent in 1999 (Figure 3.1). Thereafter it increased slowly, reinforced by the constant entry of natural gas plants since 2001. It was already clear by the end of the 20th century that the proportion of thermal plants had fallen to a critically low level and that it would be necessary from an operational point of view to increase it substantially. While no in-depth study on the ideal proportion of flexible thermal plants had been made, it was presumed that it would be convenient to have a capacity to the order of 20 per cent available over the medium term. This level was surpassed statistically in 2006 and reached 22 per cent, including 2 per cent from nuclear plants. However, it should be borne in mind that this is a deceptive figure from the point of view of contributing to the system’s operational balance because the increase was almost entirely due to gas-driven plants. As a result of a series of negative coincidences, which will be referred to later, for some time these plants lacked sufficient fuel with which to carry out their mission. The true operational capacity of the flexible thermal park is thus still considerably below 20 per cent.

50

Energy in Brazil

100% 90% 80% 77.18%

Generation capacity

70% 60% 50% 40% 30%

22.8%

20% 10% 2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965

0%

Note: Hydro capacity includes half the capacity of Itaipu; thermal capacity includes nuclear energy Sources: Up to 1973, Statistical Bulletin issued by the Brazilian Committee of the World Energy Council; after 1974, MME, BEN 2007, Table A1

Figure 3.1 Hydro and thermal generation capacity (%)

The electric power sector under discussion The troubles that Brazil’s economy faced in the 1980s (Table 2.1) had direct repercussions on the electric power sector. Between 1988 and 1989, the electric power companies jointly undertook a study of the situation and of the sector’s prospects, named Institutional Revision of the Electric Power Sector (REVISE). The overall analysis made at that time identified the main problems facing the system. The companies did not always see eye-to-eye in their work, conflicts arising principally between ELETROBRÁS and the state utilities in the Southeast Region, as well as with the governments of the politically more influential states, as to the solutions that should be adopted. There remained, however, substantial material for later studies. In essence, the electric power system in effect in Brazil since 1957 was still valid, but in the 1990s the financial and administrative crises were clearly revealed in the large electric power companies. They resulted from a number of events that led to stopping the construction of generation plants and to inadequate transmission and distribution systems. These facts pointed to the risk of a supply crisis over the medium term.

Hydroelectric Power

51

The situation was as follows: 1 The supporting tripod had collapsed: one-third of resources generated by tariffs had been arbitrarily contained since 1976; one-third of resources from taxes and specific loans was eliminated by the 1988 Constitution; and one-third from loans taken from international agencies was reduced. The World Bank revised its position in support of investments in infrastructure under the responsibility of state companies, claiming that these were no longer playing their respective roles efficiently, and recommended a new model that would foster competition.1 The official financing was replaced by a system of private funding from abroad known as ‘Project Finance’, whose repayment terms were generally inadequate for investments in electric power generation. 2 There was no longer any confidence in the administrative quality of some of the major state companies. In the beginning, this was only felt by a limited circle of people who participated or had participated in one way or another in these administrations, but successive negative events caused the knowledge of the administrative deterioration to enter the public domain. The inability of the state to sustain the expansion became evident and this led them to seek means of attracting private capital; the structure had already received a fatal blow when a discussion concerning a reorganization of the sector started and preliminary corrective measures were adopted.

First steps towards reform A 1993 law revoked the Water Code in practice and the corresponding regulation as far as it concerned the economic system of the electric power utilities. Tariffs based on the prefixed and guaranteed remuneration of investment foreseen in the Water Code, as well as the unfortunate national equalization of rates which had been implemented in 1974, were abolished. Due to the arbitrary tariff containment, the utilities had accumulated credits against the federal government. This led to the need for a major settlement of accounts with the Federal Treasury. The crucial issue of the concession of public services was approved by two laws concerned, respectively, with ‘the regime of concession and permission to provide public services’ and ‘norms for granting and extending said concessions’. That ended the practice of the utilities to reserve their rights on hydroelectric utilizations for an indefinite period. Thirty-three concessions were cancelled. Deadlines and conditions were established for legalizing and completing constructions considered to be in arrears. The

52

Energy in Brazil

new scenario created opportunities for partnerships between utilities and other private interests that encouraged the completion of constructions underway but not yet finished.

First stage of the 1995 reorganization of the electric power sector The administration of President Fernando Henrique Cardoso began in 1995 with proposals for privatization and changes in the electric power system. The precept of free access to the basic transmission system became official and a National Electric Power Agency (ANEEL) was founded as an autonomous entity linked to the Ministry of Mines and Energy (MME), ‘to regulate and oversee the production, transmission, distribution and sale of electric power, in conformity with the policies and the directives of the Federal Government’ (Law 9,421/1996). It was up to this agency to discuss with the states the utilization of the watercourses for energy purposes and to make it compatible with the policy on hydro resources, which was still under study. The agency was also made responsible for compliance with the law for concession of public services where it concerned the exploitation of electric power and the utilization of hydro potentials, posting the necessary call for tenders. While this latest law was still circulating in Congress, the MME posted a tender for a comprehensive study of a reform of the electric power sector. The call for tenders covered four generic areas: new marketing arrangements for the sector; legal measures and their necessary regulations; institutional changes in the government and in the sector to supplement the marketing arrangements and regulations; and an analysis of the funding mechanisms and allocation of risks. The call for tenders also included a list of key issues for which suggested solutions were requested. A consortium headed by the consultants Coopers & Lybrand and Latham & Watkins (UK), with the collaboration of the Brazilian organizations Ulhôa Canto Advogados, Engevix and Main Engenharia, was chosen to carry out this study. At the same time, another organization was created in the sphere of MME’s Secretariat of Energy that became known as the RE-SEB project. It was put in charge of discussions and an exchange of opinions with four working groups corresponding to the areas defined in the call for tenders and adopted by the consultants. Approximately 200 Brazilian professionals participated in these discussions under varying conditions. The work of the consultants and the RE-SEB took place between August 1996 and August 1997. The working groups met at countless specialized meetings while usually also holding monthly plenary meetings.

Hydroelectric Power

53

In December 1997, the consultants submitted a consolidated 247-page report that was to serve as a basis for the subsequent implementation work.2 In amalgamating legal and regulatory issues, they submitted no less than 19 recommendations concerning laws, regulations and contracts. A large number of these recommendations were adopted by the government, which implemented them by means of laws and other appropriate measures. Law 9,648/1998 altered countless earlier legal provisions and, among others, established a clear separation between generation and transmission prices. Later, a decree (2,655/1998) was published, resembling a minor code. It dealt with the exploitation of generation, transmission, distribution and marketing services, the wholesale market and the national operator of the electrical system. It also issued final provisions that defined the directives for initial contracts between generators and distributors.

Privatization While studies and arrangements for the reform of the electric power sector were still underway, it was decided to enforce the National Privatization Programme introduced by the previous government, despite the uncertainties that surrounded the system still in transition. In keeping with the dual directive of the Privatization Programme and the reorganization of the electric power sector, it was left to the BNDESPAR, a subsidiary of BNDES, to coordinate the sale of companies under federal and state control. The federal government posted calls for tenders for the sale of two distribution companies, the Espírito Santo Centrais Elétricas (ESCELSA) and the Light Serviços de Eletricidade. The former was small and the risks involved were limited, while the sale of the latter, a major and traditional company, was only finalized at the last minute, in May 1996, thanks to the presence of BNDES, which, besides being the seller, also took part as a purchaser together with the principal buyer, namely the Electricité de France (EDF). Of the state companies, only one was sold in the first round of bids. Due to the lack of the specific regulation, which was still in the making, there was a return to a regime of negotiated contracts between each public utility and the conceding power, such as the original Light contract at the beginning of the 20th century. Several states, especially those that were in a precarious financial situation, were also getting ready to privatize companies under their control.

54

Energy in Brazil

Thus sales began prior to the formulation of a new specific regulation. The process was, in principle, conducted from a predominantly financial aspect, not taking into account the diversity of the situations. In the organization of an electric power system there are segments that can, with relative ease, transform themselves into independent activities, as is the case of any other industry operating in a market economy. Energy-producing companies and their consortiums are included here. They can freely sign contracts with large consumers and utilities for the sale of gross energy. Industry-owned power plants are also included in this group. Intrinsic monopolies are at the other extreme; for example, distribution operations that involve extensive urban lines that cannot be duplicated are traditionally in the hands of a single utility. Companies that own large plants of key importance to the system, with transmission lines and regional interconnections, are in an intermediary position. There were four companies under federal control in this situation, plus three companies under state control. The Itaipu Binational undertaking is unique in this context. An essentially different operation is the production and transmission of hydroelectric power in the Amazon region. It covers an extremely large, sparsely populated area that includes the Amazon forest. ELETRONORTE was founded to coordinate long-term studies on enterprises in this region where a competitive market was hardly conceivable. Despite the legal directives, influential political forces continued to be successful in contesting the privatization of the federal generating companies Furnas, CHESF and ELETRONORTE. Of all the major federal generation companies, only ELETROSUL was privatized. Two major companies under state control, Companhia Energética de Minas Gerais (CEMIG) and Companhia Paranaense de Energia (COPEL), were not privatized due to decisions taken by their respective governments. Of the large state-owned systems, only Centrais Elétricas de São Paulo (CESP) was dismembered in compliance with recommendations made by the consultants. Although three segments were put up for sale, three large plants on the Paraná River continued under state control, bearing the CESP name. One CESP transmission company was dismembered and also remained under state control. At the time of the privatizations, ELETROBRÁS took control of five state-owned companies that were not in a condition to be sold and in which it had a part interest. Except for these, sales were intense and continuous between 1997 and 2000, and included 20 state-owned distributors. Financial results were significant.

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55

Table 3.1 Privatization of the electricity system Vendor

Federal government State governments Minority participants Total

Number of companies

Income from sales (US$ million)

Debts transferred (US$ million)

Total result (US$ million)

3 20 – 23

3,908 18,330 2,438 24,676

1,670 5,840 – 7,510

5,578 24,170 2,438 32,186

Source: BNDES, Infrastructure Area, Electric Power Department (private communication, 2005)

The principal purchasers included important foreign groups: EDF; the American AES Corporation; the Spanish Endesa Internacional; Energia de Portugal (EDP); and Tractebel of the Franco-Belgian Suez group. After the privatization sales undertaken between 2000 and 2005, BNDES took an active part in funding new investments in the electric power sector. The total amount was equivalent to US$10 billion, divided between publicly-owned (87 per cent) and government-owned (13 per cent) companies. In practice, the entire privatization project took three different directions: on one extreme was the almost complete privatization of distribution; and, on the other, transmission remained almost completely state controlled. Among generating companies, sales were partial, the majority of the existing installed capacity remaining under government control.

Establishing a competitive market The guiding principle of the new concept of a competitive market to be achieved in stages was free trade between generating companies and distributors by means of bilateral long-term contracts. The model proposed by the consultants for introducing competition included the need for two major changes in the organization of the electric power sector, along with privatization: elimination of the vertical structure of the integrated companies and a clear separation of generation, transmission and distribution activities; and a maximum limit stipulated for each company of the market share they were allowed to hold. In order to further open the market, independent marketing agents were authorized to sell electric power to end-consumers. The no-longer vertically structured companies would be subdivided geographically in order to meet market limitations. Some proposals

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concerning the subdivision of generating companies were excessively artificial from a logistic point of view and were not implemented. End-consumers were divided into captive consumers, who had to purchase energy from the public utility to which grid they were connected, and free consumers authorized to choose their supplier. During the transition period, the still-valid contracts corresponding to the GCOI operating plan for 1998 served as a basis for initial contracts that involved annually decreasing quantities of energy, freeing 25 per cent in 2003 and up to 100 per cent in 2006, when negotiations between the parties would be entirely free. Since the production and demand of the companies that had been thus divided would inevitably differ from that contracted, another form of negotiation had to be introduced that would replace the former practice for these secondary types of energy. These contracts would be signed in the so-called Wholesale Energy Market (MAE), where all buyers and sellers could negotiate and fix a spot price for electric power. The MAE was founded by means of an agreement signed in August 1998 by almost all the companies operating in the electric power sector, and approved by ANEEL. In a general assembly of the MAE’s top deliberative board, votes were subdivided in specific proportion between the various categories of its members. This complicated organization was later modified. In the beginning, the MAE adhered to the operational methods previously adopted by the GCOI. Officially, operations started in September 2000. The attributions of the MAE included establishing a market spot price that would reflect the marginal cost of energy in the system to be utilized at each period and serve as a basis for deals between generating companies and distributors in a multilateral environment. A price was fixed for each sub-market: North, Northeast, Southeast and South; and classified in three levels of load: heavy, medium and light. Due to the advent of new forms of electric power generation that might be in the national interest but were not competitive in the market that was being organized, ANEEL decided to establish normative values for wind and photovoltaic sources, as well as for small hydroelectric plants, with a view to the legal provision that transfers the cost of the purchase of electric power to the supply tariffs (Chapter 7).

National system operator The National Electric Power System Operator (ONS) was instituted at the same time as the MAE for the purpose of optimizing the operation of the

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electric power system at the lowest cost, while maintaining current technical standards, reliability criteria and market regulations in order to guarantee all agents access to the transmission grid. The Operator would also contribute to ensuring that the expansion of the system was carried out at the lowest cost and under the best future operating conditions. Another major attribution was contracting and administrating transmission services, as well as submitting a proposal to ANEEL for expanding the basic transmission grid to be auctioned or authorized. The ONS was founded as a private entity comprising concession, permission or authorization holders, as well as free consumers. It was a successor of the extinct ELETROBRÁS coordinating groups and took over the majority of their technical teams. The General Assembly of the ONS consisted of representatives of associates empowered to choose an administrative council. This council comprised representatives of the three categories of associates in a preestablished proportion, and one representative of the government, indicated by the MME. The latter had powers of veto over decisions that were in conflict with government directives and policies for the electric power sector. The ONS also had an executive board of four members. Administrative costs were covered by an additional charge on the tariff for transmission use.

The market price issue Consultants Coopers & Lybrand were informed of the Newave model and its supplements. They thought that these mechanisms for the operation and expansion of the system could also be used to establish the MAE market spot-price for energy. Their suggestion was part of the procedure agreed upon by MAE members and approved by ANEEL. They preferred this option to competitive bidding among generating companies on the spot market, a procedure adopted under various circumstances in other countries for coordinating the generating companies. Many of those who followed up on the evolution of the reform voiced their opinion that extending the use of mathematical formulas to establish market prices was not a good idea. It was, however, known that this type of auction would necessarily require other modifications, so far undiscussed, in the process of operational optimization. The original algorithms were developed for a market consisting of monopolistic state companies and used a tariff regime based on the cost of the service. The new market would be operated mainly by private companies under a competitive bidding regime that authorized large consumers

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Energy in Brazil

to withdraw from the system whenever they did not consider the spot market price acceptable. The technical and economic parameters of these large consumers reflect expectations that differ from those of state utilities, especially insofar as they refer to the discount rate. Similarly to what occurred in the past, the execution of the programmes drawn up in line with the new models caused divergences in the reaction to the contracted flows, either for incidental reasons or in view of the demands of the optimization process, which required that the amounts transacted be recorded and accounted for.

Operational practices and accounting Prior to Itaipu going online and the resulting Southeast–South interconnection, the southeastern transmission grid, and to a lesser degree the southern grid, was expanded with countless possibilities of the physical transfer of energy and the use of available capacity. Substantial investments were made in telecontrol and the equipment of sub-stations that allowed more inside knowledge of what was taking place, both in the plants and in the transmission lines. It became necessary to improve the recording and accounting methods of the operations. Formerly, the GCOI had established a mechanism for measuring and accounting for the difference between energies contracted or agreed upon between companies, and those that were used in keeping with the centralized system operation coordinated by this agency, which prevailed until 1999, when the transition to the MAE market regulations occurred. Until privatization, the exact amount of the settlement of accounts between companies, almost all of them state owned, was not relevant. This situation changed with privatization, after which a centralized system operation included companies of different ownership. Now, the settlement between the amount of contracted energies and energies effectively transferred took on a new meaning. After the MAE came on the scene, they were made responsible for the accounting of market transactions. Energy contracted and energy effectively transferred had to be recorded according to information provided by the companies. The MAE settled the difference at market price.

Organizational changes in 1999 – ELETROBRÁS In the light of reform directives, the consultants made a study of the multiple attributions of ELETROBRÁS and submitted their recommendations

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of changes, the majority of which were based on the premise of the privatization of generation companies. Many of them were compromised because the large federal generating subsidiaries, as well as important stategenerating segments, failed to be privatized. The following changes in the internal organization of ELETROBRÁS were proposed and accepted: (1) the dissolution of the GCOI in 1999, whose staff and assets were transferred to the new ONS; (2) the suppression of the GCPS, whose attributes were to be transferred to a new independent agency that would be created only at a later date. Long-term generation planning, which now became merely indicative, was assigned to the Secretariat of Energy of the MME, but they were unable to form a technical organization capable of adequately carrying out this task. Various services, such as research at CEPEL and energy efficiency at PROCEL, were left with ELETROBRÁS.

Auctions for hydroelectric plants and transmission lines In the logical sequence of the partial privatization of enterprises already in existence under state control, auctions for possible utilization of hydro resources for generating electric power and for the construction of transmission lines were instituted (Law 8,987/1995). As of 1996, ANEEL became responsible for posting calls for tenders, a process that would be expanded between 1997 and 2002. In keeping with the financial spirit of the economic policy of that time, ANEEL decided that the winning tender for the construction of hydroelectric plants would be the one entered by the proponent offering the highest total annual payment during the 35-year concession period. It also stipulated a minimum bid. During this process, no consideration was given to the impact of such a criterion on the future cost of energy. Thirty-one rights to potential hydroelectric sites with a total capacity of 12,000 MW were offered. Although they had already been studied, many still did not have the necessary environmental licence. Noteworthy is the importance of the participation of large industrial consumers which aimed at ensuring self-sufficiency in energy. They were responsible, either directly or through consortiums, for approximately 42 per cent of the total contracted capacity. The potential contribution of the auctions to the expansion of the system, considering a minimum five-year maturity period, corresponded to an annual average of 1,842 MW, if all materialized. This increase was equivalent to 20 per cent of the installed capacity of 69,910 MW of the

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Energy in Brazil

Table 3.2 Results from auctions of rights to potential hydroelectric sites (up to 2002) Year

Number

Total Capacity (MW)

1997 1998 1999 2000 2001 2002 Total

4 4 2 5 13 3 31

1,517 1,866 810 1,252 4,415 1,350 12,307

Capacity Large Consumers (MW) (%) 112 – 690 450 2,785 1,242 5,179

7 0 85 36 63 92 42

Source: ANEEL, Usinas elétricas licitadas pela ANEEL, 2003

Table 3.3 Results from auctions of transmission lines – first phase (up to 2002; 1,000 km) Nature of buyer

2000

2001

2002

Private company Consortiuma State company Total

2,833 828 6 3,667

1,691 – 606 2,297

1,536 180 127 1,843

a

Private and government companies

Source: ANEEL, Licitação de Linhas de Transmissão, 2007

hydroelectric plants operating in 2002 (Table 3.2). In practice, this figure amounted to less, since some contracts did not come to fruition, notably the large Santa Isabel project (1,087 MW) on the Araguaia River, for social– environmental reasons that caused licensing problems (see Chapter 8). Auctions for transmission lines in the basic grid with voltages equal to or more than 250 kV took place in keeping with an estimated investment and the annual required income (RAP) for the availability of the use of the line during the concession period (Table 3.3). In each case the winning tender was the one that required the lowest RAP. Substantial discounts were noted. The results were significant and varied in the stock composition, private enterprise predominating. This segment of the privatization process came closest to the original objectives, attracting private enterprise, possibly because it was based on simple rules. Government-owned companies continued building transmission lines for their own account. A total of 7,807 km of transmission lines were auctioned during this phase.

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Implementation of an electric power model with high hydrological risks Three adverse conditions arose at the beginning of the implementation of the complex new model. The first was the prospect of higher costs due to the progressively diminishing number of appropriately known and evaluated locations for building hydroelectric plants, and the need for thermal plants at greater cost than those under the existing system. The second was the anticipated major risk of a supply shortage due to construction of only a few generational plants in the 1980s and 1990s caused by the country’s economic problems (Table 2.1). The consistently high rate of construction and growing capacity up to 1981, practically always above 10 per cent per year, fell to less than 5 per cent thereafter. The ratio between average generation and capacity, which until 1992 had always stood below 55 per cent, ensuring an operational leeway, increased continuously until it reached 58.6 per cent in 1998. The third was the coincident low rainfall, the potential adverse consequences of which had been predicted by ELETROBRÁS since the 1996–2006 plan and reinforced in the 1999–2008 plan. In November 1999, the principal reservoirs located in the South– Central-West region were at a level of 19.7 per cent of the corresponding full capacity, while in the Northeast the level stood at 15.9 per cent, and in the North at 24 per cent. Only those in the south maintained an acceptable level, 66.2 per cent.3 The reservoirs of the country’s main sub-market, the South–Central-West region, were being drained incessantly. Coopers & Lybrand in May 1997 classified the situation as an ‘unusually high level of risk’,4 in view of which they suggested 16 lines of action that, in fact, were much beyond the human, material and organizational resources available in the MME’s central agencies or in new agencies that were just emerging. The majority of the proposed actions failed to be carried out. To complete the picture of unfortunate coincidences, the Thermoelectric Priority Programme, based on the importation of 15 gas power plants, which was introduced in February 2000, faced a number of obstacles; for example, the difficulty in acquiring turbines on the international market, which was already saturated with orders, and the lack of experience in dealing with gas, which was imported for the first time from Bolivia. There were significant delays in the dates stipulated for the entry into operation of these plants (see Chapter 4).

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Collapse of the electric power system and rationing The year 2000 ended with the reservoirs in the Southeast–Central-West region at 30 per cent of their capacity, and the year 2001 remained dry at the beginning of the rainy season. In order to coordinate the emergency operations that had become necessary, an inter-ministerial group – Energy Crisis Managing Committee (CGCE) – was founded in 2001 and drew up an Emergency Consumption Reduction Plan. Rationing was introduced, determining differentiated cuts according to consumer groups, aside from other measures, but with load reduction as its main objective. In general, the operation was considered successful, especially due to the public’s positive reaction. Industry sought out equipment, procedures and practices conducive to increased efficiency. There occurred a spontaneous creation of an exchange market. Households began to control consumption and waste to a point where reductions affected their comfort. It is noteworthy that many of the savings measures became permanent, especially in the South-East Region. This definitely reinforces the theory that seeking efficiency and control in the use of electricity, and endeavouring to contain demand, should be an integral part of the national energy policy. The drop in electricity consumption, from 15 TWh, in April 2001, to 11 TWh, in July 2001, was followed by a relatively stable average at a level a little above approximately 12.5 TWh, from April 2002 until the end of 2004. The physical drain on reservoirs ended in September 2001, when there were signs that they were beginning to be replenished. Fortunately, 2002 started with a wet period.

Market crisis and its financial consequences At the time of the rationing the new market was already in trouble as a result of a one-year delay in the entry into operation of the Angra II Nuclear Plant (from June 1999 to July 2000), the lack of precise market regulation and misunderstandings among the participants. ANEEL’s intervention in the MAE became inevitable. It simplified their operational organization and introduced financial guarantees and penalties linked to the purchase and sale of electric power. From September 2000 until the beginning of the supply crisis, MAE prices fluctuated in line with expectations, but did not reflect the imminent risk.

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The MAE was a disaster. Although it was founded when the scarcity of energy was already known, its original model lacked essential regulations and measures. In 2001, rationing led to a significant reduction in the revenue of electric power companies. Losses continued in 2002, in line with only a partial recovery of invoiced consumption. The total dropped 7.7 per cent, from 307 TWh in 2001, to 284 TWh in 2002. Another crisis, this time financial, arose among the companies. They requested an extraordinary rate adjustment and financial support from BNDES to partly compensate them for the reduction in revenue. The 24 per cent devaluation of the exchange rate in the second half of 2002 affected the cost of Itaipu energy which had been set in American dollars, thereby adding to the issues faced by the financial recovery programme. With a view to mitigating the impact of rising costs on inflation, the government decided that the necessary readjustment would be postponed for 12 months, with BNDES providing further financial support corresponding to this postponement. The amounts involved in this complex financial setup reached the equivalent of US$9.3 billion (2002–05).

The 2003 debate on the electric power sector When President Lula da Silva, politically opposed to the former government, took over from President Fernando Henrique Cardoso, the electric power sector was disorganized due to incomplete reform and the turmoil created by the emergency measures adopted during the 2001 supply crisis. New general guidelines for the electric power sector were announced at an early date and it was soon perceived, taking advantage of the experience acquired during the years of crisis, and later confirmed that the stand taken for improving the earlier model was not pragmatic. Similarly to what had occurred in the institutional reform introduced by earlier governments, the reform of the electric power sector in a government headed by the Labour Party (PT) was predominantly ideological, although with opposite foundations. The following is a recapitulation of the situation without discussing the merits of the two positions. The first model was apparently based on the following generic convictions: (a) the unquestionable merit of market economy; (b) the unwarranted public administration in utilities; and (c) the conviction that there was no need for long-term strategic planning coordinated by the government. Little attention was given to the basic physical peculiarities of the structure of the Brazilian electric power system.

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The convictions predominating in the new directives were apparently: (a) the possibility of ensuring low tariffs through institutional measures – despite the inexorable increase in the cost of new hydroelectric projects and the predictable increase in the cost of fuel; (b) confidence in the efficacy of measures taken by the government through government-owned companies; (c) lack of confidence in the conduct of private companies due to their predominantly profit-seeking objectives; and (d) the need for longterm strategic planning by the government, basically seeking to guarantee the supply of electric power. These divergences were so great that the process initiated in 2003 could be called a reform of the reform although, in practice, many of the initial radical guidelines were toned down. According to official opinions at that time, it was necessary to ‘revert to the planning role of the state and recover its capacity to formulate the country’s energy policy’. The key concept was that of a pool that would be managed by an organization specifically founded for this purpose. In the meantime, two working groups were appointed within the government to formalize proposals for a restructure; their results were slowly becoming known. Issues unresolved at the time of rationing were taking shape, including a tariff revision that had repercussions on the antiinflationary policy. Class organizations and state governments voiced their opinions on the proposals, principally against a pool and a uniform tariff, until an official document, the Proposal for an Institutional Model for the Electric Power Sector, was issued, ratifying the original key ideas and putting an end to discussions. The National Energy Policy Council (CNPE) met in July 2003 to study the proposal. Notwithstanding the doubts that still persisted, the green light was given for the MME to work on it, approving the proposal’s basic guidelines.5 Before the projects were submitted to Congress, the CNPE introduced a number of modifications to the ONS procedures, some important, such as that concerning the use of a mechanism called a risk aversion curve (CAR), created in 2001 by the CGCE. It determined monthly the storage levels required in each region so that, even in the event of critical rainfall scenarios over the next two years, it would not be necessary to adopt restrictive measures on consumption during that period. As soon as energy stocks in the reservoirs of a region were equal or below the CAR value, all available resources were to be used for storage to revert to a safe level. According to this new decision for preparing monthly operating programmes, the Newave methodology was to be used in its original form or including the CAR. This only became possible at a later date, the

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CAR being used to search for more conservative criteria from a safety point of view.

Discussion and adaptation of the proposal and debates in congress The MME made an official announcement of the revised version of the model in keeping with the suggestions they had accepted. This version was again submitted to the CNPE for discussion, upon which the conclusive report was approved. Public discussions became more objective after this announcement, and the MME made themselves available to provide further explanations. After listening to comments, and upon the completion of the preparation of the proposal, the government sent two independent texts to Congress. The Chamber of Deputies received 766 amendments, the majority of which hinged on details of direct interest to specific types of consumers or generators. Only a few were accepted. The approved projects were forwarded to the Senate, where further suggestions were added, few of which were accepted. Discussions did not take long and ended at the beginning of March 2004, with the approval of Law 10,848/2004, published together with Law 10,847/2004, which dealt specifically with the Energy Research Company (EPE). The former is long and regulatory in some points, but the latter is compact and deals with the sole objective of authorizing the forming of the EPE as a wholly owned government company to ‘render services in the sphere of research studies in order to provide subsidies to the planning of the energy sector’. The complexity of the system gave cause for concern.

Essence of the approved reform of 2004 The essence of the new legislation can be summed up by two basic concepts: 1 A return to state control in three ways: • re-establishing, with adaptations, traditional long-term governmental planning, which had previously been the responsibility of ELETROBRÁS; the EPE would now be responsible for it. The former planning had been obligatory for the companies, while the latter was merely indicative; EPE was obliged to submit it to public hearing;

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Energy in Brazil

• appointing a Monitoring Committee for the Electric Power Sector (CMSE), made responsible for following up each year on whether the demand was met over a period of five years and for recommending preventive measures against deficiencies in the system; • a withdrawal from the predominantly private management of the ONS; the MME to appoint directors, including the president of the entity. 2 A reform of the market based on the concept of a pool administrated by a new organization, the Electric Power Trading Company, to replace the MAE. The initial concept that this organization would be the only buyer of all energy generated for resale at a uniform price paid to distributors was abandoned. Instead, a system of bilateral contracts between generators and distributors mediated by the Electric Power Trading Company was established, fixing a sole supply tariff for each sub-market within this scenario. The generating companies became responsible for meeting market needs and the distributors were obliged to contract 100 per cent of the demand forecast for the five subsequent years, while also providing guarantees against defaulting. The following supplementary provisions, among many others, were also adopted with major repercussions: •

•

•

The criterion for granting a concession for the utilization of hydro resources was, according to the earlier reform, based on the highest offer of payment for its use during the period of concession. Under the new model, this was modified to the lowest annual revenue demanded by the utility. This ruling was already in effect for transmission, so the previous model remained in effect. The principle of contracting in two spheres, in which the generators of public services, independent producers, traders and self-producers were the sellers, was maintained. In the regulated contracting market, the buyers were distributing utilities and the contracts were the result of auctions. In the free market the buyers were free consumers and traders, and the contracts are freely negotiated. The responsibility for studies and proposals for long-term energy planning, as well as viability studies of new hydroelectric sites, was assigned to the EPE.

In closing this phase of definitions, ANEEL published the Electric Power Marketing Convention, which covered organization, operation and attributions of the Chamber of Electrical Energy Commercialization (CCEE),

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indispensable to the start of energy auctions. The CCEE started operations in November 2004, replacing the MAE.

Planning and optimizing interconnected operations Planning and optimizing the system as well as the role of the ONS were once again the centre of attention. Their development was undertaken along with the organizational reforms. Some of the fundamental concepts were reviewed, while new technical terms were introduced into the legislation. The concept of firm energy was, in practice, replaced by assured energy, which was defined as the total supply of the interconnected system. It resulted from a statistical simulation by using the Newave model and observing the pre-established deficit risk criterion. This total system energy was then shared among the generating plants in proportion to their respective installed capacities. The sellers had to put up collateral for the sale of energy. The collateral consisted of proving physical generating capacity in terms of power. Thermal plants had to sign contracts that allowed meeting 100 per cent of their installed capacity in case of need. This requirement could be met by means of their own capacity or that of third parties; in the latter case, through contracts for the purchase of energy or capacity. The MME, in keeping with criteria proposed by the CNPE, regulated the method of calculating the physical guarantee given by the EPE. The principle of planning the expansion of supply of electric power was that the risk of insufficient electric power supply to the interconnected system must not exceed 5 per cent in any of its sub-systems. The ONS was responsible for planning and defining transmission and the substations needed for a safe flow of the generated energy. Since it replaced the GCOI, the ONS has also been responsible for drawing up regulations for the operation of interconnected systems, in accordance with constantly improving procedures. The physical basis of the integrated Brazilian electricity system is schematically shown in Figure A1.6, where both the installed capacity, by basin, and the main transmission lines are shown.

Implementation of the transmission model The implementation of the new model was divided into two segments: a relatively simple one for transmission, and an extremely complex one for generation plants.

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High-voltage transmission (250 kV or more) had become an increasingly independent activity since the concept of free access was adopted in 1995–96. ANEEL improved the auction system and the definition of the Rate of Use of the Transmission System (TUST), which consists of two parts: one proportional to load, the other to energy. In 2003, ANEEL held the first Transmission Line auction of the new phase, a relatively simple procedure because the essence of the basic rules of the earlier mode, in use since 2000, remained unchanged. Since then, successive auctions until 2007 have led to contracting 13,775 km of new lines (Table 3.4) which, added to those that had been auctioned in the earlier phase (7,801), amount to a 31 per cent expansion over the basic 66,954 km grid existing in 1999. The construction of these lines was planned for completion after 2007. There was, nevertheless, a 29 per cent increase in the length of lines in operation, namely from 66,954 in 1999 to 86,229 in 2006. This significant physical increase should be compared with the ratio between transmission and generation capacity, which declined during that period from 0.98 km/MW to 0.89 km/MW. A relevant factor in these auctions is the discount in relation to the ceiling prices established in calls for tenders, which have amounted to more than 30 per cent since 2003. This was even more accentuated in the 2006 auctions at which Spanish companies participated. Regarding the ratio between RAP and the proposed investment, several changes were observed since the beginning of 1999, as shown in Figure 3.2. The spread between maximum and minimum requirements was very large in the first years and the maximum requirement was reached in 2002, before the transition to a new government in 2002–03. Since then there was a continuous downward trend. This result may possibly be explained by the simplicity and continuity of the rules and the increasing trust in the country’s financial status that attracted strong competition, thus meeting the objectives of the privatizing reforms.

Table 3.4 Results from auctions of transmission lines – second phase (2003–07; 1,000 km) Nature of buyer

2003

2004

2005

2006

2007

Private company Consortiuma State company Total

527 1,260 – 1,787

1,561 1,781 412 3,754

2,057 961 50 3,068

2,319 222 618 3,259

1,120 382 408 1,910

a

Private and state companies

Source: ANEEL. Auctions of Transmission Lines, Results of Bids, 2007

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35%

Maximum Minimum 30%

25%

20%

15%

10%

5%

0% 1999

2000

2001

2002

2003

2004

2005

2006

2007

Note: RAP, annual required income/proposed investment Source: ANEEL, Summary of transmission lines auctions – RAP/investments, 2008

Figure 3.2 Results from auctions of transmission lines since 1999 The TUST, which depends on the RAP, was originally set at a very low figure since it was based on assets from state companies that had been already greatly depreciated. Later, as a result of auctions and with the expansion of the basic grid, it suffered from the entry into operation of new lines with more current investment costs. Discussions took place in search of simplifications in calculations and to avoid excessive value oscillations due to the frequent auctions.

Implementation of the generation model Contrary to what occurred with the transmission lines, in accordance with the regulations of the earlier model, which required payment for the concession, the sequence of auctions of electric power plants was suspended between 1997 and 2002. In 2004, the progressive freeing of energy included in the original contracts between generators and distributors, which had been the object of bilateral negotiations or had taken place within the MAE, was about to end. Once the Electric Power Trading Company was set up in November 2004, schedules and final terms for the first energy auction were defined. It

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would be a decisive test for the performance of the new model that allowed for two types of operations within the regulated sphere: short term and long term. The latter were the result of the deals for non-contracted energy negotiated between agents. The cost of Settlement of Differences was determined weekly, based on results of the mathematical models. The long-term operations resulting from energy auctions within the CCEE gave place to ‘Energy Marketing Contracts in a Regulated Environment’, in terms of quantity of energy (for major hydroelectric generators) and of energy availability (for thermal generators). The norms and parameters that regulate these contracts are complex. In view of the new orientation of the national economic policy which gave less importance to the financial aspect and greater importance to moderate rates, concessions were based on the offer of the lowest revenue demanded by the proponent over the concession period, which was 35 years for hydroelectric plants and 15 years for thermoelectric plants. Four auctions were held between 2004 and 2006 under these new terms, the first for energy from existing hydroelectric plants in operation prior to 2000. Such energy became known as ‘old energy’ and was intended to meet the demand of previously defined periods. The first auction, held in December 2004, was an occasion of major importance. Tenders were received from 35 purchasers, and 18 sellers were registered, six of which withdrew prior to the decisive phase of the auction, preferring to keep non-contracted energy. Deals were made for an average of 9,100 MW for delivery between 2005 and 2012, an average of 6,800 MW for 2006–13, and an average of 1,200 MW for 2007–14. Discounts in this first auction varied between 20 per cent and 28 per cent in relation to the initial megawatt-hour prices. The federal statecontrolled companies ELETRONORTE and CHESF were mainly responsible for prices below expectations. The financial turnover reached R$75 billion (a figure equivalent to US$38 billion), which required the CCEE to sign 973 contracts before publishing the official results. The second big auction of existing energy was open to plants that had entered into operation after 2000, as well as to plants under construction. Thirty-four purchasers and 16 sellers entered tenders, and an average of 1,300 MW were negotiated for 2008–15. Many companies that had existing plants and were given the option to take part in the auction of new energy preferred to hold back. Adjustment auctions of lesser importance were also held. The third auction, in October 2005, dealt with supplies for 2009–16 and the fifth, in December 2006, was supplementary. ‘New energy’ auctions began before the ‘old energy’ auctions had ended. The first, held in December 2005, consisted of two stages: (1) tenders for

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new hydroelectric plants according to the criterion of the lowest tariff proposal; and (2) auctions of energy for specific periods in which the companies that qualified in the first stage competed with the licensed thermoelectric plants. Due to the many difficulties in obtaining environmental licensing, it was decided at this new stage to require a licence prior to calling for tenders. Seven plants with a total capacity of 804 MW were auctioned. At the second stage, 100 per cent of the additional energy forecast for 2008, 2009 and 2010, amounting to an average of 2,500 MW, was contracted. There was an excess of offers, but natural gas-driven plants whose supply had already become precarious were notably absent (Chapter 4). These transactions amounted to R$69 billion in 1,823 contracts, a figure equivalent to US$28 billion. The apprenticeship for the new negotiation methods, both on the part of government agencies and companies, was thus completed over a threeyear period. In subsequent auctions, the June 2006 auction was a supplement for 2009 needs, and the October auction was held for supplying the 2011 needs. The July 2007 auction was for supplementing the needs of 2010 and ended the transition stage of the new model. Finally, the October 2007 auction served to supply the needs of 2012. In these four auctions, the volumes varied between an average of 1,100 and 2,300 MW, and the cost stood between R$23.1 and R$51.2 billion. In the auction for 2011, the volumes of hydroelectric and thermoelectric energy were identical, and for 2012 the volume of thermoelectric energy was double that of hydroelectric energy. Especially noteworthy was the introduction of two thermoelectric-imported coal-driven plants of, respectively, 315 MW in the North-East and 615 MW in the north, expected to go on stream in 2012. The latter result points in the direction of a reduction in the contribution of hydroelectricity to the national energy matrix as of 2011, if no significant projects are licensed in the Amazon region. With reservations regarding the difficulty in choosing an appropriate currency exchange rate, a rate of R$1.80 to US$1.00 was adopted, according to which the value of the energy contracted at the end of 2007 for delivery in 2012 stood at US$71/MWh. The tariffs established in the auctions held since 2004 rose for hydroelectric plants, while fluctuating without any definite trend for thermoelectric plants, as shown in Figure 3.3. They seem to converge. The amounts in the graph refer to the initial years of the contracts. The low prices in the first auctions reflect the weight of the major state-owned hydroelectric plants, whose investment was almost totally amortized. The price of the thermoelectric plants, predominantly natural gas driven,

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140 New Energy - Thermal

130 120

Price (R$/MWh)

New Energy - Hydro

110 100 90 80 70 60 50 40 2005

2006

2007

2008

2009

2010

2011

2012

Source: CCEE, 2007

Figure 3.3 Price of electric power for the initial years of contracts includes a subsidy by means of a mechanism used in fixing the price of gas, as will be seen in Chapter 4. Besides those auctions, a special attention was given to the Hydroelectric Complex of the Madeira River in the Amazon region (state of Rondônia). It comprises two projects, the Santo Antonio and the Jirau, each one with a capacity of 3,300 MW. The Santo Antonio project was the object of an auction in October 2007, between two auctions for the sale of energy. The studies and the design were carried out by a public–private consortium, Furnas/ Construtora Odebrecht. This specific case required coordinated efforts in the sphere of the federal government to overcome legal obstacles of various origins that hampered its fruition. The difficulties encountered elucidate the upheaval caused by the intervention of multiple entities in environmental licensing (see Chapter 8). The auction turned out to be unusual because three consortiums, each with a state-owned company holding 49 per cent of the capital, took part. In view of predictable problems, the private companies preferred to enter into partnership with state companies. The auction was almost immediately won by the consortium responsible for the project that proposed a rate of R$78.90/MWh (corresponding to US$40.50/MWh) for delivery on the regulated market. This corresponded to a substantial discount on the maximum permitted tariff and was partly due to the fact that the winning consortium reserved 30 per cent of the energy for sale on the open market, looking for higher revenues. They are committed to start operating in 2012.

Hydroelectric Power

73

The Jirau project was the object of an auction in May 2008 which was won by the consortium Energia Sustentável do Brasil, headed by the Suez Group (50.1 per cent), with the participation of Camargo Corrêa and two subsidiaries of ELETROBRÁS (CHESF and ELETROSUL). The consortium based its proposal on a new engineering concept that resulted in a lower investment and a proposed rate of R$71.37/MWh for delivery on the regulated market. This corresponded to a substantial discount on the maximum permitted tariff and was also lower than the Santo Antonio auction price. The consortium also reserved 30 per cent of the energy for sale on the open market, looking for higher revenues. They are committed to start operating in 2012. The result of this second auction was not immediately accepted by the winning consortium of the first auction, because there was a change of the engineering project. The discussions delayed the final approval of the result. At the beginning of 2008 delays in the process of licensing hydroelectric plants became a reason for concern regarding the capability to supply the market after 2011. The seventh auction was scheduled for September of 2008 for delivery of energy starting in 2013. The hydro plants offer was insignificant. The majority of the thermal plants offered were based on diesel engines using fuel oil. While auctions were held in the regulated market, the free market expanded rapidly. From 69 consumers in 2003, it increased to 687 in 2007. The value of monthly transactions in 2007, calculated by CCEE, varied between a minimum average of 8,700 MW and a maximum of 9,500 MW. These figures show that free consumers were responsible for between 17.6 per cent and 19.1 per cent of the total energy contracted in 2007 within the framework of the CCEE. During the entire reorganization process, since 2004, the rules for operating the Itaipu Binational and ELETROBRÁS Termonuclear (ELETRONUCLEAR) plants remained unaltered. The former as a result of the treaty between Brazil and Paraguay, which stipulates the price in dollars and the obligation of ELETROBRÁS and Administración Nacional de Electricidad (ANDE) to acquire the entire energy generated; the latter in view of the nuclear power monopoly with prices set by the government.

Transformation and strengthening of ELETROBRÁS As a result of two reforms of the electricity sector (in 1997 and 2004) that directly affected ELETROBRÁS, the structure of this hybrid company

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Energy in Brazil

became complicated and included a number of internal contradictions. To give an example, two large generating subsidiaries with different partners competed with each other in an auction for the right to build a hydro plant. For this and many other reasons, restructuring became necessary. Therefore, the Board of Directors, in line with directives issued by the Ministry of Mines and Energy, initiated a process of institutional reforms in 2008. The existing structure, that of an open corporation whose stock was listed in the stock exchange and wherein the federal government held the majority of shares, was maintained. Corporate dual functions, those of being additionally in charge of the management of social energy programmes by assignment of the federal government, were officially recognized. The reformulation of this holding company of electric utilities resulted in the definition of a comprehensive, strategic coordination of three groups of entities: 1 The most relevant group encompasses three large regional generating companies (Furnas, CHESF and ELETRONORTE) and one mainly transmission company (ELETROSUL), as well as two thermal generation companies (ELETRONUCLEAR, based on uranium, and Thermal Electricity Generation Company (CGTEE), based on domestic coal). 2 A second group consists of small and inexpressive local distribution companies that for this reason could not be privatized and require an objective reform. 3 A third group comprises activities and joint ventures in other countries. A revision of ELETROBRÁS’s relationship with the federal government is also underway with a view to a clear definition of the responsibilities assigned to ELETROBRÁS in the management of fiscal funds.

Tax on electric power There was a time when taxation of electric power, like that of oil, was very simple. It was based on a sole tax whose revenue was shared among the federal, state and municipal governments, linking the use of the revenue obtained to the infrastructure of transportation and investments in the sectors themselves which, in those days, were almost all state-controlled (see Chapter 1). Sector contributions were also charged on the rate. The 1988 Constitution ended this link of tax revenues, and the sector was taxed like

Hydroelectric Power

75

Table 3.5 Taxes and other charges added to the electric power price (in % of total revenue) Nature

1999

2003

2006

Taxes, federal, state, city Payroll charges Electric sector contributions Total

29.3 4.8 6.2 40.2

29.8 2.4 10.1 42.2

35.9 4.9 8.3 49.0

Source: Price Waterhouse Coopers, Study of the impact of electric rates on the competitiveness of Brazilian industry, 2008

any other industry, with special reference to the ICMS (Commodities circulation tax). Since then, electric power has been undergoing ever-increasing taxation, to which other charges are added. An estimate of this incidence is not a simple task since there is a variety of structures and of state fiscal legislation. A recent study attempts to show the evolution (see Table 3.5). Unfortunately the trend has been to increase the burden added to basic electricity rates and it now represents about half of the price paid by the consumer.

Expansion of the electric power system As we have attempted to show in this chapter, the electric power system has undergone a comprehensive institutional reform since the end of the 20th century and its directives have suffered a certain lack of continuity. At the same time, physically, hydroelectricity continued to dominate despite the entry of natural gas-driven thermoelectric plants. The participation of national and foreign private enterprise increased, facing the challenge of adapting to the new regulations. Despite changes in criteria for the concession of new electric powergenerating plants, installed capacity continued to expand (Table 3.6). Table 3.6 Generating capacity expansion (thousand megawatts) Type

2002

2003

2004

2005

2006

2007b

Hydroa Thermo Nuclear Totala,b

65.3 15.1 2.0 82.5

67.8 16.7 2.0 86.5

69.0 19.7 2.0 90.7

70.9 20.3 2.0 93.2

73.4 21.2 2.0 96.6

76.9 21.2 2.0 100.4

a

Includes half the capacity of Itaipu. bIn 2007, 0.25 MW wind energy was included

Source: Ministry of Mines and Energy (MME). For 2002 to 2005, Balanço Energético Nacional (BEN) 2007. For 2007, Generation Information Data Bank

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Energy in Brazil

The installed capacity increase over the five-year period 2003–07 consisted of 17,900 MW, 6,000 MW of which occurred in thermoelectric plants. In December 2007, 83 hydroelectric projects with an installed capacity of 6,500 MW (81.5 per cent) and 21 thermoelectric plants with an installed capacity of 1,400 MW were under construction. The construction of some approved projects had not yet begun, while no call for tenders had as yet been posted for others whose viability had been approved by ANEEL. Companies were undertaking viability studies; biomass and coaldriven plants were being studied. In 2007, the EPE, with an eye to the future, initiated plant viability studies as well as an inventory of hydrographical basins in the Amazon region. In 2007, hydroelectrical plants contributed 84 per cent of electricity out of a total production of 444.5 GWh, whereas they participated with only 76 per cent in installed capacity. Thermal plants contributed 14 per cent and nuclear plants 3 per cent (BEN 2008, Tables 5.3 and 5.4). The capacity factors in 2006 (BEN 2007) were, respectively, 50 per cent for the system as a whole, 54 per cent for hydroelectric plants, 36 per cent for thermal electric plants and 79 per cent for nuclear plants.

Notes 1 World Bank (1993) The World Bank’s Role in the Electric Power Sector – Policies for Effective Institutional, Regulatory and Financial Reform, Washington DC: World Bank 2 Coopers & Lybrand (1997) ‘Relatório Consolidado – Etapa VII’, Rio de Janeiro: Coopers & Lybrand 3 ELETROBRÁS (2002) O Planejamento da Expansão, Rio de Janeiro: Eletrobrás 4 Coopers & Lybrand (1997) ‘Relatório Consolidado – Etapa VII’, Rio de Janeiro: Coopers & Lybrand 5 Roussef, D. (2003) O Novo Modelo do Setor Elétrico, Gov. Brasília: Official Press

Chapter 4

Fossil Fuels

Traditional dependence on imported oil Brazil has traditionally been dependent on imported oil. There was no local or foreign interest in oil surveys until the 1930s, when a discussion on what to do to reduce the country’s dependence took shape. Technical and political discussions escalated until they culminated in a famous nationalistic, countrywide campaign that adopted the slogan ‘the oil is ours’. The trend of nationalism and government intervention was then very common in the world. In Brazil, as a result of debate, the government submitted a proposal to Congress and law was approved establishing a monopoly for all oil-related activities, except for the distribution of oil products already in the hands of international companies. Petróleo Brasileiro S.A. (PETROBRAS), a state-controlled company, was founded to administer the monopoly. Organizing the company was a relatively slow process during which specialized technical cadres were prepared. Results of surveys after the first discovery of oil in Lobato in 1939 were not encouraging. Aside from a number of disappointments, there were even moments of pessimism as to the country’s hydrocarbons potential. Concern in government circles grew and, in the 1970s, alternative measures were studied that would modify the strict policy in force at PETROBRAS, especially relating to exploration on the continental shelf. It was then that the worldwide oil crises of 1974 and 1979 occurred and had direct impacts on the then fragile Brazilian balance of payments. Investment priorities were reshuffled to give emphasis to surveys and technological development for work at sea. Investments increased with noticeable results. Unfortunately, such was not the case with natural gas, which continued to be scarce.

Investments and success in oil exploration PETROBRAS always invested a significant part of its total investments in the basic mission of oil exploration and production (E&P). For some time the proportion of approximately 70 per cent was maintained, but after

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Energy in Brazil

1,200

3,000

1,000

2,500

Million barrels

800

2,000 20 years

600

1,500

400

1,000

200

500

New discoveries

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

1968

0 1966

0

US$ million (dollars of 2002)

1988 it dropped to 60 per cent, reaching a low of 46 per cent in 1996–97. The percentage then increased again until it had climbed to a new peak of 71 per cent in 2000. Throughout the company’s history, its average investment in oil E&P was 60 per cent. In PETROBRAS investments, the portion dedicated to exploration warrants greater attention because it makes it possible to increase exploration, which, allied to competence and luck, defines the probability of expansion of the reserves required by the country’s development. These investments do not have predictable and immediate effects and require persistence and patience. A lengthy period must be allowed for their maturation and quantitative evaluation. Figure 4.1 was prepared with a view to a 50-year search for oil. It compares investment in exploration, year by year, with the gross increase in proven oil reserves, the latter depicted in five-year averages. The chart clearly shows the interval of approximately 20 years between the extensive investments in research in the Campos Basin (1982) and the large increases in proven reserves during the five-year period of 2000–04. The sequence in ever-deeper waters is impressive in combination with the development of the necessary technologies. After the country’s easing of trade at the end of the 20th century and the institutional reform of the oil sector, exploration activities were

Exploration investments

Sources: Discoveries – National Petroleum Agency (ANP), Annual Statistics 2007 and previous editions. Investments – PETROBRAS, personal communication. Reference US$ of 2002 (Consumer Price Index of US Department of Labour) 2002=100

Figure 4.1 Investments in exploration and new discoveries of oil fields

Fossil Fuels 79 reinforced by foreign private capital in the blocks they had been awarded in auctions. In terms of size, their participation can be evaluated by means of information available from the Central Bank of Brazil (BACEN) (Table 4.1). Since the work of these companies is in its initial phase, most of these investments were presumably made at the exploration stage. It is interesting to note that the total amount of US$5,170 million is slightly below that of PETROBRAS investments in exploration during this period, which reached US$6,093 million. There has not yet been time to make the first evaluation of the efficacy of foreign investments in the discovery of proven reserves. The production of oil extracted from national reserves was relatively stable between 1990 and 1994, and has increased since 1995, due to the start of production from additional reserves in the sea. In 2003, they already amounted to 91 per cent of the country’s total. It should be noted that the continued increase in extraction was accompanied by an increase in reserves, maintaining a good reserve to production ratio (Table 4.2). As a result of the successful increase in reserves and their cautious use, the country became practically self-sufficient in physical terms in 2007–08 and thus attained the main objective of the national decision to found PETROBRAS.

Table 4.1 Direct foreign investments in exploration and production of oil (US$ million) Year

2000

2001

2002

2003

2004

2005

2006

Investment

1,022

1,360

508

365

285

896

734

Note: The amount for 2000 corresponds to stock Source: BACEN, Exchange and Foreign Capital, Direct Foreign Investment. Distribution by Sphere of Activity

Table 4.2 Proven reserves and production of oil (million barrels) Reserves, end of year Production in year Increase in reservesa Reserves/Production

2000

2001

2002 2003

2004 2005

2006 2007

8,464 464 774 18

8,496 9,805 10,601 11,243 11,773 12,182 12,624 472 531 546 541 596 629 639 504 1,840 1,340 1,183 1,126 1,038 1,181 18 18 19 21 20 19 20

a Prepared by the author: increase in reserves = difference of reserves above those of the former year + production within the year. Initial reserves in 1999 = 8,154 million barrels

Source: National Petroleum Agency (ANP), Annual Statistics 2008, Tables 2.4 and 2.9

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Energy in Brazil

Dependence on foreign oil and oil products During the period of successive changes in the domestic oil exploration scenario, the trend to reduce foreign dependence continued (Table 4.3) despite a small setback in 2004, when oil production did not develop at the expected rate, mainly due to the delay in entry into the operation of three platforms (P43, P48, P50). The delay in the first two was due to problems in the contract signed with Halliburton on an issue that was referred to international arbitrage. Net imports of oil and oil products dropped from 47 per cent of domestic consumption in 1995 to 1 per cent in 2005. In 2006, Brazil became an exporter. Heavy oils that cannot be absorbed by national refineries are exported and light oils are imported. Petroleum products are both imported and exported, due sometimes to temporary, partial natural imbalances between domestic supply and demand or because of operational characteristics of the refineries. For the country as a whole, the future balance will include, aside from PETROBRAS results, the expected results of private companies that operate in exploration and production. In economic terms, the scenario is less favourable. Losses incurred with the exchange of heavy oil for light oils continue, leaving a negative balance. In 2006, the price of heavy oil corresponded to approximately 75 per cent of the price of imported light oil. This situation leads to querying the choice of investments made in PETROBRAS programmes, bearing the large negative weight of the exported heavy oil in mind. The company has invested in some of its refineries, with technical support from the Research and Development Center (CENPES), in order to allow them to use a larger proportion of heavy oil; this effort was restricted by the technical impossibility of processing the excess, which is being exported. The potential annual loss of foreign exchange credits now and in the near future is, however, very significant. Based on the volume of 134 million barrels exported in 2006 and the difference between import and export prices, which was well over Table 4.3 Dependence on oil imports (thousand m3/day) Years

2000

2001

201 60 23 285 29

212 49 7 268 21

Production Net imports: crude oila Net imports: oil productsa Apparent consumption External dependence (%)

2002 2003 238 23 5 266 11

247 17 –6 258 4

2004 2005 245 38 –13 270 10

a

Net values = imports minus exports

Source: National Petroleum Agency (ANP), Annual Statistics 2008, Table 2.50

272 17 –14 275 1

2006 2007 288 –1 –9 277 –4

291 2.5 –4.6 289 –0.7

Fossil Fuels 81 20,000 Imports

18,000 16,000 Exports

US$ Million

14,000 12,000 10,000 8,000 6,000 4,000 Deficit

2,000 0 2000 2001 Note: Series was revised in 2008

2002

2003

2004

2005

2006

2007

Source: National Petroleum Agency (ANP), Annual Statistics 2008, Tables 2.44 and 2.49

Figure 4.2 Value of imports and exports of crude oil and oil products US$10 per barrel, the negative balance would reach an appreciable amount to the order of US$2 billion during that year (Figure 4.2). This amount is comparable with the investment in a new refinery, even if its unit cost is higher than that of a standard refinery. Arguments in favour of a new refinery are supported by an analysis of the development of the capacity and the intensity of utilization of the national refining park that clearly shows there is room for expanding the capacity. The refining capacity rose 5 per cent from 2000 to 2007, although no new refinery was inaugurated after the Refinaria do Vale do Paraíba (REVAP) in São José dos Campos, state of São Paulo, in 1979. The utilization of refineries rose from 87 per cent to 92 per cent in the same period. The domestic oil processed varied between 74 per cent and, more recently, 79 per cent of the total load, while imported oil decreased to about 365,000 bbls/day (barrels/day). Two technically appropriate refineries for processing heavy oil are being considered: (1) one of a 200,000 bbls/day capacity to be installed in the state of Pernambuco, with investments to the order of US$2.5 billion, in partnership with Petróleos de Venezuela S.A. (PDVSA), designed to consume national and Venezuelan oil in equal quantities as of 2011; (2) the other, of 150,000 bbls/day, to feed a set of petrochemical industries to be installed in Rio de Janeiro, also to go on stream in 2011. The merits of the partnership in the former case are debatable, since they involve the importation of heavy oil, a product that Brazil already has in excess. The opening foreseen in the new legislation for the construction of refineries by private enterprise did not attract any investors.

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Energy in Brazil

An opening (1995) in the oil and gas sector Prior to the 1995 reform, the oil and natural gas sector consisted of a set of distributors dealing initially with imported oil products, the majority of which were foreign private companies established in Brazil since the beginning of the 20th century. All other activities were concentrated in one sole company, PETROBRAS. The National Petroleum Council (CNP) was, for most of the time, except at the initial stage, only an auxiliary institution that calculated the cost of oil products and granted authorizations of minor importance. Traditionally, PETROBRAS was autonomous but for rare exceptions, both in regard to the CNP and the Ministry of Mines and Energy. The reform that took place in the oil sphere since 1995 differed from that adopted for electric power, although it had the same declared objective of privatization and competitive markets. In the former case, excluding distribution, the structure could have been called monolithic, undergoing a moment of entrepreneurial success while carrying out its fundamental objective, that is, the discovery of oil reserves capable of ensuring selfsufficiency. In the latter, numerous and varied state companies predominated, all of them suffering a process of deterioration and insufficient expansion that risked shortages. By means of a Constitutional Amendment in 1995, Article 177 of the 1988 Constitution covering the oil monopoly was modified, as always in an intensely political climate. Discussions only reached a decisive stage when President Fernando Henrique Cardoso categorically guaranteed in a letter to the president of the Senate that his government would undertake the commitment not to privatize PETROBRAS and would grant the company the privilege of exploiting the 29 potentially oil-producing blocks which they had identified in Brazil. In the final text, paragraph 1 of Article 177 was substituted by another that authorized the government to contract state or private companies to carry out surveys, production, refining, importation and transportation under conditions established by law. Following on from this constitutional modification proposed to Congress in July 1996, a draft bill on oil was submitted that caused an intense debate until its approval (Law 9,478). It dealt with the creation of the National Petroleum Agency (ANP), with the responsibility to regulate current exploration and production activities, as well as with exploration, development and production in new areas. Auction norms were drawn up, as well as conditions for the transition of PETROBRAS from being the executor of the monopoly to becoming a mere public concession holder. The ANP, as the regulating agency of the oil industry, was made responsible for the implantation of the national oil and natural gas policy ‘with

Fossil Fuels 83 emphasis on guaranteeing the supply of oil products throughout the entire country’, and on the protection of the interests of consumers, fostering studies with a view to boundary lines of the areas intended for concessions; establishing criteria and promoting auctions for the concession of exploration, development and production; and authorizing refining activities, aside from other supplementary functions. This law confirmed that the government had full rights of exploration and production of oil and natural gas, and appointed the ANP as its administrator. The status of PETROBRAS was redefined. It became a mixed economy company linked to the MME, whose objective is the survey, production ..., to carry out its activities in an environment of free competition with other companies, and in keeping with market conditions. (PETROBRAS, ‘Annual Report 2001’) PETROBRAS was formally authorized to carry out any of the activities included in its social objectives outside Brazil. The constitutional provision of the monopoly of states regarding the distribution and marketing of natural gas was maintained, but the obligation that this activity be exercised by a state company was withdrawn. This allowed the concession of services to private companies by means of auctions.

Execution of the privatization programme of PETROBRAS The National Privatization Program affected PETROBRAS immediately, closing two subsidiaries of secondary importance dedicated to marketing and mining activities. Highly significant, however, was the withdrawal of PETROBRAS from the petrochemical industry which had developed since the 1970s, following a formula consisting of a division of capital into three parts: national private, foreign private and state. This model had fulfilled its mission to start the petrochemical industry in Brazil. Auctions were held between April 1992 and September 1996, comprising 27 typically industrial companies which PETROBRAS either owned, or in which it was associated with private companies. The sale reached an amount equivalent to US$2,698 million, with the transfer of debts to the value of US$1,003 million, attaining a total of US$3,701 million.1 PETROBRAS was moderately involved in petrochemical enterprises in subsequent years through its subsidiary Petrobras Química S.A. (PETROQUISA), complying with the government directive to keep these activities

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Energy in Brazil

in private hands. Yet, after the change in government in 2003, PETROBRAS again participated in large-scale petrochemical projects. In its other activities, PETROBRAS made significant investments in refineries, with an emphasis on adapting them to processing nationally produced heavy oil. In the distribution area, the predominant participation of Petrobras Distribuidora increased with the acquisition of Ipiranga and other smaller companies, but competition with the traditional distributors Esso, Shell and Texaco, as well as with some newcomers (e.g. Chevron and Repsol-YPF), continued. Repsol has an interest in the Alberto Pasqualini refinery. In compliance with Article 58 of Law 9,478/1997, which gives third parties free access to both oil and natural gas pipelines, the ANP published regulations referring, respectively, to the construction and operation of transportation and transfer pipelines, and to free access to them. In practice, few changes took place: PETROBRAS or its subsidiaries continued to be in control, except for private capital in Gasbol, transporting gas from Bolivia, and its ramification to Cuiabá. Public discussion on effective free access to the pipelines continued.

Auction of oil exploration areas Essential activities of oil exploration and production were covered by the auction policy for blocks in sedimentary basins on land and in the sea according to legal precepts (Law 8,987/1995). The recently created ANP was in charge of conducting the auctions. Before tenders were issued, blocks and fields that would continue to be the responsibility of PETROBRAS (Table 4.4), due to the advanced stage of the work undertaken on them, were defined. The auction of blocks during the first four years comprised 94 units, covering a total area of 144,000 km². The parts acquired by international private companies always amounted to more than half the total on offer. Those that were assigned to PETROBRAS started on a modest scale and came to less than a quarter. Adding these to that from their partnership Table 4.4 PETROBRAS concessions Stage Exploration Development Production Total

Number

Area (1,000 km²)

115 49 233 397

443.2 2.7 10.5 456.4

Source: National Petroleum Agency (ANP), 2003, Former Rounds Review, Round 0

Fossil Fuels 85 with private companies, the total was always less than half of what was on offer. Figure 4.3 shows the results of auctions during this first stage, which continued until 2002, as well as during the second stage, which started in 2003, already under a new government with a political orientation that differed from the former. With the impetus of the former process, ANP continued to prepare five new auction rounds of blocks for exploring oil and gas involving smaller areas than those offered in previous rounds, and demanded from candidates a greater participation in local expenditure. In the fifth round, which took place in 2003, the start of another government and of a second stage, there was a retrenchment of the private sector and the participation of PETROBRAS predominated, possibly due to doubts as to the direction the new government would take. Since 2004, private companies, with or without partnership with PETROBRAS, were again strongly in evidence. Inactive areas with marginal accumulations in Bahia and Sergipe, and areas with lesser investment requirements, were put on offer in the rounds held in 2005 and 2007 and attracted smaller entrepreneurs, the majority from private national capital. In the eighth round held in November 2006, among the foreseen offer of 284 blocks, 40 were held to be of major significance in view of their 100% 90% 80% 70% 60% Private Partnerships * PETROBRAS

50% 40% 30% 20% 10% 0% 1999

2000

2001

2002

2003

2004

2005

2006

2007

Note: Number of blocks by nature of winning companies (%). *Partnerships are between PETROBRAS and private companies Source: ANP, 2006, Round 1–8 and Round 9

Figure 4.3 Results from auction rounds for oil exploration

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Energy in Brazil

prospects of natural gas. The ANP introduced an innovation in this call for tenders that restricted the maximum of blocks each candidate could bid for. ANP’s new norm caused a public outcry due to being interpreted as a measure intended to restrict PETROBRAS’s freedom of action. While the auction was held and after some contracts had been decided upon, it was interrupted due to a legal injunction against the clause adopted by the ANP. Regardless of the merit of the question, the suspension had a negative impact on the market by interrupting a process that had been regular and was transparent. The injunction was revoked by the court at the end of 2007. Procedures for the eighth auction remained undefined. The data in Figure 4.3 referring to this round are, therefore, of little significance. The ninth round, held at the end of 2007, put 271 blocks on offer. This total excluded 41 blocks withdrawn by the ANP as a result of the decision of the National Council for Energy Policy (CNPE), based on the information provided by PETROBRAS that tests in exploratory blocks pointed to the existence of a new and significant oil territory in Brazil that included areas initially part of the offer. PETROBRAS had drilled wells, independently or in partnership with other companies, to depths of 5,000–7,000 m, reaching a so-called pre-salt stratum. This area of 800 × 200 km was thought to be at a water depth of 1,500–3,000 m. In light of this information, and since they had the authority to propose measures aiming at safeguarding national interest by promoting the rational use of its energy resources, the CNPE ruled that the blocks located in this area be excluded. The tenth auction was scheduled for December 2008, excluding pre-salt blocks. In total, approximately 400,000 km2 were auctioned over nine years. Up to the seventh round, the bonuses obtained reached R$3.3 billion (approximately US$2 billion). With the exception of the fifth round, which was atypical, the participation of international companies in the blocks granted varied between 11 and 30 companies.

Oil exploration successes in deep waters increase Prior to the change in the process that attracted the interest of so many international companies, PETROBRAS’s tasks aimed at an increase in reserves, and the production of oil and gas continued regardless of foreign oil crises and changes in political orientation. A new era of oil started in Brazil with the discovery of the Garoupa field in the submerged area of the Campos Basin in 1974. Subsequent studies showed that the Campos Basin probably measured 100,000 km2. More and more discoveries followed, the most important being the fields of Namorado (1974) and Enchova (1975),

Fossil Fuels 87 both at water depths between 100 and 200 m. Production in these fields started in 1977, with 10,000 bbls/day. The work on the platform proceeded without interruption, pointing to ever-deeper waters. The undoubted success in the search for oil was due to a favourable association of teams of geologists and petroleum engineers working in the field with technological researchers in the CENPES, which was installed on the UFRJ campus in 1973. A technological development programme was instituted in 1986, to prepare the company for exploration and production in locations of water depths of 1,000 m. In 1992, a new programme was prepared for depths of up to 2,000 m and, in 2000, for 3,000-m depths. In practice, the performance regarding the depths reached is depicted in Figure 4.4, where the historical landmarks of Marlin, at a depth of 625 m in 1992, and Roncador, at 1,886 m in 2003, can be seen. These results had already been noted on the international scene from the mid-1980s. Exploration in the Campos Basin underwent a significant geographical expansion with the Espírito Santos Basin to the North and the Santos Basin to the South. The extension and location of the results of exploration are shown in Figure A1.7 (Appendix 1).

Source: PETROBRAS, personal communication, 2007

Figure 4.4 Deep-water wells

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Energy in Brazil

The discovery of a field named Tupi in the Santos Basin, at the end of 2007, was of particular importance. The exploratory drilling rig reached 7,000 m, something unconceivable a few years before. Subsequent exploration results confirm the early prospects are of very large reserves. Economic possibilities are great, but there are also many technical and economic problems to be resolved. These discoveries provoked renewed political discussions over the adequacy of the existing regulation to the deep-sea pre-salt reserves. There was a pause in the sequence of auctions. Aside from the exploration and production work conducted by PETROBRAS, international companies were also developing their activities independently. Since the opening of 1995, and during the eight auctions of blocks for exploration, the presence of major foreign companies on the Brazilian continental shelf has been significant. Aside from the activities in partnerships wherein PETROBRAS is the operator, some foreign companies have already reached an advanced stage in their work, notably those listed in Table 4.5. It is natural for private companies to be cautious in releasing information, but unofficially there are indications of favourable results. Only Shell and Devon are in full productive operation in their respective blocks. The product is exported directly by sea. When these companies expand their production, which should occur by 2010, they will have the option to

Table 4.5 Foreign oil companies in activity in the Campos Basin (preliminary results up to December 2007)

Projects at the development stage

Operator and share (%)

Project name

El Paso Oil & Gas – 100% El Paso Oil & Gas – 40% Shell Ltda. – 35%

Camarão/Pinauna Sardinha

Shell Ltda. – 35%

Nautilus/Ostra

Abalone/Argonauta

Chevron Brazil – 51.7%

Projects at the production stage

Anaduko – 50% Peregrino Shell Ltda. – 80% Bijupira/Salema Devon Energy – 60% Polvo

Partners and share (%)

PETROBRAS 40%/Norske 20% PETROBRAS 35%/Esso 30% PETROBRAS 40%/Chevron 20% Frade PETROBRAS 30%/Frade Japão 18.3% Norske Hidro 50% PETROBRAS 20% SK Brasil 40%

Source: ANP, Statistical Data. ‘Areas in Development Stage and in Production Stage’, 2008

Fossil Fuels 89 sell to PETROBRAS or to export directly from their own fields. Where associated gas is concerned, the flow is more complicated, due to the small volume from each field. It is believed that PETROBRAS will probably initially be the only buyer.

The entry of natural gas – a brief history Natural gas enters the Brazilian energy matrix by two different paths: on the one hand, that of the discovery by PETROBRAS in 1956 of a small volume in the Brazilian northeast and in the 1980s in marketable volumes; and on the other, negotiations with Bolivia in the 1990s that originated in a long history of issues since 1938. The reserves discovered by PETROBRAS in the Northeast, mainly in the form of gas associated to petroleum, had been increasing at a moderate rate since the end of the 1970s. Some local industrial consumers were supplied. Within the government, the issue of natural gas was discussed at the National Economic Council in 1986 and by a commission on making natural gas viable in 1991. Neither discussion went beyond speculations on how to proceed. In the expectation of a possible entry of natural gas in the national economy, the members of the 1988 Constitutional Assembly included a provision assigning to the states the right ‘to explore directly or by means of a concession to a state company, with exclusive distribution rights, the local service of piped gas’. This provision was later altered to omit the obligation to a ‘state company’. Brazil’s interest in natural gas in the 1990s was influenced by ideas that dominated the scene in the industrialized countries. The history of gas in Brazil was, however, very different from that of countries that since the 19th century had possessed networks installed at the time of manufactured gas obtained from coal. In order for Brazil to switch to the use of natural gas, it would not only have to build pipelines from the production sites or points of importation, but also have to substantially expand the distribution networks. While the increase in gas within the energy matrix was being discussed, PETROBRAS continued exploration work on two distinct fronts: on land in the Solimões Basin (Amazon region), and in the sea in the Campos Basin. In the former, the discoveries at the end of the 1970s resulted in confirmation of the Juruá and Urucu reserves, where productive operations started in 1998 (Figure 4.5). In the latter, discoveries of oil with associated

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400

Natural gas reserves (billion m3)

350 300 250 200 Campos fields 150 100 50 0 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2006

2007

Source: ANP, Annual Statistics 2008, Table 2.6

Figure 4.5 Proven reserves of natural gas in Brazil gas succeeded each other in ever-deeper waters in the Campos Basin and resulted in 1999 in a faster growth of the volume of proven reserves. In 2007, 81 per cent of total reserves were found in the sea. Most of the reserves were in the Campos Basin, followed by Urucu, in the Amazon Basin, with 17 per cent. Discoveries in the Santos Basin and later in the Espírito Santo Basin led to prospects of an increase equivalent or higher than all that had occurred previously. Besides, the corresponding reserves are located at less than 200 km from the coast in the Southeast, the region with the greatest potential demand for gas. The national production of oil-associated natural gas by PETROBRAS in the Northeast and Southeast accompanied the production of oil. However, only part of this gas was marketed as a result of losses in several units in the Campos Basin, where gas was being flared, and continues to be, for lack of a solution to its outlet in the limited quantities in which it is available. Solutions in the form of compressed natural gas (GNC) are being studied.

Urucu gas in the Amazon region Of special significance in the exploration and production of hydrocarbons is the successful discovery of oil reserves and associated gas in Urucu, deep

Fossil Fuels 91 in the Amazon jungle, which warrants special treatment. The development of this reserve since the 1970s, when work began, has possibly the longest history in the country and faced considerable environmental and logistical issues. Work on the oil pipeline as far as the Coari base, from where the oil was transported to the Manaus refinery in barges, was completed in 1999. The gas is being reinjected into the field. The gas project was controversial from the very beginning: on the one hand, there was interference of political interests of the Amazonas state government; and, on the other, the choice of transporting the GNC in barges or of overcoming the environmental impact of a gas pipeline. The option of building a pipeline to Manaus gained support, and thought was given to an extension as far as Porto Velho. When the initial project of the programme was finally completed in 2005, a call for tenders for its construction was made. The Urucu–Coari–Manaus gas pipeline of more than 700 km in length will be able to transport 5.5 million m3/day. The Coari–Manaus section, with 680 km, was the object of a call for tenders, but the highest proposal was considered unacceptable. Another auction took place and the construction was contracted at a significantly higher cost than the original budget. Nevertheless, the construction faced new delays due to technical and environmental difficulties. From an economic point of view, the delay impacts on PETROBRAS, which is still unable to sell gas and has no return on investments already made, as well as on the price of electricity paid by all Brazilian consumers, which includes a subsidy for fuel oil consumed in the thermoelectric plants of Manaus. This subsidy had reached a figure equivalent to US$1 billion in 2007. Notwithstanding the obstacles, the pipeline is expected to go on line in 2009.

Brazil–Bolivia natural gas agreement The first initiative to import hydrocarbons to Brazil from Bolivia resulted in a treaty of co-operation between the two governments, signed in 1938. Other initiatives followed along the same lines, all without practical results. A study was carried out by PETROBRAS at the beginning of the 1970s of various ways to increase exploration, including the possibility of operations abroad so that the company would gain experience in other environments. Congress approved the authorization, giving PETROBRAS the authority to operate in other countries, irrespective of treaties between governments. PETROBRAS Internacional S.A. (BRASPETRO) was

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founded in 1973 and thought was then given to a greater expansion of exploration activities. Years later new talks were held with Bolivia between 1971 and 1973, at that time already dealing more specifically with natural gas, of which a volume of 2 million m3/day was offered. Negotiations developed at a meeting in 1972 of the governments of the two countries and the respective state companies. The volume of gas initially offered was considered insufficient. At subsequent meetings, the scope of the negotiations was expanded to allow the importation of 8 million m3/day, subject to checking on available reserves. The outcome of these meetings was unsatisfactory. Around 1990, the idea of importing gas from Bolivia was revived, and negotiations entered their final stage at the end of 1991. The overall Brazil– Bolivia agreement came into effect in 1992, and the contract for the purchase and sale of natural gas was signed by the presidents of the Yacimentos Petrolíferos Fiscales Bolivianos (YPFB) and PETROBRAS in 1993, giving rise to the Bolivia–Brazil gas pipeline project. An initial volume of 8 million m3/day was established in the contract, supposed to increase progressively until it reached 16 million in the eighth year after the start of operations. It also included an option for the purchase of an additional 14 million. As a result, the gas pipeline was designed to transport 30 million m3/day from Bolivia to Campinas. Highly significant in the gas purchase contract was the take-or-pay clause of 80 per cent and of the ship-or-pay clause of 100 per cent in the use of the pipeline. A 1,180-km extension of the gas pipeline to the southern states was added. This decision was greatly influenced by the political intervention of the three state governments in that region, as well as by industrial associations. The first stretch had a 6 million m3/day capacity. This extension would not have been economically viable, had it not been incorporated into the main project; however, it caused tariff problems, as will be shown. The entry of Bolivian gas brought into focus the interdependence of the various forms of primary energy in the energy balance that was becoming increasingly diversified. There were a multiplicity of issues to be resolved. On the one hand, the minimum capacity of the gas pipeline had to be attained rapidly to make it economically viable; on the other, the introduction of gas into small and medium industries in São Paulo, in substitution of oil, where its positive impact on the environment was greater, depended on a decision by hundreds of entrepreneurs and the efficacy of the distribution system. Automotive gas did not arouse much interest. A large, gas-fired thermoelectric plant to be built in São Paulo by an independent producer was considered a means to provide support for the cost of the pipeline. Next, the suggestion of building, possibly within a

Fossil Fuels 93 period of three years, several thermoelectric plants as an anchor in the Prioritary Programme of Thermoelectricity (PPT) gained importance. In quantitative terms, the sale of the domestic natural gas amounted to 15 million m3/day in the year Bolivian gas first entered the country (1999), bringing the prospect of tripling the supply of this product in Brazil. Negotiations held in April 1996 concerning the importation of gas from Argentina led to another, this time corporate, agreement without the explicit intervention of the respective governments. The agreement aimed at supplying the Uruguaiana thermoelectric plant located on the border of the two countries, as well as building an extension of the pipeline to Porto Alegre. The 600-MW plant was built by an AES Corporation subsidiary with the financial support of BNDES. The entire project failed to materialize because it turned out that Argentina did not have sufficient gas available for export. The pipeline from the border to Porto Alegre was not built, and supply, restricted to one plant, depended on availability. In 2008 the plant had to be disconnected. As there are no prospects of a supply of gas from Argentina, the plant’s future is being discussed between the AES and the respective government agencies.

Introduction of the gas programme In order to carry out the responsibilities attributed to it under the national gas programme, PETROBRAS created a wholly owned subsidiary in May 1998, the Petrobras Gás S.A. (GASPETRO). GASPETRO was put in charge of coordinating the structure of Transportadora Brasileira Gasoduto Bolívia–Brasil (TBG), in which it held 51 per cent of the capital and in which several groups of private investors participated, including the BBPP Holdings, with 29 per cent, and Transredes do Brasil, with 12 per cent. Its only objective was the construction of a 1,413-km gas pipeline on Brazilian territory. At the same time, the Gás Transboliviano (GTB) was founded to build the 557 km located on Bolivian territory. It consisted of several partners, coordinated by Transredes, a private company established in Bolivia with the participation of Shell and Enron (later closed) and in which Gaspetro held 11 per cent. The gas pipeline to Campinas, with a 32-inch diameter and 12 compression stations, was designed to transport up to 30 million m3/day. The investment is estimated to have cost US$2 billion. Including the 1,180-km extension to Porto Alegre, the whole pipeline measured 3,150 km, thus being the longest in Latin America. Bolivian gas reached São Paulo in July 1999 and Porto Alegre in March 2000. The gas programme also included a secondary-branch pipeline to Cuiabá, state of Mato Grosso, owned by a private consortium composed

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of Shell and Enron, with 362 km in Bolivia and 282 km in Brazil, starting from the Bolivian stretch of the main gas pipeline, having a capacity of 2.8 million m3/day for the specific purpose of supplying the thermoelectric plant of the Empresa Produtora de Energia with 529.2 MW in a combined cycle.

Natural gas within the energy matrix Natural gas became a significant part of the energy matrix, due to the increase in national production and importations from Bolivia. In 2003, at the end of the fourth year of the inauguration of the gas pipeline, importations from Bolivia, to the order of 5,597 million m3, corresponded to 15.3 million m3/day, almost reaching the target set for the eighth year in the original contracts, although only half the capacity of the pipeline was in use. Full capacity (30 million m3/day) was reached during a few days of July 2005. As of 1995, the joint balance of national and imported gas developed as shown in Figure 4.6, wherein the year 1999 clearly appears as the beginning of a new phase of natural gas in Brazil. The expansion of reserves and of the gross production of gas from PETROBRAS fields remained very much below the results achieved in the oil sector. At the end of 2007, proven reserves were at the level of 364 billion m3, and the production of the year amounted to 18.2 billion m3. Nevertheless, in the Brazilian gas exploration, the reserves:production ratio of 16 times is almost equal to the achieved ratio in the oil industry.

25 Sales

20 15 10

Sector Use

Natural gas (million m3/year)

30

5

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

0

Note: *Sector use includes consumption by PETROBRAS, re-injection and losses in flares Source: ANP, 2007. Balance of Natural Gas in Brazil, Table 3.29

Figure 4.6 Natural gas balance (million m³/year)

Prod. + Import. Production Sector Use*

Fossil Fuels 95 Gas sales to end-consumers enjoyed a new rate of growth from 2000, when Bolivian gas entered Brazil, to 2004: they increased from 17 million to 35 million m3/day in that four-year period. Sales in the Northeast developed very differently from those in the South–Southwest, due to the geographical location of gas supplies. There was no relevant discovery in the former region, and the pipeline of imported gas did not reach that far. Growth was slow. The South–Southwest, however, received gas from the Campos Basin in the East and from Bolivia in the West, and their sales increased substantially. The expansion of sales was thus extremely concentrated, especially in São Paulo and Rio de Janeiro, which absorbed 61 per cent of the total, taking advantage of the existing facilities for the distribution or manufacture of gas. In second place was Bahia, where natural gas extraction and distribution operations had started much earlier. There was also a concentration of customers. The industrial sector absorbed 56 per cent and thermoelectric plants, 29 per cent. In Figure 4.7 an attempt is made to show the gas sales distribution according to geographical locations, and in Figure 4.8 sales are shown by consumers.

South 10%

Central-West 5%

Southeast 65%

Northeast 20%

Source: Revista Brasil Energia, an energy monthly magazine

Figure 4.7 Regional distribution of natural gas sales Automotive 17%

Other 3%

Electricity 19%

Source: Revista Brasil Energia, an energy monthly magazine

Figure 4.8 Natural gas sales by consumer

Industry 61%

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Total consumption reached 41,000 m3/day in 2007. Distribution is the responsibility of 20 regional companies of which six are responsible for three-quarters of the total. Of these six, the São Paulo Gas Company (COMGAS) sold 13,000 m3, and State Gas Company (CEG) of Rio de Janeiro sold 10,000, providing half the national total. PETROBRAS participates in the capital of all the companies, in partnership with state governments, except COMGAS, which is controlled by Shell and British Gas, and CEG, controlled by Gas Natural (of Spain).

The adventure of gas-fired thermoelectric plants From the time of the entry of Bolivian gas, and with greater intensity after the hydrological crisis that jeopardized the supply of electric power, thoughts veered to using thermoelectric plants as an anchor for the outflow of imported gas and the full execution of the terms of the contract. However, the insertion of these plants into the Brazilian thermoelectric system was not simple (see Chapter 3). The old coal and fuel-oil-fired thermoelectric plants could operate without great difficulty in the South–Southeast integrated system, thanks to their relative flexibility and the Fuel Consumption Account (CCC), which reimbursed the fuel costs of generating companies. On the other hand, gas-fired plants with little flexibility due to rigid contracts for the purchase and transportation of fuel, and without the benefits of the CCC, which was being abolished, found it difficult to fulfil their supplementary mission, while being unable to compete with the old hydroelectric plants or with many of the new ones, when required to operate according to the market load factor. The supplementary mission would have been strengthened had the MME and the ANEEL not made the mistake of overestimating the capacity of assured energy from each hydroelectric plant, accepting the risk level of not meeting the demand which had been in effect prior to the privatization of the distributors. As was already shown in Chapter 3, subsequent studies indicated that in the Southeast Region alone, the excess of ‘certificates of assured energy’ over a realistic calculation of firm energy amounted to an average of 2,400 MW. The distributors were not interested in contracting for the thermal capacity that would provide a safety margin. Gas-fired thermoelectric plants were, therefore, operationally caught between the Priority Thermoelectricity Programme (PPT), introduced by the MME, in its mission to contain the drain of the hydroelectric plant reservoirs, and the long-term programme of the Bolivia–Brazil gas

Fossil Fuels 97 pipeline, having to meet the requirements of both. Many Brazilian government decisions were taken hastily at critical periods without defining proper regulations, either regarding the traditional electric power sector or the natural gas area in which Brazil lacked experience. Twenty-two plants were built with a total capacity of 7,373 MW, and were put into operation with considerable delay. Only four, of 1,986 MW, went on stream in the year of the crisis and even so only as of September, when the reservoirs had already reached rock-bottom, holding only 20 per cent of their capacity. When the majority were ready to start operations, electricity consumption had already been reduced, partly due to society’s extraordinarily positive reaction to saving requirements and the resumption of rainfall that allowed a rapid recovery of the reservoirs. Finding it difficult to attract companies willing to build plants, the government resorted to PETROBRAS for partnerships that materialized, thanks to PETROBRAS absorbing economic risks.

Entry of PETROBRAS into the field of electric power generation The entry of PETROBRAS into the field of thermoelectricity took place at the time of the national privatization policy, based on which a widereaching reform of the electric power sector took place, drastically reducing the role of ELETROBRÁS. PETROBRAS moved in the opposite direction. Its strategic ten-year plan, prepared in April 1999, established as a directive that the company, besides beginning to operate internationally, was also to be active in the electricity field, in order to ensure the existence of a natural-gas market. The inclusion of energy in a wide sense as one of the company’s objectives was concurrent with the entry of Bolivian gas, and was part of the ambitious government PPT plan to have private enterprise build gas-fired thermoelectric plants. Soon, PETROBRAS took part in the PPT programme. The entry of the company, principally as a participant in consortiums, offered more security to possible foreign investors in new gas-fired thermoelectric plants. To this end, PETROBRAS had to invest US$450 million and US$1,510 million in 2001 and 2002 respectively, a substantial figure, considering that it invested in its essential activity of exploration and production little more than US$2 billion per year. The company also took responsibility over the long-term for the purchase of some of the energy produced by the merchant plants that operated without contracts with distributors and were called on by the

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Energy in Brazil

GCOI to supply at spot price (Macaé and Eletrobolt plants in Rio de Janeiro and the MPX plant in Ceará). Under these contracts it accepted responsibility for making contingent payments to reimburse operating costs, taxes and the opportunity cost of invested capital should the revenues from the sale of energy not be sufficient to cover these commitments. The involvement of the company also included the supply of natural gas for the production of electric power.

Price of gas and exchange rate Establishing the price of gas sold to the end-consumer is not a simple task. Other countries with a longer tradition in this field adopt a variety of criteria. In Brazil, since prices are mainly based on imported gas, everything starts with the conditions laid down in its contracts with Bolivia. In 1996, the price agreed upon for the acquisition of Bolivian gas was US$2.26 per million BTU, to which the acquired gas at the well head contributed US$1.00. The price in foreign currency corresponded to R$2.2 per million BTU at the exchange rate in effect at that time. The price of gas of US$1.00 at the well head was to be readjusted quarterly, in line with the price of a basket of fuel oil on the world market, taking into account 50 per cent of the price of the previous quarter. At that time gas was cheap. The parcel of the final cost corresponding to transportation by pipeline was to be adjusted every year according to the price index of the US currency. In the last two quarters of 1999, the city-gate price varied between US$2.55 and US$2.85/million BTU. The foreign-currency financial crisis that hit the country in 1999 led the government to adopt a new currency exchange policy based on a fluctuating rate. The nominal US$ rate, which had been rising slowly from R$0.92 in 1996, jumped under this new methodology to R$1.91 in the fourth quarter of 1999. Brazil was faced with an exchange rate double that which had been in effect at the time of the studies and the contracts with Bolivia. The impact on the cost of gas in national currency was immediate, rising to R$5.44 in the last quarter of 1999 and to R$6.47 at the end of 2000. The cost of gas delivered in Brazil increased from R$2.26 to R$6.00 in national currency.2 An intense debate erupted as to what to do, especially as regards the supply of the thermoelectric plants under construction. Gas in Brazil became expensive in national currency, while in Bolivia gas was still being sold cheaply compared with the international market. Rules for the domestic price of gas were drawn up in 2000, separating the value of the product from that of transportation and determining the respective readjustments in keeping with the terms agreed with Bolivia.

Fossil Fuels 99 From an institutional point of view, the regulation was to clearly define three parcels in the price of gas to the consumer: price at the well head or at the location where the producer makes it available; transportation services to the points of delivery to distributors; and distribution cost. It was considered ideal to work out a system where there would be no differentiation by type of consumer and where transportation was calculated according to distance.3 Unfortunately, this did not happen in Brazil. In the methodology adopted, three situations were considered when establishing prices: 1 Nationally produced gas, whose maximum commodity price was to be adjusted between PETROBRAS and the distributors or arbitrated by the ANP if negotiation was impossible. 2 Imported gas, whose price would result from a contract between the importer, in this case PETROBRAS, and the Bolivian producer, with the addition of the cost of transportation to the city-gates where it would be delivered to the distributing companies. 3 Gas for the PPT programme: plants whose price would result from the average between the price of imported gas in the proportion of 20 per cent, readjusted by the US consumer price index, and the price of national gas in the proportion of 80 per cent, readjusted by the domestic consumer price index. This artificial procedure was not in accordance with the proportion of gas available, most of which was Bolivian. Not considering the competitive policy intended by the energy sector, this price would be uniform throughout Brazil, regardless of the location of each plant. A maximum of US$2.58 per million BTU was also established. Brazil was heading for a new price equalization. Highly complex mechanisms were created for compensation among the parties involved, as well as to record the amounts charged to distributors through an annually established tariff and the quantities owed in line with the foreseen quarterly readjustments. Two types of transportation by gas pipeline are differentiated: transfer between two installations belonging to the same company, which in Brazil’s case is only PETROBRAS, and transportation of public interest, subject to the principles of free access (Law 9,478/1997). Two distinct methods were adopted for charging for transportation by gas pipeline: 1 A sole price was established for gas supplied by the Bolivia–Brazil pipeline to any city-gate, including the southern states supplied by the Campinas–Canoas extension. This price was called ‘postal’, due to its

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similarity with post office tariffs, which are the same throughout the country. 2 In all other cases of the still-incipient grid, the areas to be supplied were subdivided into zones; a specific ‘postal’ type tariff was also established for each zone. Aside from this relative parity of transportation prices, which had great practical consequences, PETROBRAS continued to rule the market by concentrating production and importation, as well as being the only transporters. This price system left the market in suspense as to future decisions in the probable event of private gas producers turning up.

The tangled knot of natural gas Natural gas became important within the Brazilian energy scenario after the inauguration of the Bolivia–Brazil gas pipeline in 1999. Regulations did not cover much territory and issues were dealt with on a case-by-case basis as they arose. There existed the risk of failing to consume the volume contracted with Bolivia, and the government sought to foster demand in two ways: that of the PPT, which has already been referred to, aiming at the implantation of thermoelectric plants; and by containing prices in national currency, as well as by differentiated taxation in relation to competitive energies, creating severe distortions in the market, as shown in Table 4.6. Amounts shown change according to the exchange rate and taxation, but, by order of magnitude, the table shows the direction of the deviations. The domestic price in national currency and, specifically, for consumption in thermoelectric plants that since the decisions taken in 2001 served as an anchor for the Brazil–Bolivia contract, developed as shown in Figure 4.9.

Table 4.6 Charges on fuel prices in 2004 (% of price) For industrial, transportation and electricity consumers Fuel US$/million % of BTU price

For residential and automotive consumers Fuel US$/million % of BTU price

Natural gas Fuel oil Diesel oil

Natural gas LPG Petrol

1.0 1.5 4.2

14.7 24.0 28.7

Source: Almeida, Edmar, Política de Preços do Gás Natural, 2005

3.3 3.4 14.4

12.7 20.5 64.3

Fossil Fuels 101

City-gate price for natural gas (US$/million BTU)

8.00 7.00 6.00 5.00 Local Production Thermal Use

4.00 3.00

Imported from Bolivia

2.00 1.00

1

4T 2007

2T 2007

4T 2006

2T 2006

4T 2005

2T 2005

4T 2004

2T 2004

4T 2003

2T 2003

4T 2002

2T 2002

4T 2001

2T 2001

4T 2000

2T 2000

4T 1999

0.00

Non-weighed averages, without sales tax. Current exchange rate

Source: PETROBRAS, Operational Highlights Gas and Energy, ‘Gas prices at city-gates’, 2008

Figure 4.9 Natural gas prices at city gates1 Until 2004 price trends were related. At that time there were growing concerns about the future capacity of gas supply. In 2007, PETROBRAS decided to make a significant increase in price. Measures taken to contain domestic prices in local currency to the endconsumer were partially counteracted by the devaluation of the real. The average price of Bolivian gas at city-gates in R$/million BTU, which had amounted to 7.63 between the first quarter of 2001 and the second quarter of 2002, rose to 9.89 and 12.15 in the second and third quarters of 2002. These figures corresponded to an average of the order of US$4.00/million BTU. Despite this price increase, consumption expanded substantially in all sectors, except for the thermoelectricity sector. Major industrial consumers converted to gas, where the increase in price was felt less since it corresponded in the majority of cases to an input that bore less weight within the total cost. A distribution system for automotive gas was developed in which the tax difference in comparison with petrol was enormous (Table 4.6).

Regulating the natural-gas market Natural gas had not yet taken shape within the energy matrix when the Oil Law (9,748/1997) was being finalized; it was still an expectation. Therefore, the country did not yet have any experience in marketing,

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which explains the lack of definitions concerning the regime desired for gas. After the successful entry of gas, several issues arose and, consequently, proposals for their solutions. How to regulate a regime desired to be competitive, based on a monopolistic reality? PETROBRAS was in charge of production, importation and gas pipelines, while also having a significant share in all state distributors with the exception of São Paulo and Rio de Janeiro. Discussions of regulatory principles specific for natural gas intensified in 2004, and the MME extended invitations to a number of agents in the sector to take part in them. The preparation and discussion of a draft bill to be sent to Congress was unsuccessful. In the meantime, the Senate started to discuss a draft bill. It dealt, among other matters, with definitions of activities to be regulated and with auctions for concession contracts for the construction and operation of gas pipelines similar to those established for transmission lines. Another draft bill was submitted by members of Congress in 2006, but contained no significant alternative. The government finally submitted a draft bill that proposed a mixed regime of concessions in some cases, such as the storage of gas, and of authorizations in others, including gas pipelines, whose application would be at the discretion of the MME. Due to the beginning of an election period, the issue stagnated in Congress, awaiting new discussions. The transition to a competitive market was further jeopardized by the constitutional provision that assigned the right of exploiting piped gas services to the states, to be carried out either directly or by means of concessions. This caused the additional problem of conciliating federal and state regulations. In the tug-of-war between PETROBRAS on the one hand and the associations of regulatory agencies and the distributing companies on the other, the latter officially stated their position in April 2006, in a document called the ‘Maceió Letter’. A Special Congressional Commission was appointed in 2007, to combine the three proposals under study in an amendment that had a chance of being approved. There were difficulties in reaching a consensus, and approval of the new regulation was predicted for early 2008. The probable entry of new gas producers, holders of proven reserves and others, who may still have had positive results in the exploration of conceded areas, brought new emphasis to the need to establish clear rules.

Fossil Fuels 103

Domestic coal-fired thermoelectrical plants The national coal industry suffered a blow in 1990–91, due to the extinction of the obligatory consumption of metallurgical coal in steel plants and the freeing of prices. After this crisis, the industry requested the federal government to give a definite solution to its insertion in the energy matrix by establishing a national coal policy. The government, being involved in the in-depth reform of the electricity sector, adopted a predominantly passive attitude in relation to coal. Industry believed that the main issue was pointing coal production in the direction of the generation of electric power, which included establishing solid economic bases and the reduction of environmental aggression caused by the waste from the mines and the emissions from thermoelectric plants. Norms for the protection of the quality of the environment were laid down for thermoelectric plants. The National Council on Environment (CONAMA) Resolution 8/1990 established limits for the emission of gases and particles by plants fired by coal or petroleum products. As a result, studies and discussions were intensified. A workshop on the subject of coal policy was held at the CEPEL in February 1997, at which Brazilian and US teams coordinated by the US Department of Energy took part. These discussions led to a programme of systematic testing of national coals, using the new technologies available. Within the government, the MME took the initiative to appoint a commission in 1997, assigned to draw up a proposal for a coal-fired thermoelectric generation policy, but they never actually completed their report. In the meantime, discussions for a new legislation that would establish directives for the transition of the economic and operational regime of the thermoelectric plants that were part of the integrated South–Southeast system, were also taking place in Congress. It was decided that for existing plants the CCC methodology would continue until 2002 and that thereafter the corresponding onus and benefits would be systematically decreased until they were abolished at the end of 2005. After this basic legislation, the MME appointed a working group in January 1999, whose final report was submitted in January of the following year, together with an economic study regarding the applicability of the measures proposed. No practical results ensued. The coal industry unions re-approached the MME, requesting that the same fiscal treatment be granted to the competing natural-gas sector, as well as an accelerated depreciation over a ten-year period for new coal-fired plants. The subject arose again in 2002, when, already under the impact of the supply crisis in 2001, an Energy Development Fund (CDE) was created, intended to last 25 years.

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The CDE raises funds from end-consumers and uses them to various ends: universality of energy consumption; helping low-income consumers; reimbursement of fuel costs in coal-fired plants; and the construction of gas pipelines in states that had none when the law was published. The portion for coal also includes funds for the expansion of coal-fired thermoelectric generation, provided the projects meet environmental legislation and the minimum requisites of efficiency in burning of coal. During unending discussions on national coal, the construction of two projects, Jacuí and Candiota III, which had been initiated in Rio Grande do Sul, were stopped for a long time. Jacuí, with 254 MW, was contracted in the first auction for new energy for the period 2009–15, and Candiota, with 292 MW, for 2010–15. After studies and tests regarding clean coal and based on the new technologies available, private enterprise developed two projects for plants: one in Rio Grande do Sul, with a 500-MW capacity, based in the Seival mine; and another in Santa Catarina, with a 440-MW capacity, resulting from a reshuffle of the existing mining activities and the utilization of its waste in a proportion of 25 per cent in a mixture with coal from mines already in operation. The project for the Seival plant went ahead and in December 2007, already in possession of an environmental licence, was transferred from the COPEL mining company to the Tractebel power company. In the fifth energy auction, held in October 2007, the first plants based on imported coal were contracted for construction by national private companies: in Maranhão (in the North), 315 MW; in Ceará (in the Northeast), 615 MW, where thermal complementation is lacking. Due to the lack of new or renewed mines, the production of saleable coal in Brazil remained static between 1995 and 2002, at a level of 5 million metric tons, with a peak of 6.7 million tons in 2000. During the rationing of electricity, it was impossible to use more coal to run the thermoelectric plants in the south, due to the limitations in the interconnecting South–Southeast lines, which were improved at a later date. Importations of coal for the steel industry stayed at approximately 13 million tons per year. The share of national and imported coal in the domestic energy supply was 6 per cent in 2007.4

Notes 1 BNDES – Brazilian Development Bank (2002) Privatização, Rio de Janeiro: BNDES 2 PETROBRAS (2006) Preços do gás natural no city gate, Rio de Janeiro: PETROBRAS

Fossil Fuels 105 3 ANP – National Petroleum Agency (2002) Indústria Brasileira de Gás Natural. História Recente e Política de Preços, Brasília: ANP 4 MME – Ministry of Mines and Energy (2007) Balanço Energético Nacional (BEN), Brasília

Chapter 5

The Nuclear Issue

Brazil enters the nuclear era Brazil’s involvement in nuclear energy issues occurred both in the academic world and in the search for radioactive minerals. Activities related to the training of personnel and to pure and applied research were concentrated in four institutions: •

•

• •

The Institute for Radioactive Research, later renamed Energy Development Centre (CDTN), on the Federal University of Minas Gerais (UFMG) campus, since 1952. The Nuclear Energy Institute, later renamed the Institute for Nuclear Energy Research (IPEN), on the University of São Paulo campus, since 1956. The Nuclear Engineering Institute (IEN), on the Federal University of Rio de Janeiro (UFRJ) campus, since 1962. The Naval Technological Centre of São Paulo (CTMSP), on the University of São Paulo (USP) campus, with the support of the Aramar Experimental Centre, in Ipero, state of São Paulo, since 1986.

Since 1956, activities within the college sphere have been coordinated by the National Nuclear Energy Commission (CNEN), founded by the federal government. Several of these institutions will be mentioned in this chapter. The search for uranium minerals started in 1952 on a systematic basis. Three separate periods can be distinguished: 1 The period of American co-operation began with an informal agreement between the Ministry of Foreign Affairs and the US Department of State, which was formalized in 1956 as the Joint Program of Cooperation for Identifying Uranium Resources in Brazil. Technical assistance was provided by professionals of the US Geological Survey, headed by Charles G. White. 2 The period of French co-operation started in 1960, when an agreement between the CNEN and the Commissariat à l’Energie Atomique (CEA)

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was signed. Thanks to this agreement, a new team of geologists were able to undergo training, take specialization courses and visit uranium mines in France. Supplementing the work of the former period, a systematic investigation of all the sources of uranium known at that time was carried out. The main contribution of the CEA, headed by André Gerstener, consisted in setting up a work methodology for prospecting and for the technical improvement of the Brazilian team. 3 In the third period, the Brazilian team took entire responsibility for prospecting tasks under the CNEN when the French geologists left and, since 1971, this work has been carried out by the Brazilian Nuclear Energy Company (CBTN). Further funds were provided for mineral research in 1973, due to an increase from 1 per cent to 2 per cent in the dedicated portion of the sole tax on fuel. This led to another impetus in mineral research. The nuclear issue gained new importance as a result of discussions regarding a first nuclear plant.

The first nuclear plant Brazil’s first nuclear plant was the object of discussions within the sphere of the CNEN in 1965. The ensuing report of September 1967 suggested directives for co-operation between CNEN and ELETROBRÁS, and had an attachment listing the essential foundations for the construction of nuclear plants and their inter-relation in the electricity scenario. At the same time, major debates took place on the international scene. The treaty for the proscription of nuclear weapons in Latin America, the Treaty of Tlatelolco (Mexico), which many countries did not agree with, was signed in Mexico in 1967. The Brazilian participation was subsequently ratified by the National Congress. Its implementation was jeopardized by the absence of some countries and reservations voiced by others that had signed it. The Treaty for the Non-Proliferation of Nuclear Weapons (TNP) was formulated, negotiated and concluded in 1968–69, and began by dividing the world into militarily nuclear and militarily non-nuclear nations. Brazil refused to sign that treaty, considering it discriminatory, especially because it involved the proscription of all activities that could lead to military applications in the signatory countries, while exempting from international inspection those nations that were then manufacturers of nuclear armaments and other explosives.

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At that time, political pressure was exerted on Brazil to sign the TNP by including it among the safety requirements demanded by the International Atomic Energy Agency (IAEA). This, however, did not prevent co-operation contracts being signed with the USA, France and Germany. The decision of the federal government to acquire its first nuclear reactor abroad was strongly criticized and condemned by the great majority of the local scientific community, who considered the government were buying a black box. There were those who believed in the possibility of immediate independent action in this complex field of nuclear technology. A local proposal had been underway at the Institute for Radioactive Research since 1965. It dealt with the development of a reactor suitable for thorium, based on the initial use of natural uranium and heavy water as moderator and cooler. This undertaking failed to prosper. The acquisition of a first reactor led to discussions between the government and various groups of scientists, who also differed among themselves as to the best path to take for choosing the type of reactor. Various options were made available abroad, some already proven. Complying with the government decision to acquire a reactor abroad, an agreement was signed between CNEN and ELETROBRÁS in April 1968. The task of supporting the studies and of building the plant was assigned to Furnas, due to its location within the area of operation and its excellent and disciplined technical team responsible for noteworthy hydroelectric projects that had for some time included experts in the sphere of nuclear power. Giving continuity to the project, studies were made to identify possible suppliers of the main equipment for the first plant in Brazil and in search of foreign technical assistance. Visits were made to Canada, England, Sweden, Germany, France and the USA between 1968 and 1969. The assistance of a group of experts indicated by the IAEA and headed by J.A. Lane was also requested through the United Nations. The conclusive report was delivered in November 1968. As a result of these studies and of opinions by contracted consultants, the reactors qualified to be the object of the auction in Brazil, as well as the manufacturers qualified to compete, were established. The site in the region of Angra dos Reis (state of Rio de Janeiro) and the size of the plant in keeping with the technology available at that time were also decided upon, and procedures for international tenders were drawn up. After studying the question from various angles, the Westinghouse proposal for a lightly enriched uranium reactor cooled by pressurized water (PWR) was considered technically and economically the most suitable. Negotiations with this company were completed in 1972.

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At that time, the American government guaranteed a supply of lightly enriched uranium to provide the Angra dos Reis plant and long-term financing for its construction through the Eximbank. The plant in question had a capacity of 620 MW, and the estimated cost was equivalent to US$308 million at that time, of which approximately US$100 million originated from foreign funding. The national contribution to the equipment for this first project was modest, but within the spirit of acquiring a minimum of experience in the construction and operation of this new technological field. The Angra I plant entered the testing stage in 1981, and started supplying electric power in 1982. Aside from this development and considering the possibility of a future expansion of the nuclear plant programme, it was decided that it would be opportune to carry out a thorough study of the capacity of national industry to produce components for nuclear installations and to comply with the strict specifications required by such installations. The Bechtel Overseas Corporation, associated to Monitor S.A., was contracted to assess the country’s industrial capacity in the event of the introduction of a sustained programme for the construction of nuclear plants. The report on this work, completed at the end of 1973, pointed to a significant and increasing capacity (including assembly, civil and structural works, and construction installations and equipment), which came as a surprise to the majority of observers.

Gigantic nuclear plant programme in 1974 At the beginning of the administration of President Ernesto Geisel, when the preliminary work on the Angra I plant had barely begun, a more ambitious plan for nuclear development, in co-operation with the German government, which encompassed the construction of eight thermonuclear plants and the installation of an industrial park for the specific purpose of manufacturing equipment for these plants, was announced. The idea was autarkic and its purpose was to establish a complete cycle for nuclear power, ranging from the manufacture of the equipment to mineral research and fuel production. The government that took office in 1974, ignoring the first oil crisis, opted to proceed with the policy of accelerated growth, irrespective of the world economic crisis. Within this context, the Brazilian–German programme was immediately approved. Brazilian Nuclear Power Plants (NUCLEBRÁS) was founded, together with several specialized subsidiaries, to carry out this programme. The treaty of co-operation with

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Germany was signed in June 1975, and the decision was maintained not to sign the TNP. This scenario, intentionally or not, represented a challenge to the nuclear club nations. This initiative was not successful for a number of reasons. The very basis of the programme was, at best, ill-advised, since it was founded on a forecast of demand for electric power that presupposed a continued strong rate of economic growth. The decision became even more critical as it was made after an obvious break in the evolution of the world economy in 1974, which required a careful and constant revision of investment programmes. It was, moreover, a question of meeting demand by means of a nuclear programme that included a monolithic set of projects inter-related with a strict execution schedule, which would become a substantial part of the country’s electricity supply. The justification resulted from the interaction of three directives: the possible exhaustion of new hydroelectric generating capacity; the need for a high level of autonomy in the construction of thermonuclear plants; and the minimum scale of orders for equipment able to sustain the local industry to be developed for this purpose. Demand for energy was much lower than projections. The economy was losing its growth impetus. The government faced financial problems, and there was a shortage of funding for investments, mainly due to the five gigantic, simultaneous programmes included in the Second National Development Programme, whose total expenditure, to the order of US$50 billion, would have exceeded the country’s capacity even if the crisis of international adjustment to the new oil prices had not occurred. In this programme, Furnas was assigned the task of building Angra II and III at the end of 1974. The contracts between Furnas and SiemensKWU were signed in 1976, forecasting the entry into operation of the plants, respectively, in 1983 and 1984.

Angra II and Angra III nuclear plants In a scenario of successive administrative changes, with corresponding changes in command, it was possible to ensure proper planning and execution of the construction of Angra II from a technical point of view, thanks to the combined work of national and foreign entities involved in the process. The construction of the plant continued without interruptions, allowing it to go on stream in 2000. As improbable as it may seem due to the uncertain scenario mentioned above, the technical performance of the plant was, right from the start, exemplary and continued thus during the first five years, as confirmed by inspections carried out by

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international agencies (the IAEA and the World Association of Nuclear Operators). The operation of Angra II began with a high-capacity factor, declining in 2004–05 and recovering in 2006–07. The availability of the plant was measured according to the relationship between the period of time in which it was operating at nominal capacity, or in a position to be operated in that capacity and the referenced time interval. Aside from the period 2004–05, Angra II availability remained always more than 80 per cent. Results were much better than those of Angra I, which operated intermittently until 1994, when its performance improved. Its capacity factor was more than 55 per cent, reaching a maximum of 71 per cent in 2004. Since 1997, its availability has always been more than 70 per cent, except for the year 2007. The evolution of the capacity factor is shown in Figure 5.1. During 2006 and 2007, the share of the nuclear plants in the total supply of electric energy rose to the level of 2.8 per cent, surpassing the share of gas-fired and coal-fired plants. The construction programme of Angra III was suspended in 1991, even though some of the equipment had already been acquired. Restarting was the object of unending discussions, similar to what occurred in the 1980s, not only here but also in several other countries. In 2003, Angra III was once again discussed in the CNPE and involved various government agencies. The situation was, and continued to be, a reason for concern because, aside from everything else, US$750 million had by then been invested in the project and charges for storage and 100% 90% 80% Generator Failure Capacity factor

70%

Fuel Failure

60% Angra I Angra II

50% 40% 30% Transformer Failure

20% 10%

Source: ELETRONUCLEAR, personal communication, 2008

Figure 5.1 Capacity factor of Angra I and Angra II power plants

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

0%

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maintenance of the equipment already acquired; payment of the team and conservation of the work site amounted to US$20 million per month. The subject of construction of Angra III was raised once again at a meeting of the CNPE in 2005, but no unanimous decision was reached to continue with the project. Nevertheless, the Decennial Electric Power Expansion Plan for 2006–15, prepared by Empresa de Pesquisa Energética (EPE), included Angra III, with operations foreseen to start in December 2012. In this study, the plant was given a key role in the electricity supply in the subsequent years. In July 2007, the CNPE formally approved restarting construction, forecasting that it would go on line in 2013. The main responsibility for the project lay with Areva, a French company, which joined with Framatome, also French, and which acquired control of the German Siemens-KWU that, in turn, was responsible for the main supplies to Angra II. There was thus continuity in the engineering activities. Except for the heavy equipment already built, updated technology would be used for the entire operational and control part. The Brazilian company Andrade-Gutierrez Construction was contracted to undertake the construction. Taking the next step, President Lula determined at a meeting in December 2007 that location studies for a fourth plant in the Northeast of the country should be initiated. The nuclear programme had to be based on a new generation of reactors, some still at the stage of proving commercial viability. The first new unit would only be able to start operations at the end of the decade starting 2010.

Institutional dispositions In 1971, before decisions concerning the first nuclear plant had been taken, the Companhia Brasileira de Technologia Nuclear (CBTN) was founded, incorporating two of the major research laboratories linked to the federal government: the Nuclear Technology Development Centre (CDTN) in Belo Horizonte and the Nuclear Engineering Institute (IEN) in Rio de Janeiro. The IEA of the University of São Paulo was not included. The CNEN’s highly trained geological research team was incorporated into the CBTN, as well as equipment specifically related to their activities. The objectives established for the CBTN included mining, technological development and the construction and operation of nuclear installations, except for thermonuclear plants. At that point, it was thought that the country would achieve a strong position within the international nuclear scenario while preparing itself

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technologically, provided it discovered and developed its potential fossil minerals and the corresponding technological capacity in the fuel cycle. Already having a trained team and a structured organization for fieldwork, they were only missing the regular allocation of sufficient funds to begin. In a second step, NUCLEBRÁS was founded in 1974 at the time of the Brazil–Germany agreement, and had a wide-reaching objective, including generating units, the fuel cycle and the production of equipment. The CBTN was incorporated into NUCLEBRÁS. This setup underwent, however, several partial changes caused by the split of activities, and it finally acquired the following form: • • • •

the Angra power stations remained under ELETRONUCLEAR, founded as a subsidiary of ELETROBRÁS; mining and the nuclear fuel cycle were concentrated in the Brazilian Nuclear Industries (INB), linked to the CNEN; the research centres were transferred from the CBTN to the CNEN; the CNEN itself was transferred in 1999 from the MME to the Ministry of Science and Technology (MCT).

Notwithstanding these changes, the final INB setup was not very different from what had been conceived for the CBTN.

Professional and technological qualifications The scientific and professional–technical qualifications of personnel was an ongoing concern of the national energy programmes, even before the beginning of nuclear technology development. Shortly after the Brazil– Germany agreement, a programme for training human resources for the nuclear sector was introduced, coordinated by the general secretariat of the MME. Long-term training of engineers was carried out in the KWU installations. Besides, other engineers were seconded to the KWU to participate in engineering services in German nuclear plant projects. Additionally, other engineers were trained by NUCLEBRÁS itself. Within this field, the nuclear energy sector followed the country’s deeprooted tradition of continuous intensive programmes for professional training on all levels in both the electricity and oil sectors. In the area of technological qualification of Brazilian industrial companies to meet the demand for construction of nuclear plants, the 1973 report was fortunately relatively recent and the information contained therein could serve as a basis for beginning with surveys and negotiations with

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the industries. Only identifiable components such as heavy boilers – the pressure vessel, steam generators, the internal structures of pressure vessels and some others of a similar nature – were foreseen for manufacture in a NUCLEBRÁS subsidiary. The remainder would either be imported or manufactured by local private industries. Almost 1,000 interested industrial companies registered, of which at least half were pre-selected as potential suppliers under the strict quality criteria established, having in view the plants’ safety requirements. For many of the companies, the commitment to the project resulted in a great effort to achieve technical and quality control standards. In contracts for the supply of equipment to Angra II and III, the nationalization rate of 30 per cent was established as a target, but aimed at achieving higher indices in subsequent constructions.

Intensification of prospecting for nuclear minerals The continuity in orientation since the pioneer exploration stage and an accumulation of information in the coherent succession of research programmes eventually led to significant discoveries. Funds increased substantially since the investments of less than US$1 million until 1969, reaching a level of US$7 million annually in the period 1970–75 and US$19 million between 1976 and 1982. A drastic reduction took place in 1983, causing the suspension of uranium prospecting in the country. During the years following the discovery of the Poços de Caldas deposits, where exploration started in 1982, 1,200 metric tons of U3O8 were produced. The mine ran out in 1991. After half a century of prospecting, it is presumed that geological research had covered 30 per cent of the country. Deducting unpromising areas to the order of 20 per cent, there remain approximately 50 per cent still to be explored. Several areas which deserve a more in-depth attention were identified besides Poços de Caldas. Most attention was given to the Lagoa Real, Bahia. The uranium province of Lagoa Real encompasses various radioactive anomalies, already identified and, to a large extent, assessed. Attention has been concentrated on these reserves, considered the best within the sufficiently studied reserves and where mining and the corresponding processes were started in 1999, in one of the anomalies identified through open-air mining and stacked lixiviation, which results in a low processing cost. This cost is compatible with that of other similar mines. The nominal capacity is 400 tons of U3O8/year in the form of yellow cake, which is

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about sufficient for supplying the Angra I and Angra II plants. Average production has amounted to 360 tons of U3O8/year. The INB started a project of duplicating production at Lagoa Real through open-air mining of two other anomalies, as well as underground mining. With this expansion, it will be possible to also supply the Angra III plant and produce a surplus that could be exported. The other major reserve, of Itataia/Santa Quitéria, contains uranium mineral associated with phosphorus; such joint production is naturally more complex. The phosphorus ore reserve amounts to 80 million tons, with an average content of 11 per cent of P2O5 and 0.1 per cent of U3O8. Making use of it is based on moving 1.5 million tons/year of ore. Utilizing the uranium in these reserves requires entering into a partnership with some private company to produce and market the phosphate. The associated uranium could be produced there at a low cost, resulting in competitive power on the international market. The INB has been negotiating with private enterprise, with the government, and with the state of Ceará, to get this project going. The production of phosphate would allow the production of 800 tons of U3O8, more than sufficient for domestic needs in the next decade. Thought is given to exportation or to reserves for the supply of a future expansion of thermonuclear power. Possible exportation depends on a revision of the corresponding restrictive regulations, which have never been applied because there was no uranium to export. The Pitinga (state of Amazonas) reserve is also complex, having several useful ores that have been extracted for some time for the production of cassiterite. The mining of uranium requires negotiations with the company holding the mineral rights to tin and also the development of technological routes to extract the metal from the structure of columbite/tantalite ore. There exists some 15,000 tons of U3O8 in the area. Many other sources have not yet been investigated in depth. The INB did not continue the prospecting programme because the volume found was more than sufficient for any demand that could be envisioned and, besides, having scarce financial resources, they had to give priority to investments in other stages of the nuclear fuel cycle. Measured Brazilian reserves certainly suffice to meet the domestic market in the foreseeable future, which places the country in a privileged position in terms of reliability of supply. Bearing in mind the technical and economic criteria adopted by the IAEA1 to characterize uranium resources, Brazil has reserves of 139,600 tons of metallic uranium recoverable at less than US$40/kg of metallic uranium, and 231,000 tons at less than US$80/kg. There are among them reserves of, respectively, 68,800 tons of uranium in Lagoa

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Real and 38,500 tons in Itataia. These reserves would be included by the IAEA among reasonably assured resources (RAR), since the layers and the uranium contained in the deposits can be recovered through known and proven technologies and within the specific cost parameters. In 2007, taking into consideration the US$40/kg of uranium cost limit, Brazil ranked fifth among the largest reserves in the world, in a sequence of decreasing importance: Australia, Kazakhstan, Canada, South Africa and Brazil.2 Taking into consideration the US$80/kg limit due to notification of the Russian Federation reserves, Brazil ranked sixth. Brazilian reserves correspond to approximately 5 per cent of the world total of informed reserves.

The nuclear fuel cycle In 1978, the federal government introduced a new programme known as the Independent Programme of Nuclear Technology. It was unrelated to the Brazil–Germany Agreement, and designed for the development of a reactor for submarine propulsion. Its implementation was assigned to the Ministry of the Navy, which had been preparing for this task since 1980, consolidating its technical installations in the CTMSP and in IPEN. This association was formalized in 1981. The initiatives within this programme regarding the stages of the fuel cycle were combined with some procedures resulting from the Brazil– Germany Agreement, as will be discussed below. Concern with mastering production technology of fuel elements for nuclear plants reaches back to the 1950s, the time of the pioneer work of Admiral Álvaro Alberto. The subsequent development comprised, with different intensities, the five stages of the fuel cycle. The first stage, producing yellow cake from the Poços de Caldas ore, had taken place on a laboratory scale in 1972. Since 1999, it has been produced on an industrial scale at the Lagoa Real mine. The second stage, which corresponded to turning it into UF6, was developed in a pilot plant at the IPEN in São Paulo between 1980 and 1990, after which time the work was transferred to the CTM–Aramar. The operation is not carried out on an industrial scale in Brazil. The incorporation of this stage into the nuclear fuel cycle causes, besides the technical difficulties involved, problems due to the difference between the scale of economic operations and the small demand of the Angra I and Angra II plants. Conversion is carried out under agreements abroad, mainly with Canada.

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The third stage, enrichment of isotope at 3 per cent of uranium hexafluoride, was carried out in two different ways: under the Brazil–Germany co-operation agreement; and with local resources through the independent programme. When negotiating the agreement with Germany, it was presumed that channels would be open for the centrifugal jet process at the time under development in that country, and of the ultracentrifugals, also installed by Germany in co-operation with the Netherlands and the UK (Urenco Enrichment Group). However, the transfer of the technology to Brazil did not take place because of the allegation that Brazil had refused to sign the TNP. The executors of the agreement then looked for other available technology of the centrifugal jet still under development and therefore without economic proof. The Brazilian–German pilot project included the implementation of the first cascade with 24 stages, with the intention of raising the content of isotope U235 from 0.7 per cent (natural) to 0.8 per cent. It was built and tested in Germany at the Nuclear Research Centre in Karlsruhe. Based on results, it was decided to start the construction of the first cascade in Resende, but the project did not go ahead. In a different direction, IPEN and naval teams developed a national ultracentrifugal project up to the stage of mini-cascades that was later assigned to the Naval Technology Centre in São Paulo. The first unit operated in 1982 and the first mini-cascade in 1984. The results made it possible to build another cascade in the Aramar Experimental Centre, which was inaugurated at a later date. Based on this, the construction of a demonstration plant was started in Iperó, state of São Paulo. Due to the politically critical aspects of this development, it will be discussed below. The fourth stage was the production of fuel elements, the factory for which was built under the agreement, by the INB in Resende, state of Rio de Janeiro. The project had the technical collaboration of the German KWU. Considering the problems in carrying out the Angra II and III plant programme, other plants were unlikely and the need for fuel elements would be less. A complete installation for the manufacture of these elements was therefore not justified from an economic point of view. It was decided that the project would be partially implemented, however, carrying out assembly functions with imported components. The plants include the operation of re-conversion of hexafluoride into uranium dioxide powder (UO2) and the production of uranium dioxide pastilles, which were the object of contracts with Siemens for the acquisition of the respective complete production lines. These were completed in 1998–99.

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The unit for the manufacture of parts and the assembly of fuel elements was installed based on contracts signed in 1997 for the transfer of US and German technology, respectively, from Westinghouse to meet the needs of Angra I and from Siemens for Angra II. The fifth stage, reprocessing the fuel removed from the reactors, is the most critical from a political point of view, as well as from the point of view of applying international safety measures, since it results in the plutonium that can be used in producing military devices. To conclude this review of the situation regarding the nuclear fuel cycle in Brazil, it must be said that the final disposal of high-activity waste (essentially radiated fuels) continues to be a controversial issue. ELETRONUCLEAR has been storing this waste in Angra, in the buildings of the nuclear plants themselves, similarly to many countries. Existing storage capacity is sufficient over the long-term. The final disposal of the low-level radioactive waste is less controversial internationally and there are countries that have already built permanent deposits. In Brazil the issue has, however, not yet been resolved and ELETRONUCLEAR deposits them, on a temporary basis, on the site in Angra.

Uranium enrichment, fuel reprocessing and the TNP The critical task of the fuel cycle lies in the isotopic enrichment for increasing the concentration of the fissile isotope U235, from 0.7 per cent, as it is found in nature, to 4 per cent in fuel reprocessing. After the demonstration plant at Iperó began operation, an inter-ministerial group was formed by the federal government, in 1998, to evaluate the possibilities of installing an industrial plant for the enrichment of uranium by ultracentrifuging. The success of the CTMSP programme contributed to the decision taken in 2000 that the INB would build a modular plant in Resende, the former being responsible for the manufacture of ultracentrifuges. The set of components for the first cascade was installed in 2002. The plant will initially consist of four modules of ten cascades, of which the first, with two cascades, went into experimental operation in 2005. Upon completion, this plant will be able to supply 60 per cent of the needs of Angra I and Angra II. Until this happens, enrichment will continue to be carried out abroad, in a decreasing proportion, according to the intensity of investments in the Resende installations. The 115,000 separative work unit (SWU) capacity foreseen in the first stage of the Resende installations, to be achieved within a still-undefined period, is equivalent to 0.2 per cent of the worldwide installed capacity in ultracentrifuging plants.

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At the beginning of the 21st century, Brazil is operating with the technology necessary to meet the fuel needs for its nuclear plants, except for the production of UF6, which they hoped to incorporate into the system by 2008. In some of the production links there is not sufficient scale for supplying national nuclear plants, mainly due to a shortage of financial resources allocated by the government to the respective investments. The federal government made modest financial resources available to the INB between 1995 and 2007, to finalize the country’s autonomy in the nuclear fuel cycle, including mining activities. Over a period of 13 years, the total has reached the equivalent of US$188 million, which corresponds to a yearly average of US$14.5 million. The expenditures already incurred need to be compared in size with the estimates of investments still pending in Resende to complete the various stages of fuel element production in Brazil harmoniously. The forecast of investments for the four-year period of 2008–11, according to the current multi-annual plan, is to the order of US$203 million, with a yearly average of US$50.7 million. This plan does not include the funding required to cover a balanced expansion programme. In order of size, it is estimated that an additional expenditure of the order of US$200 million is required for the enrichment programme alone to attain the capacity needed to meet 60 per cent of the requirements of Angra I and Angra II (114,000 SWU). Still other investments are essential for the installation of an additional capacity (84,000 SWU) to achieve self-sufficiency for Brazil. This would avoid expenditures of US$11 million for recharging the present reactors. Activities related to reprocessing fuel elements for recovering uranium and plutonium, as stipulated in the programme agreed upon with Germany, were interrupted in 1986. The engineering project, carried out under a contract with the German consortium Uhde-Interhude, estimated an investment of US$340 million, of which US$60 million had already been invested. Reprocessing was not considered economically justifiable for the same reasons that curtailed the manufacturing programme of fuel elements. Besides, this was a project that from the very beginning had attracted uncomfortable international political pressure since it entailed the recovery of plutonium. Regarding the TNP, Brazil maintained the same attitude as in 1970, when it refused to sign it. As many nations, with the exception of countries with programmes of a clearly military nature, signed and ratified the treaty, Brazil and also its neighbour Argentina became clearly ever more isolated. The two countries made intensive efforts to reach an understanding concerning actions to be taken in common, resulting in a safeguard system of their own. The efforts culminated in the signing in June 1991 of

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constitutive acts of the Brazil–Argentina Accounting and Control of Nuclear Materials Agency (ABACC). This organization took responsibility for checking whether the existing nuclear materials in either country were used exclusively for peaceful ends. Negotiations with the IAEA followed, resulting in the December 1991 four-party agreement by which the two countries were integrated into the international system of safeguards. In 1997, after a lengthy and in-depth study, Brazil decided to adhere to the TNP, a decision that was ratified by the National Congress in 1998. Argentina had already taken the same decision. Brazil’s attitude allayed much of the criticism that the country had faced for being aligned with nations involved in military programmes and conflicts. By the end of the 20th century, the use of nuclear power was losing its impetus in many countries because of pressure from environmental and pacifist movements. In Brazil, the construction of the Angra III plant was still pending. The cycle of nuclear fuel in Resende was being implemented at a slow pace due to the lack of investments. Discussions within ABACC on a technical level, as to the best method to ensure the safeguards regarding the Resende operations, were held at the beginning of 2004. The aim was to calculate the UF6 gas at the gate to the installation and at its exit after it had been enriched, in order to know the concentration achieved. Brazil had an interest in preserving constructive details concerning the ultracentrifuging equipment. Efforts were made to find a means of conciliating the conflicting requirements. Unfortunately, the international scene at that time was one of great upheaval. The IAEA wanted general approval of an additional protocol to the nuclear safeguard agreements in order to reinforce the TNP, establishing new restrictions, including initiatives of civilian interest. The limited Brazil–IAEA technical issue was published in the Brazilian press and abroad in a sensationalist manner, as if it were a relevant political issue, and this jeopardized the course of the specific negotiations that were underway. The issue was, nevertheless brought to a successful conclusion satisfactory to both parties. Already in 2004, a nuclear safeguard agreement was signed with the IAEA and the ABACC, covering the INB’s enrichment facilities in Resende.

Notes 1 IAEA – International Atomic Energy Agency (2008), Uranium 2007 – Reserves, Production and Demand, Vienna 2 Idem.

Chapter 6

The Role of Biomass and Land Use in Brazil

Brazil has traditionally used biomass as a source of primary energy: at first with firewood in a primitive fashion, later with ethanol extracted from sugar cane, now with improved use of sugar cane bagasse in thermoelectric plants and, finally, in a preparatory phase, with bio-diesel originating from oleaginous plants. Firewood from planted forests is once again under consideration as a source of energy. These three fields of action will be dealt with herein, concluding with comments on the controversial issue of using land for energy crops, its competition with food production and also the possible relationship to the harm done to the Amazon Rainforest.

Ethanol as an automotive fuel The systematic use in Brazil of sugar cane alcohol (álcool) as an automotive fuel dates back to the 1930s, but until the end of the 1900s the term ‘ethanol’ which identifies this product (chemical formula C2H5OH) was not used in Brazil. It was imported from the Northern Hemisphere at the turn of the 21st century. It is therefore natural that ‘álcool’ is used in the names of Brazilian distilleries, government programmes and institutions dealing with ethanol. At the initial stage, which lasted until 1975, anhydrous ethanol was produced as an additive to automotive petrol. This was so-called motor-álcool. The technological process included the conversion of hydrated ethanol, a product usually available in distilleries attached to the sugar mills, into anhydrous ethanol (minimum graduation 99 per cent), in a way that allowed it to be mixed with ordinary automotive petrol. The Sugar and Alcohol Institute was founded to promote and regulate private economic activities and to act as an economic agent; it built three central distilleries. The addition of ethanol to petrol was mandatory. This first stage of furthering and encouraging the ethanol industry was more directed to the agricultural scenario and the equilibrium of the sugar market, which varied from year to year, than to replacing imported petrol.

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The proportion between the consumption of ethanol and petrol amounted to an average of 5.5 per cent during the ten years between 1935 and 1945. In 1942, ethanol accounted for less than 1 per cent of the national consumption of energy; but experience in its production and use was being acquired. At this stage, the production of ethanol varied from year to year since it was linked to that of sugar. The average annual consumption of fuel ethanol rose in every decade, although the ratio between the consumption of ethanol and the consumption of petrol remained relatively stable, between 4 per cent and 6 per cent.

The Pro-Álcool programme In 1974, after the first crisis of oil prices, the federal government introduced a programme called Pro-Álcool, with a view to expanding the production of anhydrous ethanol as an additive to petrol, similarly to what had been done in a limited form in previous decades. Its aim was to increase production from 500,000 m3/year to 3 million by 1980. This target was exceeded. The proportion of ethanol added to the mixture was increased in an attempt to reach 20 per cent, a percentage considered technically viable without requiring substantial modifications to the vehicle engines. This proportion did, in fact, reach approximately 17 per cent in 1979. The programme was initially based on the existing capacity of the physical installations of the sugar sector to which distilleries were attached. Another Pro-Álcool phase began in 1979, at the time of the second oil crisis, leading to new solutions and much more ambitious targets. The national policy presumed the progressive reduction of the cost of ethanol and an unavoidable increase in oil prices. Special emphasis was given to independent distilleries, also taking into account the geographic expansion of sugar-cane plantations in other areas and contemplating the production of hydroethanol to be used as a substitute, rather than as an additive, to petrol in its traditional form. This new product required significant alterations to vehicle engines and a certain time before manufacturers were able to render satisfactory service to their customers. Simultaneously, the proportions in the anhydrous ethanol–petrol mixture kept on changing until it reached 22 per cent, a figure officially adopted in 1984. Independent distilleries were responsible for 10 per cent of the ethanol production in 1975–76, and this participation attained 41 per cent ten years later. Total ethanol production rose from 0.5 to 10.5 million m3/year during this period. The data are also significant in regard to the percentage of anhydrous and hydrated ethanol in the national consumption of the petrol–ethanol mix, which reached 41 per cent in 1985.

The Role of Biomass and Land Use in Brazil 125 In terms of executive capacity and production, the success of the programme was evident. In order to achieve these objectives, the government resorted to a number of mechanisms, especially to extremely favourable financing conditions for the construction of distilleries. These conditions, in a second phase starting in 1979 with pre-established monetary correction of loans at a level substantially lower than inflation indices, may have generated incentives to businessmen estimated at an amount equivalent to US$1.5 billion. Moreover, the IPI (tax on industrialized products) on ethanol-driven vehicles was reduced, as well as the IUCL (sole tax on liquid fuels) on ethanol. A constant ratio of 65 per cent between the sales price of hydrated ethanol and automotive petrol was decided upon based on studies originally carried out with regard to the energy power of the two fuels when used in existing engines. PETROBRAS covered the difference between the price established for the sale and the cost of acquisition of ethanol by means of the so-called álcool-account, wherein the profits from mixing anhydrous ethanol with petrol were used to maintain the parity established for hydrated ethanol. These incentives and subsidies for the programme were abolished in 1988, and only the mandatory addition of 22 per cent ethanol to automotive petrol continued. It is estimated that the funds applied to the programme were equivalent to a total of US$7 billion, of which US$4 billion originated from the government and US$3 billion from business enterprises. This amount was counterbalanced by exchange savings in the importation of oil during a critical period in foreign accounts. The progress achieved by the agricultural sugar cane industry, especially in São Paulo and neighbouring regions, was reflected in the reduction of the cost of their products. In the absence of the subsidies which initiated the ethanol era, and lacking any governmental support mechanism, the price of ethanol became competitive in the liquid fuel market.

Adaptation of vehicle engines The long history of ethanol in Brazil includes radical changes in the behaviour of society and the automotive industry, which are recapitulated in Figure 6.1, showing the sales of automobiles according to the fuel they use. The introduction of hydrated ethanol-fuelled vehicles was swift, as was the decline in their production when the federal government reduced direct intervention in the agricultural sugar cane industry and limited the subsidies to ethanol vehicles. This took place at the same time as the temporary shortfall in ethanol supply in 1989, thus putting the programme at risk.

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100 90

Market share (%)

80 70 60 Petrol Ethanol Flex

50 40 30 20 10 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

Source: National Association of Vehicle Manufacturers (ANFAVEA), Anuário da Indústria Automobilística do Brasil, 2007

Figure 6.1 Automobile sales: domestic market share by type of fuel The year 2003 saw the beginning of a third phase in the participation of ethanol as a fuel due to the introduction, headed by Volkswagen, of flexfuel models adapted and equipped with processors that permitted the efficient use of petrol and ethanol at any level of mixture. The sale of ethanol-fuelled cars dropped suddenly. The entry of the flex car impacted on the demand for ethanol, boosting its previously declining demand. Flexfuel offered car owners a free choice of fuel at any given moment. This was a decisive step towards the equilibrium of the domestic market of automotive fuels. Domestic production of anhydrous and hydrated methanol had been increasing since the introduction of the Pro-Álcool programme, reaching approximately 15 million m3 during 1996–97 (Figure 6.2). Due to the de-regulation of the sector and the reduction of tax incentives to ethanoldriven vehicles, the production of hydrated ethanol, now restricted to the fleet manufactured at an earlier date, suffered a significant reduction until the year 2000, stabilizing thereafter. Production of anhydrous ethanol continued to grow. Total production decreased to a minimum in 2000–01, increasing again until 2007, when it exceeded the previous maximum level.

The Role of Biomass and Land Use in Brazil 127 25

Ethanol (million m3)

20

Hydrous Ethanol

15

Anhydrous Ethanol

10

5

0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: ANP, Anuário Estatístico 2008, Tables 4.1, 4.2, 4.3

Figure 6.2 Production of ethanol (million cubic metres)

The sugar cane agribusiness Ethanol is by far the main energy product derived from sugar cane, but not the only one. The agricultural sugar cane business is complex and must be viewed as a whole. Brazil is responsible for approximately one-third of the world’s cultivation of sugar cane, having produced 416 million tons out of a total of 1.3 billion in 2004.1 A production of 475 million tons was predicted for 2007– 08. Within the Brazilian energy matrix, sugar cane maintains a significant position. The participation of its by-products in the domestic supply of energy, which includes ethanol and sugar cane bagasse as fuel for the production of heat, remained relatively stable, except for the year 2000, when a sudden drop occurred due to the seasonal reduction of sugar cane production (Table 6.1). Sugar cane plantations in Brazil expanded from 2 million ha in 1975 to 7.1 million ha in 2006 and continue to expand. The average national yield Table 6.1 Primary energy supply from sugar cane Years Million TOE % of total supply

1975 1980 4.2 4.6

9.2 8.0

Source: MME, BEN, 2008, Tables 1.2a, 1.2b

1985

1990 1995

2000

2005

2007

17.9 13.6

19.0 13.4

20.8 10.9

30.1 13.8

37.9 15.9

22.8 14.0

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grew continuously during the agricultural stage, from 47 t/ha to 74 t/ha over that same period. Results in São Paulo were even more accentuated due to soil and climate conditions, as well as the agricultural sugar-cane techniques developed jointly by the companies and the Sugar Cane Technology Centre (CTC) in Piracicaba, which had succeeded the Copersucar Technology Centre, and were coordinated by the Brazilian Agricultural Research Company (EMBRAPA). The modernization of the companies’ administrative practices played a significant role in this process. Unfortunately, results in the Northeast were not as satisfactory. Figure 6.3 shows on a national scale (index 100) how production and yield indices per hectare of planted area have developed since 1975. Over the 31 years depicted in Figure 6.3, production increased by an average annual rate of 5.4 per cent, sustained by a 4.3 per cent expansion in the area and a 1.5 per cent increase in the yield per hectare. At the industrial stage, the sector has a complex structure, due to joint production. Sugar and ethanol are extracted alternately from the same sugar cane, and energy in the form of heat or electricity results from burning sugar cane bagasse. It was estimated that 47 per cent of the sugar cane harvested in 2007 and 2008 would be used to produce sugar and 53 per cent to produce ethanol.2 Due to the thermal efficiency of the technology predominating at the plants, the energy extracted from the sugar cane bagasse meets their own energy requirements.

600

500

Index

400

Harvested area Production

300

Yield

200

100

0 1975

1980

1985

1990

1995

2000

2005

2007

Source: Ministry of Agriculture (MAPA), Balanço Nacional de Cana-de-Açúcar e Energia 2007, Table 3

Figure 6.3 Sugar cane yield in Brazil (yield per hectare)

The Role of Biomass and Land Use in Brazil 129 Physically, the industry includes sugar mills with their distilleries, as well as independent distilleries of various sizes that have developed since the Pro-Álcool programme. The sector as a whole has some flexibility in directing their production to one or the other of their main products. It is not easy to assess the increase in efficiency of the industrial area within this framework. Ongoing studies by independent entities dedicated to accompanying the entire agricultural sugar-ethanol industry3 based their data on a concept of equivalent litres of hydroethanol per hectare to obtain a representative index of both sugar and ethanol. According to this study, the average agricultural industry yield increased continuously from 2,024 equivalent litres per hectare (l/ha), in 1975, to 6,459 l/ha in 2007. The average annual increase in yield amounted apparently to 3.7 per cent for the sector as a whole. Offsetting the progress achieved, improved utilization of sugar cane bagasse for the production of electric power continued to be of secondary importance, due to the dominance of the hydroelectric system, the lack of specific legislation for industrial producers of energy and the problems in reaching an understanding with the distributing companies. It is a segment of the industry that offers opportunities for progress. Joint production has other consequences. A large part of the sugar is earmarked for the foreign market, which absorbs between 40 per cent and 60 per cent of total production; as a result, supply and price of ethanol are influenced not only by agriculture’s climatic vicissitudes, but also by the international price of sugar, which varied between US$293.00 and US$150.00/ton between 1996 and 2002. The foreign market opens the possibility of changing to a greater or lesser production of ethanol, and this has had repercussions on the supply of the domestic energy market.

Controversies regarding energy efficiency and price of ethanol The Pro-Álcool programme was the subject of controversies both in Brazil and abroad, especially in regard to its relationship to production cost, sales prices and energy equivalency between ethanol and petrol. The superiority of the former in environmental terms was confirmed as discussions continued. According to a study under the conditions in effect in 2002 in São Paulo, a comparison between consumption and generation of energy in the production of sugar cane and ethanol is clearly positive (Table 6.2). Thus, these studies indicate a ratio of 8.3 between the energy produced and the energy consumed in the process. Results are significantly better

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Energy in Brazil

Table 6.2 Input and output of energy in the sugar agribusiness Phases in the process I Total input of energy In sugar cane production, including farming, transportation, fertilizers, other inputs and equipment In the ethanol production process, including purchased electricity, chemicals, lubricants and equipment II Total output of energy Ethanol Bagasse surplus III Net energy

Cane (kcal/t) 60,008 48,208 11,800 499,400 459,100 40,300 439,392

Source: Macedo, Isaias de Carvalho (org.), A Energia da Cana-de-Açúcar, 2005

than those for ethanol produced from corn flour in America and from beetroot in Europe, with a ratio to the order of 1.6. Production costs reflect these results, although it must be kept in mind that international comparisons are influenced by unstable exchange rates, government taxation and eventual regulatory containment of prices. A recent assessment based on the most efficient plants of an economically sustainable production cost in the Centre-South region of the country is very favourable to Brazilian ethanol compared with that which is produced in other regions.4 The cost in US dollars per litre was at the level of 0.28 for ethanol (Brazil), 0.33 for ethanol (USA) and 0.48 (EU). At the same time it fluctuated around 0.22/0.31 for petrol. Since then, up to 2008, the price of oil in the international market doubled twice, although the domestic price of petrol in Brazil was contained, at least temporarily, by the regulatory agency. The domestic ethanol to petrol price ratio in Brazil stood at four in 1980, at the time when prices were set by the government, and was progressively reduced until 1999. The government continued to set prices until it freed them in 2002. Since then the price at the distribution pump has fluctuated between 60 per cent and 70 per cent of the price of petrol, which includes 20–22 per cent of anhydrous ethanol. In Brazil, liquid fuels are taxed by both the federal and state governments, although at different rates. National averages of total taxation are higher on petrol than on ethanol. On the other hand, distortions caused by the containment policy for domestic prices of oil by-products in force since May 2005, notwithstanding the high prices in the international market, favoured petrol to date.

The Role of Biomass and Land Use in Brazil 131

Prospects of technical progress There are still prospects of improvement in this energy balance, including gains in efficiency in the utilization of biomass as fuel by means of proper management of the harvest and the installation of available modern equipment to generate electric power, as well as a possible better utilization of sugar-cane biomass (husks and tips), which is wasted. Results of laboratory tests carried out at the Public Transport Company of São Paulo show the values corresponding to each one of the parts into which sugar-cane biomass can be broken down (Table 6.3). In current practice, when harvest is manual, the leaves are burned in the field and the bagasse is used in boilers of low pressure and temperature to generate steam and electricity. Production is expected to amount to 120 kWh/t of processed sugar cane, equivalent to the needs of the industrial process itself. Until recently there was practically no surplus for sale to the electricity grid. In 2007, with improved technology, there was a surplus for sale of 1,650 MW, corresponding to about 2 per cent of national capacity.5 In the event of the introduction of mechanized harvesting, viable in parts of the cultivated areas with a slope of less than 12 per cent, the mass available for burning will double. If this new procedure is combined with the use of the more efficient high-pressure and high-temperature boilers available to the country’s manufacturers, a net additional generation to the order of 120 kWh/t may result. This energy is available during more than 4,000 hours between the months of May and December, and is adequate to supplement the electric power system, whose energy from hydro sources is deficient during that period. Furthermore, since this energy is available close to the main load centres, it saves investments in transmission lines. The duration of this supply could also be expanded by using reforestation firewood. The São Paulo Association for Co-Generation of Energy (COGEN) and the Sugar Cane Industry Union (UNICA) are developing a joint project to make the supply of 1,500 MW nominal capacity of energy co-generation viable by 2010. Table 6.3 Breakdown of energy content in sugar cane (per ton) Parts (TOE) 83 l ethanol 280 kg bagasse 280 kg waste Total

Energy (1,000 calories)

Equivalent

550 630 630 1,810

0.050 0.058 0.058 0.168

Source: Macedo, Isaias de Carvalho (org.), A Energia da Cana-de-Açúcar, 2005

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Energy in Brazil

These assessments point to a considerable margin for expanding energy supply, regardless of an increase in cultivated area by using leaves, more efficient boilers and other ethanol industry equipment. A survey was carried out between 1997 and 2005 to assess and develop technology aimed at using residues of sugar cane, bagasse and leaves as fuel for advanced co-generation systems. The Global-Environment Facility (GEF) and Copersucar participated in the project with the support of the United Nations Development Programme (UNDP), under the coordination of Brazil’s MCT. The work was carried out at the CTC. The stage relating to the gasification process was the responsibility of Tecniska Processor AB (TPS) of Sweden. Funding originated from resources of all participants, including the plants where the experiments took place. The total invested was estimated at US$15 million. The basic technology was an integrated biomass gasifier–gas turbine (BIG–GT) system, a process that still requires practical demonstration, while the use of residues requires logistic studies. Excess energy in relation to the current level of 50–60 kWh/t of sugar cane increases to 100–120 kWh/t with existing technology and to 250–300 kWh/t with BIG–GT. Following another technological path, studies were carried out abroad and in Brazil concerning the production of ethanol-cellulose, obtained by splitting the cellulose from the sugar cane bagasse, a process also applicable to other cellulosic raw materials, including wood chips and grass. This is an investigation that has not yet reached the stage of commercial demonstration.

Sugar cane expansion – Requirements and possibilities Currently the sector is sufficiently developed and financially independent to operate under market conditions. In 2007, the sugar cane agribusiness was able to supply the domestic fuel demand of automotive vehicles with 8.6 million ton petroleum equivalent (TEP) of ethanol (both hydrated and nonhydrated). This corresponds to 30 per cent of the sector’s total ethanol and petrol consumption. Ethanol exports were equivalent to 1.8 million TEP. The present size of Brazil’s ethanol industry can be illustrated by the relationship between domestic ethanol production and total world consumption of petrol, which in 2006 was 1.4 per cent and may increase further. However, to meet a world demand based on a target of 10 per cent ethanol in petrol consumption, and on the same Brazilian productivity, a production area of at least 40 million ha would be required. This would

The Role of Biomass and Land Use in Brazil 133 correspond to seven times the present production in Brazil and would require a substantial increase in the number of producing countries. A comprehensive study of potential areas for sugar cane expansion with a view to possible exports was published in 2005.6 According to this study, in Brazil, outside the Amazon region, expansion possibilities with a high productivity level, that is, more than 80 t/ha, would be 8 million ha, with further areas if irrigation is considered. In order to fully exploit the energy potential of sugar cane biomass and the sustainable development of the sector, it is necessary to find solutions to three problems. The first is caused by nature and is due to seasonal periods of harvests and between-harvests. Ethanol consumption is distributed evenly throughout the entire year. On the other hand, its availability for generating electric power during the dry season coincides with the time when hydroelectric plants have a generation shortfall, an advantage that could be acknowledged by a specific tariff. The second is a traditional problem, already mentioned earlier, resulting from the fluctuations in the international sugar market, with reflexes on the ethanol market, and requires a supply regulation of some kind, such as regulatory stocks. The third problem is social and environmental and results from the practice of burning sugar cane in the field at harvest time. A progressive reduction of this practice was the subject of federal legislation (1998) and state of São Paulo legislation. It imposes a target of 50 per cent reduction within ten years for land that can be machine harvested, stipulating a slower rate, over 20 years, for land that cannot be machine harvested. An agreement in São Paulo brought these dates forward to 2014 (suitable for machine harvesting) and 2018 (unsuitable for machine harvesting). Put into practice, these measures will significantly improve working conditions in the sugar cane plantations and reduce local air pollution in the area surrounding the cultivation of sugar cane. The proportion of harvesting without burning increased in São Paulo from 18 per cent in 1997 to 50 per cent by 2008. A side benefit of this policy of reducing cultivation in areas unsuited to mechanized harvesting is that it can lead to reforestation initiatives which, in turn, can contribute to biomass for energy, a subject that will be dealt with below.

Biomass – Firewood and charcoal Burning firewood includes a range of situations involving different stages of technology. It is estimated that the use of firewood worldwide as a source of energy amounted in 2000 to 563 million TEP.7 In its basic form,

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Energy in Brazil

it is mainly used for culinary purposes on primitive stoves in less-developed regions of Africa, Asia and Latin America, where collection of firewood begins the process of deforestation. On a smaller scale, it is used for producing charcoal in Africa, as well as in Latin America. Another energy source is lye, associated with the cellulose industry, employed mostly in America and in Europe. In Brazil, firewood continues to occupy a significant place in the energy balance, mainly in primitive forms of consumption (Table 6.4). When looking at the question of firewood in Brazil, it is necessary to distinguish its origin, extracted from natural or planted forests, and its use for energy or other purposes. The extraction of wood to produce energy has declined, but plantations of forests have developed over the last four decades, due in part to the significant technological progress made during that time, mostly connected with the production of raw materials for the cellulose industry and only as an accessory for the production of coal. Firewood from natural forests and other lesser formations is still mostly used in primitive stoves. Little progress has been made in designing more Table 6.4 Primary energy supply – wood and charcoal 1975

1980

1985 1990

1995 2000 2005

2007

33.2 36.3

31.1 27.1

32.9 25.1

22.3 14.3

28.6 12.0

Million TOE Total supply (%)

28.5 20.1

23.1 12.1

28.5 13.0

Source: MME, BEN, 2008

30,000

Charcoal consumption (m3)

25,000 20,000 Natural Forest Planted Forest

15,000 10,000 5,000 0 1980

1985

1990

1995

2000

2006

2007

Note: Traditional measurement: volume occupied by stacked charcoal Source: Minas Gerais Forestry Association (AMS) – Anuário 2008

Figure 6.4 Charcoal consumption according to its origin (1,000 m3)

The Role of Biomass and Land Use in Brazil 135 efficient stoves that can be sold in rural areas. The production of charcoal also employs primitive techniques, yielding approximately 50 per cent in energy terms, often under appalling working conditions at the ovens in which it is produced. In the case of firewood used for making coal, development has been irregular, as shown in Figure 6.4. Until around the year 2000, native origin declined and planted origin increased in the production of charcoal. Since then, the situation has become inverted, the former source increasing and the source from reforestation stagnating. During the triennium 1998–2000, the former amounted to approximately 8 million m3, while the latter stood at about 18 million m3. By 2006, the two sources had reached a balance at, respectively, 17.2 million m3 and 17.9 million m3.8 One explanation can be found in the metallurgy park for the production of pig iron for export, built along the Carajás railway next to the risk area of the Amazon Rainforest, without proper reforestation projects being implemented by the companies headquartered there. Brazil, the largest producer of charcoal, has endeavoured to improve its technological knowledge in this field, from finding a solution for the gases and making use of by-products, to the design and construction of kilns that provide a better energy and environmental performance. A highlight in more recent developments is the work carried out in the state of Minas Gerais in which metallurgic companies, such as Vallurex & Mannesman, Companhia Agroflorestal Santa Bárbara, Acellor-Belgo Mineira and research institutions participate. In some cases, the prototype and viability demonstration stage has been reached. Viçosa University has developed a continuous carbonization container kiln. At the Federal University of Minas Gerais (UFMG), work concentrates on the design and construction of retorts. There is still room for additional technological advances. Notwithstanding these developments, kilns for the production of charcoal for pig iron plants continue in their majority to use traditional technology. In Brazil, making use of energy from wood with traditional techniques also includes 13 plants for thermoelectric generation based on lye, with an installed capacity of 782 MW, and 24 operating with wood chips of a 204 MW capacity, making only a minor contribution to the country’s total generating capacity. Much attention is given in Brazil as well as abroad to obtaining ethanol from wood cellulose and other vegetable species by means of new technological methods based on the use of enzymes. This is a technical development that may become economically viable and therefore could compete with our traditional production of ethanol from sugar cane.

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Energy in Brazil

Reforestation In the middle of the 20th century, the impressive predominance of firewood gave rise to increasing concern regarding indiscriminate deforestation. At a time when there was still no talk of sustainable development, the first of the authoritarian governments in Brazil took the initiative to submit a new Forestry Code (1965) of an essentially conservationist nature to Congress, establishing idealistic rules difficult to put into practice. Aside from the merit of initiating a legal definition of the various possible forest situations, this law had little effect on the continuity of predatory forest exploitation along the same lines as before. It also said little about reforestation. In the following years it was not possible to install a forestry service in keeping with the responsibilities that the new code imposed on the government. The decreasing participation of firewood in subsequent years did not result from a government policy, but simply from natural evolution and the depletion of native forest resources close to the large energy-consuming centres. A little later (1966), a law of fiscal incentives for reforestation was drawn up. Two sectors made use of this instrument to obtain biomass: the cellulose and the charcoal sectors. Only a small part was subsequently destined for direct energy applications. The fiscal incentive-based reforestation carried out in Brazil for 20 years allowed companies dedicated to it to achieve notable technological and administrative progress. It is reasonable to estimate that investments exceeded US$7 billion, a good part of which was due to an incentive in the form of its deduction from the investors’ income tax. During this stage, the main objective of undertakings was the production of raw material for the cellulose industry and to the production of charcoal to replace the raw material originating from native forests. In both cases, it is a question of a short cycle operation of five to seven years. Once the incentive was suspended, there occurred a relative deceleration of new plantations. They were only taken up again some time later by the major companies in the cellulose sector and some in the metallurgic sector. The National Forestry Programme (PNF) was introduced in 2000, at the Ministry of the Environment, establishing some directives for government action. It dealt mainly with natural forests and their preservation, but also with matters related to the environment. Only one item in ten dealt with reforestation. An Energy Forest Research programme was created within the sphere of EMBRAPA. Although the government had not provided incentives for reforestation, it is estimated that new annual plantations increased from 320,000 ha in

The Role of Biomass and Land Use in Brazil 137 2002 to 627,000 in 2006, and to 600,000–700,000 ha in 2007. Mention must be made of the contribution of small producers that rose from 8 per cent to 23 per cent during this period. In 2006, planted forests covered approximately 5.4 million ha: eucalyptus trees were planted on 3.6 million ha, and pine trees on 1.8 million ha. Other species occupied 0.4 million ha. The Brazilian Association of Planted Forests Producers (ABRAF) have detailed information available concerning their associates who are responsible for 2.4 million ha, of which 78 per cent are on their own properties, 14 per cent in incentive programmes and 9 per cent on leased land. There are, besides, approximately 1 million ha maintained by Collective Associations associated to them. The associates maintain 1.3 million ha of preserved native forests on their own properties. According to the Brazilian Forestry Society (SBS), the major owners of planted forests are the cellulose (31 per cent), charcoal (24 per cent) and sawn wood (20 per cent) segments concentrated in the Southeast (45 per cent), South (35 per cent) and Northeast (13 per cent) regions. The introduction of the reforestation incentive programme in Brazil in the 1960s and 1970s provided a solid business base that achieved great technological progress, resulting in a continued increase in productivity in subsequent years. The productivity of plantations continues to increase, with emphasis on pine, which lagged behind the eucalyptus development. A new reforestation stage is now under development with a view to meeting other needs

Mean productivity (m3 / hectare) / year

45 40 35 30 25

Eucalyptus Pinus

20 15 10 5 0 1990

1995

2000

2005

2006

Source: ABRAF. Statistical Yearbook, 2007

Figure 6.5 Average productivity of forest plantations (cubic metres per hectare per year)

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Energy in Brazil

such as sawn wood and reconstituted panels, which require a longer forest-management cycle. The required intermediate thinning out of trees produces firewood that can be used to generate heat and electricity. A favourable factor for expanding forestry undertakings is the possibility of planting them in areas that are unsuitable for mechanized agriculture. There are opportunities close to urban centres in the Southeast where the climate is appropriate for forestry, including land now planted with sugar cane in non-mechanized farms, where the days of manual harvest and burning of leaves are numbered due to specific environmental legislation.

Bio-diesel enters the energy scenario Bio-diesel is a source of energy that, at the turn of the century, entered the scene in a number of countries interested in renewable sources of energy. It is a fuel resulting from the industrialization of vegetable oils through a chemical process to obtain a product with physical–chemical properties close to those of diesel oil derived from petroleum. It is combined with diesel derived from a mineral source to be used as fuel for internal combustion engines. The production and use of bio-diesel has led to several technological research activities and business enterprises. The development of bio-diesel involves three distinct, though closely related, areas: oleaginous plant agriculture; the land required; and the technology to obtain the oil. At the end of the 20th century, bio-diesel technology was consolidated around a process which consists of the chemical reaction of vegetable oil with ethanol through a catalyst; it results in the production of bio-diesel and of glycerine, a by-product. The catalyser is generally sodium or potassium hydroxide. An excess of methanol is loaded for the purpose of accelerating the conversion and later recovered. Ethanol can also be used. The production is carried out in batches and, in more recent installations, through a continuous process at a lower operating cost which, however, requires a larger investment. The technology is relatively simple, but its use, especially in the continuous process, requires monitoring and quality control to guarantee the safety of its consumption and a low maintenance cost for the vehicles that use the product. Hydrogenation was developed by CENPES, patented as H-BIO, and announced in 2006, when industrial testing started in one of the company’s refineries. The process is based on the introduction of refined vegetable oil at a specific point of the oil-refining process, with the addition of hydrogen. During the initial operations a problem was identified

The Role of Biomass and Land Use in Brazil 139 in regard to the use of unrefined soy oil, in the form that it is currently produced in Brazil. The oil must be refined prior to its introduction into the H-BIO process.

Bio-diesel production There are, in America, dozens of facilities in commercial operation that are based on soy and benefit from fiscal incentives for agriculture. The original motivation was economic, due to the imbalance between the demand for soy flour and oil. There exists, however, protection for the agricultural part and, in some states, its use is compulsory for environmental reasons. There are norms already for the specifications of the pure product (B100), as well as for a mixture of 20 per cent bio-diesel in diesel oil (B20). The European Union adopted tax reductions for the use of bio-diesel. It was determined that 20 per cent of the fuels used in transportation must be replaced by 2010. In Germany, the European Union’s principal producer, the original objective was to find a market for rapeseed oil, a by-product of the corresponding flour used as animal feed. The oil was condemned for human consumption. Its use as fuel also enjoyed taxreduction benefits. Malaysia is the principal producer in the East and has a palm-oil programme in an attempt to attain a 5 per cent participation in mineral diesel in the local market. Plantations provide double the domestic consumption. Indonesia has 6 million ha of palm and environmentalists keep a watchful eye on new projects, fearing possible danger to forests. Bio-diesel is perhaps a prime example of the complexity inherent to achieving compatibility between environmental, economic and social objectives. From a strictly environmental point of view, its use has unquestionable advantages over diesel oil. On the other hand, in Brazil, its economics involve problems of an agricultural, industrial and principally logistical nature, due to its scattered production that has to be assembled in reception centres, where it is added to mineral diesel. The production of bio-diesel also involves a social aspect that may be a positive factor since it allows the exploiting of areas unsuitable for large-scale mechanized cultivation. There, farms owned by low-income families can undertake cultivations of oleaginous plants such as castor beans, palm trees (dende palm tree and babassu), pinhão manso (Jattropha curcas), sunflowers and cotton. This orientation does not exclude the production of oil from mechanized and intensive cultivations such as soybeans. Similarly to what occurs in the USA, there is a market reason for this since the main demand is for its flour, and part of the oil can be diverted to the production of bio-diesel.

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Brazil’s bio-diesel programme Since 2003, Brazil’s federal government has taken the initiative to foster the production of bio-diesel by means of specific legislation, and this has led to the introduction of the Production and Use of Bio-Diesel programme. The first legislative measure determined that bio-diesel has to be introduced into the Brazilian Energy Matrix, a volume of 5 per cent being the minimum mandatory addition of biodiesel to diesel oil sold to the end-consumer in any part of the national territory. An eight-year deadline was stipulated for its implementation, with an intermediary target of 2 per cent over two years, corresponding to approximately 840,000 m3, based on the demand in 2006. If the 5 per cent is enforced the total would amount to more than 2 million m3. The next step was preparing a special roster of producers at the ANP for fiscal and quality certification purposes, regulating the incidence of taxes on the sale of the product with a partial exoneration in the North– Northeast and semi-arid regions and agricultural production characteristics, establishing a significant preference for family farming. A ‘social stamp’ was instituted for producers who met the requirements of location and type of priority agriculture (Law 11,116). Specific economic studies indicate that the result of activities carried out by producers who were granted the social stamp will be 6 per cent higher than those of producers who do not have the stamp. At the beginning of 2008, the CNPE decided to anticipate the targets, aiming at 3 per cent for bio-diesel added to diesel as of July, and the ANP programmed another auction for this purpose. It is expected that 4 per cent can be reached by 2009 and 5 per cent by 2010, thus also anticipating the date of the programme’s final goal. At the start of the programme, the price for bio-diesel to the producer holding a social stamp would be 70 per cent higher than that of mineral diesel in the domestic market. A comparison between the price of bio-diesel and of mineral diesel in effect in 2008, evaluated at an equivalent in dollars per litre, resulted in the following composition: price of mineral diesel for the producer, 0.54, plus tax of 0.10, equals 0.64. Since bio-diesel is purchased at 0.89, it can be seen that besides the tax exemption the product is also granted an additional 0.25. Thus the price of bio-diesel is 65 per cent higher than that of mineral diesel. This is an acceptable situation in view of the current pioneering stage and the possibility of greater efficiency. On the other hand, it must also be considered that the government has adopted a price-freeze

The Role of Biomass and Land Use in Brazil 141 policy for oil by-products in the domestic market, despite the increase in the international market. In May 2008, there occurred a modest rise of 15 per cent in the price of diesel. To make the scene still more complex the worldwide rise in commodity prices affected the cost of soybean oil. In Brazil, as in the USA and the European Union, it seems necessary, at least at the beginning, to grant fiscal incentives to the producer of biodiesel in order that it can compete with mineral diesel, as shown above, except in the event that the substantial increase in oil prices is consolidated. In order to anticipate the target date of January 2008 that had been set for distributors of oil by-products for adding 2 per cent bio-diesel to their mineral diesel sales, PETROBRAS was made responsible for the acquisition of what had been produced prior to that date. The ANP published a call for tenders in November 2005 for the sale of 70 million litres for delivery between January and December 2006, and these were all acquired at the price of R$1.90/litre FOB, without paying the commodities circulation tax (ICMS). Contracts with the purchaser PETROBRAS and its associate company the Pasqualini Refinery were signed in February with the first four producers. Other auctions followed: the second for delivery between July and December 2006; the third and fourth for delivery in 2007; and the fifth, sixth and seventh were held for the first semester of 2008. The price for 2007 fell from R$1.90/litre at the first auction to R$1.74/litre at the fourth. The price for the first semester of 2008 remained, however, at R$1.862/1.866 per litre. The beginning of the bio-diesel programme was promising from a physical point of view, clearly indicating that the official goal could be achieved. However, the government regulation contained one error. In anticipating the target, the difficult part of the logistics did not live up to expectations and part of the production capacity had no outlet. PETROBRAS was under obligation to purchase the production and its distribution subsidiary did not have the capacity to handle it. There was a temporary excess that had to be stored. PETROBRAS did not collect the excess production; neither did it pay for it, and the pioneer producers had to carry the stocks at great financial loss. Equilibrium came in 2008, but the harm had already been done. In the first four auctions, the Northeast and North regions attained 49 per cent of the sales, based on castor beans, palm and cotton, the majority within the concept of the social stamp. The geographic distribution and the origin of the oil, however, changed significantly between the 2006 and 2007 experimental period and the official start of the mandatory programme, as shown in Figure 6.6. The Northeast, which initially predominated (with 38 per cent), gave way to the Central-West (with 37 per cent) in the auctions held during the first half of 2008. Both the Central-West and the South involved the predominance of extensive soybean cultivation.

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EMBRAPA initiated in 2005 an intensive research programme on the least-known oleaginous species. Experiments will require a few years before they yield results. The palm species may become of special interest for Brazil due to their location in the North and their non-mechanized culture, but they require fundamental research and experimentation. Palm oil already has an important role in the international market due to its significant production in Indonesia and Malaysia, where it occupies respectively more than 5 and 4 million ha. The number of specialized plants increased rapidly. In January 2008, 51 bio-diesel production plants with a unitary capacity varying between 2.4 m3/day and 360 m3/day, their total exceeding 2.7 million m3 in 300 operating days, were authorized to operate. Not all the authorized plants were ready at that time. In nominal terms, there is already an over-capacity, exceeding the needs to supply the 2 per cent target of the first stage and, in theory, sufficient even to meet the 5 per cent target. Their geographical distribution, shown in Table 6.5, reflects the composition of the supply noted in the auctions for 2008. 2006 / 2007 North 11.0%

South 18.0% Southeast 17.0%

Northeast 38.0% Central-West 16.0%

2008 North 11.0%

South 22.0%

Northeast 15.0%

Southeast 15.0%

Central-West 37.0% Note: The 2008 figures refer to the first semester Source: MME, Monthly Bulletin of Renewable Fuels, 2008

Figure 6.6 Results from auctions for the purchase of bio-diesel

The Role of Biomass and Land Use in Brazil 143 Table 6.5 Bio-diesel plants authorized by ANP up to January 2008

Number of plants Capacity (1,000 m3/year) Total capacity (%)

Total

South

51 2,786 100

4 433 16

South- Central- Northeast West east 16 710 25

16 1,216 44

5 398 14

North 10 29 1

Source: ANP, Authorized bio-diesel capacity, 2008

There is an over-capacity in bio-diesel plants. Notwithstanding that situation, since 2006 PETROBRAS has been directly involved in the industrial side of the programme and decided to build three bio-diesel plants to compete with the private sector. The introduction of the new fuel involves implanting a specifically oriented logistical infrastructure. PETROBRAS invested R$35 million in their bio-diesel reception centres, and other distributors of oil by-products imitated them. All told, 44 of its 45 centres were ready by the end of 2007, as were 10 of the 12 centres under joint operation, and two of seven centres of other companies. The BR Distribuidora (PETROBRAS Distributing Company) played a significant role in marketing the product. All these actions belong to an initial phase of the bio-diesel programme in which, naturally, many errors were committed.

Urban waste dumps Not only biomass, but also urban waste, is used as a renewable primary source, but for a different reason. The generation of energy in this case is a by-product that serves mainly to reduce the cost of the environmental task of finding a final destination for waste. Public opinion and municipal administrations of underdeveloped nations where the scenario worsens progressively as a result of continued and persistent urbanization are increasingly concerned with the collection and destination of urban waste. In Brazil the urban population exceeds 80 per cent of its total inhabitants, and 225 townships with populations of more than 100,000 harbour more than half the country’s population.9 The importance of this population growth leading to the predominance of the system of depositing the collected waste in landfills (dumps) has several consequences: •

environmental, as a result of the concentration of decomposing organic material that emanates gases, and the deterioration of underground waterbeds;

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social and public health, as a result of the distressing access of needy populations to such deposits; and economic, resulting from the increasing distance and, therefore, the cost of transporting the waste to the landfills, as well as the increasing complexity of administering the deposit areas.

The majority of the urban centres of developed countries have for some time now installed large plants for burning or industrializing waste, using various technologies adapted to the respective local characteristics. In general, these plants are adjacent to steam or electric power-generating facilities and their size varies considerably, from units with a processing capacity of 80 tons/day and a generating capacity of 6 MW, to the large plant in Amsterdam with a 2,400-ton/day capacity, generating 52 MW. In Brazil, only private enterprise took experimental initiatives in this regard. One, for capturing methane gas on a landfill, located at the Bandeirantes Landfill in São Paulo, has 20-MW generating units and is already in operation. Another was developed by the Usinaverde Company, which installed a pilot plant that has already been in operation since January 2004, next to the Alberto Luiz Coimbra Institute – Graduate School and Research in Engineering (COPPE), to prove the viability of a technological process appropriate for Brazilian conditions.

Occupation of Brazil’s vast geographic territory In the study of the various sources of renewable energy made in this chapter, their relationship to the occupation of Brazil’s geographic territory was always kept in mind. The size of this territory of 8.5 million km2, which corresponds to twice the area of the European Union, as well as its diversity, are factors that contribute to Brazil’s prominent position within the world scenario of renewable energy. While the principal methods of using biomass for energy purposes are relatively independent of each other, the federal government has sought to coordinate the actions of public and private entities with a view to making better use of Brazil’s vast territory, both from an economic and an environmental point of view. The merit of the various forms of possible territorial occupation is a controversial issue in Brazil as well as abroad when all different aspects are considered simultaneously. Before evaluating and classifying the factors involved, it is important to recapitulate the natural characteristics of the Brazilian territory in an ultrasynthesized manner as to its potential for use for farming, cattle-raising and

The Role of Biomass and Land Use in Brazil 145 forestry. Many studies have been conducted in which the relief, the soil, the climate and the hydrography were taken into account. Due to the complexity of the picture, it is impossible to undertake a comprehensive classification of the areas according to their suitability and potential that includes all these factors, as well as the possible negative environmental consequences of their exploitation. Every observer or research institution tends to give priority to one of these factors when analysing the anthropic risks faced by occupying the territory: soil degradation, obstruction of the water course, loss of biodiversity and, moreover, contribution to the climate change. Basic knowledge of exploitation possibilities has improved. Many ecosystems have been identified, and methods of exploiting them in the past that resulted in a reduction of the areas they originally occupied are known. The replacement of native vegetation by pastures and plantations has developed in an extremely productive fashion in some cases, and in a predatory fashion in others, causing major environmental problems, especially when this has occurred on physically fragile land. Definitions have improved thanks to the continued progress of the technology for collecting and interpreting digital data, as well as to the studies carried out by EMBRAPA, but this does not prevent different interpretations, some optimistic and others less so, of the availability of Brazil’s geographic territory and its proper use for new productive activities. Preliminary results of the 2006 census of agricultural establishments cover 355 million ha, a territory which has remained basically unchanged since 1995, and is just a little below the maximum cited in the 1985 census (375 million ha). The areas covered by the census correspond to approximately 40 per cent of Brazil’s total surface of 851 million ha. The development of the occupied area, with a breakdown into the types of its use, is depicted in Figure 6.7. In the period under study, the forest areas increased. Pasture areas decreased since the maximum of 1985. Crops varied little until 1995, when they increased significantly until 2006, reaching 77 million ha, corresponding to 9 per cent of the national territory. According to EMBRAPA, there are areas without soil problems for agricultural activities, most of which are already occupied by permanent or temporary plantations that operate at various technological levels, as well as by pastures for extensive cattle-raising. There are at least another similar number of areas with well-defined obstacles for their exploitation that can be circumvented by using an appropriate technology. However, the major part of the Amazon Rainforest ecosystem is inadequate for sustainable agriculture. It has long been known that the thin, poor soil on which the forest rests degrades rapidly after deforestation, whatever use is made

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200

Land utilization (million hectares)

180 160 140 120

Crops Forests Grazing

100 80 60 40 20 0 1970

1975

1980

1985

1995

2006

Note: Forests include natural, secondary and planted forests Source: Brazilian Institute of Geography and Statistics (IBGE), Census of Farms and Pastures, 2006

Figure 6.7 Land utilization in Brazil, 1970–2006 (million hectares)

of it. The region requires specially designed forms of agriculture to avoid mistakes that have already been incurred. Limitation of usable space is not exclusive to a fragile ecosystem; it also includes areas where there is a critical need to preserve the biodiversity. Here arises a phenomenon similar to that which occurred in industrialized and densely populated countries after the Industrial Revolution. Biodiversity declined drastically in North America and Europe during that period.

Crops for energy purposes Let us now pass on to the subject of land occupied for energy purposes. At the stage of agriculture at the beginning of the 21st century, of the total cultivated area in 2006, 54.5 million ha were used for plantations of the nine largest intensive crops, as depicted in Table 6.6. Forestry, which does not figure in national agricultural statistics, was included in order to complete the picture. Not included in the table is the area occupied by the reservoirs of hydroelectric power plants that covers about 3 million ha; that will be the object of the next paragraph. These data show that in 2006 large crops corresponded to approximately 90 per cent of permanent and temporary crops and to 7 per cent of the national territory.

The Role of Biomass and Land Use in Brazil 147 Table 6.6 Harvested area of major crops in 2006 (million hectares) Crops

Area

Crops

Area

Soybeans Maize Sugar cane Forestrya Beans

22.0 12.6 6.2 5.4 4.0

Rice Coffee Manioc Wheat Cotton

3.0 2.3 1.9 1.6 0.9

a

Occupied area in 2005. Brazilian Association of Planted Forests (ABRAF). Statistical Yearbook, 2007

Source: IBGE, 2006 census

Among the major cultivations of interest to energy, sugar cane is by far the most important. It occupies less than 1 per cent of the territory and its products are already a part, and an increasing one, of the country’s energy matrix. Recently, and on a much smaller scale, part of the soybean oil production has been diverted to producing bio-diesel. The total area occupied by soybeans corresponds to 2.5 per cent of the territory. In Brazil, there are, however, other crops of lesser importance that can also contribute to the production of bio-diesel; these were listed earlier in this chapter. It must be remembered that, in the biofuels mix, firewood for generating electricity can originate from reforestation, especially in the Southeastern Region, on land unsuitable for mechanization, without, therefore, competing with the major food crops. The merit of biomass energy originating from intensive crop cultivation has been discussed abroad and raised some controversy focused on two aspects: on the one hand, their possible occupation of an exaggerated large portion of land suitable for agriculture, thus competing with food crops; and on the other, the possible danger to the preservation of the Amazon biome. This question does not allow for universally valid answers. It depends, among other parameters, on the size and adequacy of available land and on the agribusiness efficiency in each country. Brazil has a privileged position regarding all these aspects. Aside from land and climate, productivity of the agribusiness is constantly improving. Specific results for sugar cane were shown in Figure 6.3 and, for forestry, in Figure 6.5. Figure 6.8 depicts the productivity of all types of grain, including the dominant share of soybeans. Agricultural production is thus steadily increasing in Brazil, especially since 1997, due to both land occupation and productivity. In the case of Brazil, this development is also accompanied by increasing exports of agricultural products, as shown in Figure 6.9 Wheat is the single, relevant grain import.

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250 230

Production

210

Index

190

Productivity

170 150

Area

130 110

2006/07

2005/06

2004/05

2003/04

2002/03

2001/02

2000/01

1999/00

1998/99

1997/98

1996/97

1995/96

1994/95

1993/94

1992/93

1991/92

1990/91

90

Source: National Supply Company (CONAB), Áreas Plantadas, Produtividade e Produção, 2008

Figure 6.8 Grains – production, area and productivity (1990–91=100) 900 800

Value

700

Index

600 500 Quantity

400 300 Price

200 100 0 1975

1980

1985

1990

1995

2000

2005

2007

Source: Foundation Centre for Foreign Trade Studies (FUNCEX), Statistical Base, 2008

Figure 6.9 Exports from agriculture – value, quantity and price (1975–2007) In 2007, exports from agribusiness, including food and non-edible products, amounted to US$58.8 billion, corresponding to about one-third of Brazilian total exports. If only foodstuff is taken into account, it amounted to US$37.8 billion, to which the sugar–ethanol complex (78 per cent sugar and 22 per cent ethanol) contributed US$6.1 billion, corresponding to 4.2 per cent of the country’s total.

The Role of Biomass and Land Use in Brazil 149 In the case of Brazil, there is no incompatibility between foodstuff and ethanol production. However, the expansion of the agricultural area occupied by sugar cane is also the cause of concern in the international forum, mainly due to misgivings that it may contribute to the continued deforestation of the Amazon Rainforest, although the major expansion, aside from the traditional occupation in the Southeast and Northeast, occurred in the Central-West, as shown in Figure 6.10. Furthermore, any expansion of sugar cane in the Northern Region, especially within the Amazon biome, would be problematic, due to the heavy rainfall in that region. On the other hand, there are other areas with no tradition of sugar cane cultivation that are suitable for the expansion of this activity and are being investigated. Sugar cane occupies less than 1 per cent of Brazilian territory, outside of the Northern Region, and contributes 15 per cent to the country’s total energy supply. Soybeans that, so far, have only a marginal link with bioenergy have a significant expansion in the Central-West. These incursions of sugar cane and soybeans in the Central-West, mostly into grassland formerly used for extensive cattle raising, have an indirect impact on the Northern Region. Displaced cattle ranchers move north and enter the Amazon biome. It should be noted that soybeans also have a direct impact in the Northern Region, although on a very small scale (Figure 6.10). These two relevant developments in agriculture/environmental issues are not restricted to cultivations for the purpose of producing energy; they also exist in all major plantations, here and elsewhere, employing modern technologies whose productivity contributes to sustaining this overpopulated world. In that broader scenario, there is a wide-reaching chain of cause and effect that is not within the range of this book, which deals primarily with energy.

Repercussions of extended plantations in the Amazon region Since the Amazon region became inhabited, and due to the fashion in which it was peopled, it has been submitted to rubber extraction, deforestation for the acquisition of firewood, the implementation of agricultural enterprises, and the predatory exploitation of hardwood and valuable metals in placer deposits. The latter resulted in localized impacts. New settlements required opening roads which, in turn, facilitated and accelerated human incursion into the forest. More recently, clearings have been made for the construction of pipelines and transmission lines to be used for the outflow of energy from hydroelectric plants.

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Energy in Brazil Sugar Cane South 8.6%

North 0.3%

Northeast 17.6% Central-West 11.2%

Southeast 62.3%

Soybeans South 38.9%

North 2.4%

Northeast 7.5% Central-West 44.5%

Southeast 6.7% Source: National Supply Company (CONAB), Brazilian Crop Assessments. Sugar cane 2007 and soybeans, 2007-08.

Figure 6.10 Sugar cane and soybeans – regional distribution of planted areas (%) At the end of the 20th century, it became obvious that the whole land issue, caused by the intemperate appropriation of public land and conflicts regarding the land occupied by the foresters, was serious. The main consequence of the lack of legal definitions is the difficulty in identifying those responsible for the economic activities carried out in order to enforce the current law. During the entire process, the visible environmental impact on the Amazon region has been deforestation without replacement. Similar destruction took place in territories of industrialized countries up to the 19th century, either to open spaces for agriculture or to extract wood and firewood, the latter continuing until mineral coal appeared on the scene in substitution. Many developing countries, including Brazil, are involved in deforestation in the 21st century. In this context, attention is concentrated on the Amazon region, about which much has been written and said, giving rise to successive and varied technical analyses, public demonstrations and political speeches which are frequently inappropriate. There is much confusion in the use of the

The Role of Biomass and Land Use in Brazil 151 word ‘Amazonia’ (or Amazon region). It must be remembered that it is used to designate different geographical areas. In the country’s political division, Amazonia covers eight states, known as ‘legal Amazonia’, and measures 508 million ha, more than half the territory of the country. It includes all the states in the Northern Region, as well as the states of Mato Grosso and Maranhão (see Appendix 1, Figure A1.1). Within it are the Amazonia biomes, and it is dominated by the Amazon Rainforest, which comprises two parts, defined respectively as dense and open, and whose total area is to the order of 340–80 million ha, corresponding to 40–45 per cent of the Brazilian territory. Many attempts have been made to interpret the main deforestation process. Gradually, a systematic explanation of the complexity of the phenomenon occurring over the last 20 years has been found in the previously mentioned extension of cultures to the Central-West and the consequent push of cattle ranchers to the North, seeking opportunities in new areas in the Amazon region, especially in the states of Pará and Rondônia. The front line, which has been designated ‘the arch of fire’, is depicted in Figure A1.8 (Appendix 1). This migration, by opening forest areas, leads to joint interests of cattle ranchers and foresters. The latter are in the search of hardwood and employ predatory practices, while the former look for pasture space, which requires completing the total destruction of forests. Another localized incursion into the forest results from the use of charcoal in pig-iron plants in the state of Maranhão. These plants operate almost entirely on native wood due to insufficient planned reforestation.

The size of the hydroelectric reservoirs To complete the description of the relationship between the geographical size of the territory, land use and renewable energy, it is necessary to revert to the subject of the reservoirs used to regulate watercourses for the purpose of generating electric power to which we referred in Chapter 3. At the beginning of the 21st century, the total area of these reservoirs in Brazil covers 30,000 km2. In the main hydroelectric plants, the ratio of generating capacity to the area occupied by the corresponding reservoirs stood at 3.3 MW/km2. It is probable that the technically realistic hydroelectric potential to meet the new standards of minimizing the environmental impact in developing plants will be inferior to that in those which have already been exploited. The reservoirs will become proportionally smaller. An example is a modified concept for harnessing hydropower in the Amazon being adopted by ELETROBRÁS in its new development study for the large Tapajós Basin.

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In this case inventory studies pointed to an overall capacity of about 14,000 MW. Subsequent studies, considering the reduction of environmental harm, resulted in a capacity of 10,680 MW. The main plant, whose capacity is 6,100 MW, will require a flooded area of 722 km2, corresponding to 8 MW/km2, almost three times the average of the existing plants. This concept also innovates in the question of human displacements with a minimum impact on the surrounding forest, the idea being to start operations during construction, similarly to what occurs on ocean oil platforms, where workers reside in an existing town in the neighbourhood. Current estimates point to a total capacity of 35,000 MW to be built in the Amazon region. The maximum area occupied by new hydroelectric plant reservoirs will, based on the old average, not exceed 10,000 km2. By the new criteria it will be less. At the most, old and new plants will total 44,000 km2, the equivalent of 0.5 per cent of Brazil’s territory. The flooded area that now covers about 3 million ha may rise to 4.4 million ha, a figure that ranks fifth in the comparison with presently harvested areas mentioned in Table 6.6.

Brazil endeavours to control incursion into the Amazon region In the 1970s, when the decision was taken to build the Trans-Amazon highway, an extensive physical survey was undertaken by the MME with the then most modern equipment available (airborne side-looking radar), and continued for a long time to serve as a basis for systematic information on the territory of the Amazon region. The next step was making proposals for corrective surveys and measures, including Economic Ecological Zoning (ZEE) with a view to pinpointing territory with areas suitable for agriculture, areas of restricted use subject to control and, finally, in 1981, areas of permanent preservation. Some states carried them out partially. Taking a parallel path, the National Institute for Spatial Research (INPE), together with the Brazilian Institute of Environment and Renewable Resources (IBAMA), accompanied deforestation activities from 1989, through the Amazon Forest Satellite Monitoring Project (PRODES), which was very significant. Renewed attempts to implement practical measures were made during the Collor de Mello government (1991). The first thought was to concentrate efforts on economic–ecological zoning, which was already covered by legislation. The state governments were not particularly enthusiastic about developing this project, nor had

The Role of Biomass and Land Use in Brazil 153 they at the time financial resources that could be used for this purpose. On the whole, the results of such zoning were disappointing, despite a few worthwhile enterprises and some preparatory measures. The second idea was to implement an infrastructure equipped with modern mechanisms, capable of improving the knowledge of the nature of the Amazon region and permitting the control of aggressive human intrusion. As a result, the Amazon Vigilance System Project (SIVAM) was implemented. Three regional vigilance centres were established in Manaus, Belém and Porto Velho, respectively, as well as remote support entities connected to these centres. The project included remote sensors, environmental and meteorological monitors, and the use of communications, radar protection, operational resources and telecommunications. It needed a large physical structure and involved the most modern technology. US$1,395 million were invested in specialized equipment. A deliberative council (CONSIPAM) was instituted that included representatives from various government areas directly related with the programme’s objectives, as well as a Management and Operational Centre which, together with SIVAM, were linked to the Office of the Presidential Chief of Staff. On the executive side, there was great delay in introducing the SIVAM programme, due to debates in Congress resulting from criticism of the contract with the Raytheon Company of America without a call for bids and backed by specific funding from the Eximbank. Unfortunately, for administrative, budgetary and political reasons, it was not possible to make efficient use of the information that became available as of 2003. Fortunately, on the other hand, INPE’s PRODES project, which had been in regular operation since 1989 and the digital images of which were disposed of since 2003, became an effective tool for identifying areas that had been negatively affected by human intrusion. From an institutional point of view, in order to emphasize the importance given to the environmental issues in the Amazon region, the National Council of Legal Amazonia was formed to define a policy. In turn, the Council appointed 11 work groups, whose studies of the sector were concluded in 1994 and whose final report was approved by the Council in November of the same year, under the title ‘National Integrated Policy for Legal Amazonia’. After a change in government, at the beginning of the Fernando Henrique Administration, a formal meeting was held in Belém to discuss the topic ‘Amazonia and sustainable development: new paths’, which led to the issue of a new document bearing the same title but in essence very different from the former.

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This difference between practically simultaneously issued papers that involved hundreds of people deserves attention because it shows the intrinsic problems in reaching an understanding in the search for a national policy for the Amazon region.

Confirmation of deforestation Results of the surveys carried out by the PRODES project are impressive, due both to the extent of the burned areas and the continuity of the phenomenon, which has become increasingly serious since 2000–01, despite manifestos and proposals of measures to contain it. The news of a new deforestation record in 2003–04 had great repercussions in the domestic and foreign press (Figure 6.11). It was even the subject of an article published by the directors of the World Bank, which emphasized the importance of improving property rights and local administration, as well as the introduction of market mechanisms (O Globo, 3 June 2005). Several explanations were given concerning the 1994–95 peak. These included a year of drought, land speculation in the search for real-estate assets after the Real Plan, and even an expansion of soy cultivation in the Central-West. According to maps showing vegetation cover published by the Ministry of the Environment, the Amazon Rainforest had lost 15 per cent of its total area.10 35

Deforested area (thousand km2)

30 25 20 15 10 5

07/08

06/07

05/06

04/05

03/04

02/03

01/02

00/01

99/00

98/99

97/98

96/97

95/96

94/95

93/94

92/93

91/92

90/91

89/90

88/89

0

Note: The data refer to the period from August to August. Those for 1992–94 correspond to biennial averages Source: INPE, PRODES Programme

Figure 6.11 Deforested area of the Amazon region

The Role of Biomass and Land Use in Brazil 155 Results of the triennium 2004–05 and 2006–07, on the other hand, were encouraging, showing the continued decline of deforestation depicted in Figure 6.9. But the euphoria did not last long. The announcement in January 2008 that, according to data issued by Deforestation in Real Time (DETER), deforestation had been resumed and reached 3,200 km2 between August and December 2007, mostly in Mato Grosso (54 per cent), Pará (18 per cent) and Rondônia (16 per cent), took the public largely by surprise. These results caused even more concern due to information that the DETER process, producing quicker results, assessed between 40 per cent and 60 per cent of the areas detected by PRODES. Therefore, based on DETER results, the INPE estimated a probable deforestation of 7,000 km2 during this short period. Once the uproar in both government circles and society as a whole in Brazil and abroad had died down, whether the extrapolation in view of this news was entirely valid or not, it became evident that something positive, organized and consistent would have to be done. It is a typical case of something good coming out of something bad. Both the federal and state governments concerned proceeded to act jointly with renewed intensity. An immediate measure was a major police onslaught, which was given the name ‘Arch of Fire’ corresponding to the denomination already being applied to the transition zone between the Cerrado and the Amazon biomes, depicted in Figure A1.8. Its main target was the wood illegally extracted by timber companies in the region. A significant volume of logs was apprehended and fines were imposed. Control measures included the definition of 36 critical areas in the Northern Region that would be submitted to intensified control; rural properties would be required to be re-registered; an administrative freeze (embargo administrativo) would be placed on properties where illegal deforestation took place; and industries that processed products coming from such areas would bear joint responsibility. Subsequently, a Central Bank resolution ruled that commercial banks had to intensify their requirements regarding the registration of properties prior to the concession of loans related to any economic activity on said properties.

Various perceptions of the Amazon region Since the Rio 92 conference, analyses and proposals of measures have been underway abroad, especially in industrialized countries, by organizations for the preservation of tropical rainforests, with particular emphasis on the Amazon region, as well as on watercourses. Statements were made

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by important personalities in developed nations, stressing the importance of the Amazon region for the world’s natural environment which, although they did not always apply, never failed to criticize Brazil’s conduct. Non-governmental organizations (NGOs) were founded on an international scale with branches in Brazil and proceeded to take action on environmental issues that were at times constructive, at others simply critical. Several forms of international intervention in the administration of the Amazon region were proposed. Notwithstanding the impropriety of some of these interferences in the domestic policy of another country, they had the merit of attracting local attention to the need for a systematic rather than the existing predatory manner of occupation. The Amazon issue involves many inter-related questions that lead to a variety of field investigations, theoretical analysis and public policy proposals. They comprise academic institutions, government agencies and NGOs. Some of the NGOs, both local and international, have wide access to the media, and this permits them to transmit their points of view to a large public audience. The complexity of the issue is an obstacle to simple policy solutions. There are too many contradictions between equally desirable objectives. The central question is to preserve the forest, which plays an important role in world climate. But there is a rural population that desires and deserves opportunities for a decent way of life, inexorably related to the economic use of forest produce and the use of land for crops and cattle grazing. There is also the development of potential mining and hydro resources that benefits the nation as a whole. And last but not least, there are the Indian groups with their specific objectives. Public and private agencies that dealt with subjects pertinent to anthropical interventions in the Amazon region multiplied. Their organizations have two distinct directives in these organizations: preservation, covering the largest possible territory; and sustained development, with the least interference in nature. In practice, it is difficult in either case to quantify the boundaries. Among the NGOs with a variety of constructive objectives, it is important to distinguish between those that are aimed at research activities related to the nature of and the possible means for change, and those that are dedicated in a number of ways to overcoming problems in the process of occupation, to mitigate harmful impacts, and to improve the well-being and progress of the local population. Within this last objective the most critical problem is related to the government policy for the Indian groups of population that must be conducted according to the 1988 Constitution (Article 231):

The Role of Biomass and Land Use in Brazil 157 Indian groups of population have the right to their own social organization, customs, languages, beliefs and traditions, as well as to land they traditionally occupy, the Federal Government having the authority to delimit, protect and enforce respect for their assets. Since the Rondon (officer of the Brazilian Army) Missions at the beginning of the 20th century entered the Brazilian hinterland, the Brazilian policy towards the Indian groups was to respect their culture and promote their non-compulsory incorporation into organized Brazilian society. Years later the idea of preserving Indian culture and habits in their original locations predominated, giving origin to the corresponding delimitation of large areas: the ‘Indian Reservations’, almost all of them in the Amazon region. In practice, the extension of the areas, not proportional to the size of the groups, and the different interpretation of their rights, led to a contradiction with the nation’s objectives. There are various NGOs and social groups involved with the question, corresponding to diverse interpretations of what is best for these populations, including the extreme proposition that they should be kept as intact as possible, as a kind of anthropological museum. Aside from these NGOs, there are also countless smaller organizations concerned with their own financial interests that only use the environment as a pretext, or may be used by other organizations whose interest is predominantly political and which confuse the scenario. To give an idea of their number, including social groups involved in Amazon issues, the Amazon Working Group (GTA; established in 1991) alone consists of 602 entities. Unfortunately, the controversies concerning the economic activities in the Amazon region are similar to a dialogue of the deaf between private and public businessmen and environmentalists. However, initiatives are emerging in parallel to government measures supported by the traditional model of command and control. They result from initiatives originating in the involved corporate sector or in NGOs that have studied alternative or supplementary lines of action to those that have been attempted. Two examples are worthy of note. In May 2006, two corporate entities connected with soy plantations, the Brazilian Association of Vegetal Oil Industries (ABIOVE) and the National Association of Cereal Exporters (ANEC), proposed a two-year moratorium as an attempt to delimit the cultivation of soy and hold back its possible incursion into the Amazon Rainforest. Together with NGOs such as Greenpeace, a workforce was formed to proceed with the initiative, assuming the commitment to implement a programme by means of responsible and sustainable use of the country’s natural resources, backed by a joint undertaking.

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In 2007, nine national and foreign NGOs drew up a National Pact for the Valorization of the Amazon region. The Pact final report was prepared by Macrotempo, based on analyses of the credibility of proposals of economic mechanisms, to foster forest conservation and reduce deforestation in the Amazon region by means of a system of payments for services provided by a standing forest. It included forest areas as well as the savannah, taking as an example data and information from the state of Mato Grosso. An evaluation was difficult because the services related to external factors that have no market price. Calculations were based on the expansion of soy plantations. Also analysed were possible sources of financial funds for the implementation of the programme. The proposed pact was formally launched in the Chamber of Deputies in Brasília in October 2007.

Notes 1 FAO – Food and Agriculture Organization (2004) FAO Statistics, Rome 2 CONAB – Companhia Nacional de Abastecimento (2008) Brazilian Crops Assessments – Sugar Cane, Brasília 3 DATAGRO (2008) Average Industrial Yield – Brasil, São Paulo 4 Macedo, Isaias de Carvalho (2005) A Energia da Cana-de-Açúcar, São Paulo 5 UNICA – União da Indústria da Cana-de-Açúcar (2007) Biodiversidade Eficiente e Sustentável, São Paulo 6 BNDES – Brazilian Development Bank (2005) CGEE, Estudo sobre as Possibilidades e Impactos da Produção de Grandes Quantidades de Etanol no Brasil, Rio de Janeiro 7 Trossero, M., Drigo, R. (2004) ‘Wood Fuels’. In: WEC – World Energy Council, Survey of Energy Resources, London 8 Minas Gerais Forestry Association (2008) Anuário MAS, Belo Horizonte 9 IBGE – Instituto Brasileiro de Geografia e Estatística (2000) Censo Demográfico, Rio de Janeiro 10 Macrotempo Consultoria Econômica (2007) Pacto Nacional pela Valorização da Floresta e pelo Fim do Desmatamento da Floresta Amazônica

Chapter 7

New Energy, Small Hydro and Biomass-Fired Thermal Plants

Diversity of alternative energy The expression ‘new energy’ or ‘alternative energy’ is generally employed for new ways of using traditional sources of energy, and includes primary renewable and non-renewable sources. The basic questions related to these concepts have attracted worldwide concern since the end of the 20th century. Unfortunately there is a frequent imprecision in the use of the various categories involved. In the industrialized countries large hydropower plants are not included in ‘renewables’, although they represent the largest contribution of its kind to the world energy supply. A possible explanation is that almost all potential plants have already been built there. This is not the case in the underdeveloped world, where there still exists an enormous capacity to be developed. Fuel wood and sugar-cane ethanol, of great significance for underdeveloped countries, frequently do not appear under ‘renewables’. Significant highlights in renewable energies in the developed world are wind energy, which uses the force of the wind to generate electricity, and solar energy, used for heating water by means of solar panels, as well as for generating electricity in photovoltaic cells. Geothermal energy and tidal power have an important but limited use in very specific geographic locations. Alternative energy includes small hydro plants and small biomass-fired thermoelectric plants. The most notable advance in energy from non-renewables is the fuel cell in which electricity is generated from fossil fuels through a chemical process, replacing the internal combustion engine. The next step in the development of fuel cells will be the direct use of hydrogen, which depends on a technical and economic breakthrough in its production. The use of both solar and wind energy depends largely on natural phenomena: the rotation of the earth around the sun, the cloud ceiling and wind speed. Wind and solar energy are only available sporadically, varying according to the time of day, the season and the latitude of the location of

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use. Due to this characteristic, energy originating from them is distributed over time, differently from that which characterizes usual consumer demand. All these forms of new energy have aroused great interest throughout the scientific world, with major repercussions within society as a whole, especially in developed countries where large investments are made in their indispensable technological development. Damage to the environment, the risk of extinction of non-renewable natural resources and the recent emphasis on the prospect of climate change have given an impetus to these investments. The number and variety of new opportunities is impressive, combining to form a scenario of great potential over the long term. The discoveries and inventions have, on the other hand, also caused unrealistic expectations based on the assumption of their immediate practical application and the failure to take into account the time required for technological development and proof that marketing is viable. The exception within this scenario of progress is the accumulation of electric power that still largely depends on the traditional electric battery, a device of proven worth but of limited capacity. Since the end of the 20th century, new technologies have been developed rapidly. Direct use of wind and solar energy installations for producing electric power on their own is intermittent. Continuity of service still depends totally on batteries. Perfecting them has challenged industry and research institutions to improve the relationship between accumulated energy on one hand, and the weight and cost of batteries on the other. For a long time, the relative lack of success in endeavours to discover a revolutionary way of storing electricity economically impacted negatively on the development of several other new technologies for generating electricity of an intermittent nature. There occurred new, successful technological developments at the turn of the century for perfecting hybrid vehicles, a subject that will be dealt with in the next chapter. Contrary to Brazil’s dominant initiatives and forefront position in regard to renewable energies of hydropower and biomass origin, the country occupies only a modest place in the field of solar energy for water heating and is only now taking the first steps in regard to wind energy.

Wind energy The use of wind energy is one of the oldest among energy sources. Recent technological progress goes hand-in-hand with the studies of aerodynamics needed for the propulsion of airplanes, specifically of propellers.

New Energy, Small Hydro and Biomass-Fired Thermal Plants 161 Modern windmills have a propeller, generally of three blades, which activates an electricity generator at the top of a tower. This is not a simple installation since, on the one hand, winds generally change direction and intensity and, on the other, the generator must operate consistently, supplying electricity at the voltage and the frequency to which the system is connected. A characteristic of this device is its dependence on wind speed. Usable energy varies according to the third power of the speed of the blades. Current gain from speed is very much greater than the increase in such speed, but losses resulting from a reduction in speed are very severe. That means that economic use is only viable in restricted areas where winds frequently reach speeds of more than 15 km/h and, most importantly, where the wind speed is not very variable. Technology develops extremely fast: the 50-kW turbines with 15-m propellers in 1985 increased to 112-m propellers and 4,500 kW in 2000. Groups of turbines were introduced that, because they occupied large rural areas, are called ‘wind farms’. Since 1990, they have been installed at sea, where the wind tends to vary less than on land, providing a greater capacity factor, as well as the chance of occupying larger adjoining spaces than would be possible on land. Investments, on the other hand, are greater. Similarly to what usually occurs during the first years of using a new technology, investments are still high at the start of the 21st century and installations are mostly found in industrialized countries. In 2005, of the 59,000 MW installed throughout the world, less than 10 per cent were located in underdeveloped nations. Germany ranks first, followed by Spain, America, India and Denmark. Within the total installed capacity, Denmark has the largest proportion of wind energy use. In those countries the capacity factor varied from 18 per cent in India to 24 per cent in Denmark. In the Germany–Denmark integrated system, the great capacity and large size of thermal generating units allow the intense supply fluctuation, a characteristic of wind energy, to be easily absorbed. The higher wind concentration in these countries is due to the availability of resources for subsidizing installations that are not yet competitive and to the exhaustion of other renewable energies such as hydroelectric power. Integrating small units in the grid does not cause insurmountable problems despite their inconsistencies. The integration of large wind farms is another problem. An actual occurrence in the eastern region of Denmark is a relevant example. For a load that varies between 1,200 MW and 3,700 MW, and an installed capacity in conventional thermoelectric plants of 3,100 MW, the capacity of wind energy was 2,400 MW, generating only 20 per cent of the total.1 The tendency is to accept an operational maximum of 20 per cent wind

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capacity within a basically thermoelectric system. Despite the reduction in investment, wind generation is still a technology that saves fuel, but not the capital required for its installed capacity. Operationally, Brazil is the opposite of Germany. The integrated electricity system has barely enough thermal capacity to consolidate the power of hydroelectric plants, which fluctuates much less than wind energy. Except for some specific or isolated applications, wind energy interconnected with the general grid will have to compete for some time yet with still-viable, new hydroelectric plants. As a result of the joint efforts of public and private entities, an atlas of Brazil’s wind potential2 was prepared, based on information then available. This atlas highlights regions where winds have an average annual speed equal to or more than 7 m/s: • •

A narrow coastal strip, especially in the Northeast, and in the adjacent sea, as well as in the lakes of the state of Rio Grande do Sul. The central tableland by the São Francisco River, in the states of Bahia and Minas Gerais.

The territory meeting these conditions encompasses 70,000 km2, more than half of which are located in the northeast of the country. According to these assessments, the installable potential is 143,000 MW, with a possible capacity factor of 25–30 per cent, and annual generation to the order of 272 TWh. This is obviously a theoretic calculation that can only be partially carried out. It should, however, be compared with Brazil’s operational capacity of approximately 100,000 MW and a production of 420 TWh. Before the National Programme of Incentives to Alternative Sources of Energy (PROINFA), ten wind plants were in operation, with a total capacity of 28 MW. For March 2004, official calculations pointed to an economic value of R$204.35/MWh (corresponding to US$70.34/MWh) for installations with a capacity factor equal to or less than the minimum reference factor of 0.32.3

Solar energy for generating electricity The objective of photovoltaic solar energy is to capture solar radiation and convert it directly into electricity through photovoltaic cells. The original concept of the cell, which dates back to the middle of the 20th century, is based on the photovoltaic effect resulting from the physical properties which contain certain substances (semiconductors) that directionally release particles with an electric charge generated by the

New Energy, Small Hydro and Biomass-Fired Thermal Plants 163 incidence of luminous energy. The cell consists of a thin semiconductor sheet between two positive and negative conductive layers between which the flow of electricity is generated. Variations in materials and construction resulted in significant progress, always within the limitations of the original concept. The practical efficiency in the capture of luminous energy results from the length of daily exposure, which depends on the geographic location and the season. As a reference for size, it is assumed that the cell can generate an average of 30 W/m2 of electricity. The cells can be grouped in sets. A small installation of a 1-kW capacity for confined service requires a cell surface to the order of 33 m2, which gives an idea of the essentially practical problem of this type of energy, namely the large space occupied by any major installation, making it dependent on the availability of unused land. Furthermore, despite years of technological research, investment continues to be large. Total installed capacity is estimated at 1,700 MW in some industrialized countries: Japan, Germany and America. Until 1995, plates were only produced in those countries. Production began to increase as of 2000. In 2005, it reached 1,700 MW. This is an irreplaceable technology in some applications, such as the source of electricity in artificial satellites. It has leverage when competing with other ways of meeting the requirements of telecommunications equipment and the minimum needs of isolated communities for pumping water, providing light for schools and other similar demands, considering that such communities cannot easily be connected to an existing grid in an economic fashion. Aside from these specific uses, it does not compete with traditional electricity sources due to its high cost. Existing installations in Brazil, estimated at 15 MW, are equally divided between the telecommunication sector and programmes to supply isolated rural areas. Using solar energy by means of mirrors that concentrate radiation to generate high temperatures for conversion into electric power is entirely different. Development started with the construction of a parabolic mirror that reflected the flow of solar energy to a focal point where it reaches a high temperature. There followed a model consisting of a group of movable flat mirrors that concentrated the radiation into a collector placed on the top of a tower. The latter operates at temperatures to the order of 1,000°C and is gaining ground over the former. The fluid that runs through the collector generates steam for a turbogenerator. The fact that this equipment must be installed in locations with a high incidence of direct solar radiation restricts its use. Installed capacity is estimated at 500 MW but is still pending proof of viability.4 In principle, it does not arouse much interest in Brazil.

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Small hydro and small biomass thermal plants Small hydroelectric plants have been in existence in Brazil since the start of its electricity history. At the beginning of the 20th century they were rather popular due to their small size compatible with still emerging local markets, and because they did not require large-scale regulatory reservoirs. At this initial stage of the electric power sector, the size of the markets and the long-distance transmission costs led to a predominance of distributed generation. They were later given less consideration due to the large projects of plants with reservoirs for regulating the water flow, in sites available in Brazil under very favourable conditions. Now, its merit is again acknowledged and they are included in the group of alternative energies, together with small, biomass-fired thermoelectric plants. The small thermoelectric plants burning agricultural residues are traditional but use outdated technologies. Within the new energy scenario, their review is justified, based on current technologies that will result in greatly increased efficiency. This interest has led to the inclusion of two types of undertakings limited to a 30-MW capacity in the government’s incentive programme that will be discussed below.

The PROINFA programme The first initiative to foster investments in new and alternative energies took place in 2002–03 (Decree-Laws 10,439, 10,762 and 10,848). The projects chosen were wind-driven plants, small hydro plants and biomassfired thermoelectric plants. In PROINFA’s final form it was decided that ELETROBRÁS would contract for 3,000-MW installed capacity by June 2004, to be distributed equally among the three sources of energy under consideration. The government was responsible for stipulating the value of the rate for each source, tied to the average national rate for supply to endconsumers, with bonuses of respectively 50 per cent for biomass, 70 per cent for small hydroplants and 90 per cent for wind power, corresponding at that time to final prices of, respectively, R$135, R$162 and R$190/kWh (equivalent to US$43.00, US$52.00 and US$61.00). PROINFA is tied to the CDE, through which payment of supplementary credit was made for the difference between the arbitrated value and the amount received from ELETROBRÁS. To meet costs of the subsidies foreseen in the CDE, this account is funded with resources resulting from consumer’s rate charges.

New Energy, Small Hydro and Biomass-Fired Thermal Plants 165 The programme was divided into two stages. The first stage consisted of a call for the submission of projects based on these three sources. Some projects of Small Hydroelectric Plants (PCH) were contracted. Due to the small number of biomass projects approved, a second call was made to complete the quota. The lack of interest on the part of the sugar-mill owners caused a certain surprise. In the end, ELETROBRÁS contracted 3,242 MW, giving up the idea of achieving greater participation of biomass. The value paid for the energy acquired by ELETROBRÁS, to which were added administrative, financial and taxation costs, is divided among end-consumers proportionally to their respective consumption, excluding the low-income consumer class. Having attained the target of 3,000 MW, a second stage of the programme was foreseen aiming at a 10 per cent contribution to the country’s annual consumption of electric power, a target to be attained within 20 years. At the second stage, contracts will be signed by ELETROBRÁS for a period of 20 years, other regulations being more in accordance with market conditions. Faced with these and other uses for transitory funds, it was decided that none of these sources would be assigned funds from the CDE of a total value higher than 30 per cent of annual revenues, which are constantly growing, from 1.6 per cent of the operational income in 2003 to 2.1 per cent in 2005, when the total amounts of resources reached R$1.8 billion (equivalent to US$740 billion).5 BNDES reserved R$5.5 billion, equivalent to US$2.3 billion, for PROINFA projects for which it was difficult to raise loans. To make access easier, BNDES increased their funding limit from 70 per cent to 80 per cent, and amortization from 10 to 12 years. Besides the issues of financial capacity and guarantees, there also arose problems related to the supply of equipment and environmental licensing. ANEEL follows up regularly on the progress of PROINFA projects and publishes the corresponding results (Table 7.1), based on information from entrepreneurs. Table 7.1 Status of PROINFA projects in February 2008 Status Selected projects Under construction In operation

Small hydros (N) (MW)

(N)

Wind (MW)

63

1,191

54

1,423

27

701

41 16

816 304

15 6

123 218

1 19

10 551

Source: ANEEL, Acompanhamento de Expansão da Oferta de Geração, 2008

Biomass (N) (MW)

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Results six years after the programme was launched are not brilliant. Only 61 per cent of the projects are under construction or commercially active. Notable on the negative side are the wind plants that only account for 24 per cent. There are several explanations: insufficient rate, complexity of sale contracts, and unsolved problems of connection to the grid.

Solar energy for water heating Among the new energies with practical application in Brazil, the greatest progress has occurred in installations for capturing solar energy to produce heat for heating water, which requires temperatures below 100°C. The system is simple, consisting of a collecting panel built of aluminium and glass, wherein a small coil is installed, and of an insulated thermal reservoir. The water circulates by means of a thermosiphon in the most widely used smaller installations and through pumping in the larger ones. There has been significant progress since the 1990s, when large-scale commercial production of the collectors started, not only in regard to materials, but also in their manufacture in approximately 40 specialized factories. The collectors were standardized and labelled by the National Metrological Institute (INMETRO), where more than a hundred models with significant technical differences are registered. Technological development continues and further improvements are foreseen. The rate of performance of the early equipment, measured in monthly energy production (PME), stood between 51 kWh/month m2 and 61 kWh/month m2. By 2008, it had attained a PME of 77 kWh/month m2, and it is projected to reach 88 kWh/month m2. The solar heating system, when well designed and properly installed, can save up to 80 per cent of the energy (gas or electricity) necessary to heat water. It can contribute to a reduction in the consumption of electric power at peak hours, thereby allowing utilities to postpone or avoid the need for investments in the electric power system.6 A good example of savings achieved by means of the system is the specific case of the state of Minas Gerais, where most collectors were installed. A comparison between water heating options permits the evaluation of consumer costs over a ten-year period (Table 7.2). This shows that, over the long term, solar collectors are competitive in Brazil. Similarly to what occurs with other forms of new renewable energy, there is a clear saving in running costs, but a high initial investment effort is required for their installation. There already is a market, and the production of collectors in 2001 reached a peak of 500,000 m2. When the risk of an electricity shortage was

New Energy, Small Hydro and Biomass-Fired Thermal Plants 167 Table 7.2 Comparative expenditures for water heating (R$) Alternative

Electric Power

Gas Heater

Solar Panels

Total investment Expenses year 1–10 Net current valuea

35.00 432.00 2,198.54

1,000.00 180.00 1,772.94

1,400.00 86.40 1,651.01

a The net current value was estimated for conditions prevailing in Belo Horizonte and based on a tenyear period and a discount rate of 15 per cent. These net current values corresponded to US$1,011.00, US$815.00 and US$759.00 respectively

Source: Medeiros et al. Painéis Solares, 2006. Note prepared at the request of the author

eliminated, production retracted to a little over 300,000 m2, but an annual growth of 10 per cent is expected. By the end of 2005, approximately 2.8 million km2 of panels had been installed. Another 400,000 were added in 2006, bringing the total to almost 4 million km2, and to more than 6 million km2 in 2007. It is estimated that more than two million people benefit from solar technology, with approximately 200 million litres of bath water being heated daily. In Belo Horizonte, state of Minas Gerais, considered the capital of solar central heating, more than 950 buildings are equipped with medium and large systems, besides thousands of homes. On a world scale, in 2004 approximately 80 million m2 of solar panels had been installed, half of which were in China, followed by Europe and America. Total production is evaluated at 23,000 GWh.7 At an average cost of US$120/MWh, this represents an annual saving of almost US$3 billion. China is by far the largest annual producer of panels. To have some idea of the size of the possible substitution of electric power in Brazil by solar collectors, take a minimum PME of 50 kWh/ month m2 and their installation in one million homes. The annual saving of electricity would amount to 600 GWh, equivalent to 0.75 per cent of total household consumption, to the order of 80,000 GWh. The growth potential is therefore significant and depends on one hand on enlightening the public, and on the other on a satisfactory interest rate for an investment to be amortized in ten years. In the city of São Paulo, the installation of a solar system for heating water has been mandatory in new constructions since 2007. Other townships have also complied with the mandatory installation of solar panels in new constructions. INMETRO is evaluating the efficiency of solar panels and is labelling equipment manufactured in Brazil for the guidance of consumers.

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Fuel cells and the economic utilization of hydrogen A highlight in the use of new non-renewable energies is the development of the fuel cell, with a long history dating back to 1839, based on a galvanic battery. The term ‘fuel cell’ was coined in 1889, although the first functional cell was built in the 1930s. Fuel cells received major attention in the last decade of the 20th century.8 The fuel cell is an electrochemical device that allows chemical energy to be converted directly into electricity without the intervention of the Carnot thermodynamic cycle. Electricity is produced through the reaction of controlled oxidation, which puts a fuel, generally hydrogen, methanol or another hydrocarbon, into play.9 It consists of a stack of unitary cells that, in turn, are made up of two electrodes separated by an electrolyte and by so-called bipolar plates which support the set and distribute the flow of gases. In low-temperature cells, hydrogen is introduced in the anode and oxygen in the cathode. There, a hydrocarbon can be injected into the cathode to perform an internal reform. The electrochemical reactions in the electrodes produce the flow of electricity. This procedure creates heat that must be used in co-generation systems or dissipated. The cell is constantly supplied by the chemical energy and, contrary to a battery, the electrode material is not consumed while it produces energy. Several materials have been used as an electrolyte, attributing specific characteristics to the corresponding cells. The equipment is clean and silent since it has no movable parts. An important characteristic is that its high efficiency does not depend on its size. Natural gas rectifiers, propane, LPG and ethanol can be used as a source of hydrogen, while the air itself is the source of oxygen. Many models are currently being tested. The generating systems that use fuel cells continue to require large investments. However, considering the rapid progress of technology still underway, it is hoped that these cells will become competitive and can play an innovative role, both in stationary units of distributed generation and in units for supplying power to vehicles with electric traction, thus replacing the internal combustion engine. At the start of the 21st century, there is still no practical evidence of a commercial scale. Although the power provided to the cell by hydrogen is lower than the total power used to obtain it, the cell using hydrogen from natural gas is an attractive option from an environmental aspect since it emits less polluting gases and is silent. Cell development, as well as producing hydrogen, is the object of intensive research. Although the objectives are not the same, they are closely connected. The cell programme involves basically the construction of equipment according to known technological principles. The hydrogen programme, as a vector for energy such as electricity, encompasses the

New Energy, Small Hydro and Biomass-Fired Thermal Plants 169 investigation of production procedures from their primary source and the organization of transportation, storage and distribution under safe conditions. The US Department of Energy is enlisting its laboratories, universities and industries in the mission to overcome critical technical barriers in order to reach the stage of marketing fuel cells applicable to transportation and buildings. A similar movement is underway in other industrialized countries. In 2003, the US government launched a five-year programme called the ‘Hydrogen Fuel Initiative’, backed by funds amounting to US$1.2 billion, with a view to making hydrogen-powered vehicles available by 2015.10 Brazil announced the Brazilian Fuel Cell Programme, under the auspices of the MCT, in the sphere of the Centre for Strategic Studies and Management (CGEE), through which three networks for research and development were established. This programme includes more than 30 initiatives and expects them to be marketable for stationary use around 2010.11 At the same time, the MME is preparing a government programme for the production and use of hydrogen that is being defined since 2007, aiming at pinpointing a sequence of activities to be developed with a view to introducing hydrogen into the Brazilian energy matrix. This work, called the ‘Itinerary for Structuring the Hydrogen Economy in Brazil’, has the participation of a number of public and private institutions.12 The direct generation of electricity based on hydrogen and on oxygen taken from the air in fuel cells, with only water and heat as sub-products, arouses curiosity as to the possible coming of an era of a hydrogen economy. The greatest challenge is its economic production by means of water hydrolysis from renewable primary sources that, today, cannot compete with the natural-gas reform process.

Notes 1 Varming, Sören (2004) ‘Wind Energy’, in World Energy Council, Survey of Energy Resources, London: WEC 2 MME – Ministério de Minas e Energia (2001) Atlas do Potencial Eólico Brasileiro, Brasília 3 Tolmasquim, Mauricio (ed) (2005) Geração de Energia Elétrica no Brasil, Editora Interciência, Rio de Janeiro 4 Silvi, Cesare (2004) ‘Solar Energy’, in World Energy Council, Survey of Energy Resources, London: WEC 5 Price, Waterhouse, Coopers (2005) Impacto da Carga Tributária sobre o Setor Elétrico, Rio de Janeiro: Price, Waterhouse, Coopers

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6 Medeiros, Virgilio A., Figueiredo, Jose C. Ayres, Carvalho, André M. (from CEMIG) (2006) Painéis Solares. Note prepared at the request of the author 7 Silvi, idem. 8 Serra, E. et al. (2005) Células a Combustível, Rio de Janeiro: CEPEL 9 Conselho Mundial de Energia (Comitê Brasileiro) (2001) Dicionário de Terminologia Energética, Rio de Janeiro 10 US Department of Energy (2006) Hydrogen Fuel Initiative, Washington 11 Centro de Gestão de Estudos Estratégicos (2003) Programa Brasileiro de Células de Combustível, Brasília: CGEE 12 MME – Ministério de Minas e Energia (2005) Roteiro para Estruturação da Economia do Hidrogênio, Brasília

Chapter 8

Energy Efficiency and Environment

The concept of this chapter differs from those that precede it in that it is not in chronological order. It abandons the specific issue of energy to focus on the relationship between its use and harm to the environment, assuming that everyone is in favour of meeting the energy demand in a sustainable fashion with minimum damage to the environment. This would require, on the one hand, expanding the supply capacity of renewable sources and, on the other, restricting demand by modifying the habits of society and increasing production, transportation and energy-consumption efficiency through innovative technologies and improvement of traditional installations and equipment. There are several solutions for attaining these objectives, but they also involve several contradictions; therefore, a comparison of benefits and harm is needed, which is not always easy to quantify. Especially difficult is reconciling all the above with a minimum cost to consumers. To begin with, the chapter contains a review of the environmental issue, subsequently dealing with its relationship with energy and examining the role of energy efficiency.

Main environmental concern Since the 1980s, when the environment became a major issue, concern has never stopped increasing, and studies aimed at a better characterization of specific problems in the search for possible solutions have been intensified. Awareness of the seriousness of damage to the environment has led to a mobilization of public opinion, chiefly in industrialized countries, against deforestation, inappropriate use of soil and hydro resources, decline of biodiversity and, above all, the emission of greenhouse gases, which became the background for discussions concerning the relationship between energy and the environment. In the meantime, in the poorer parts of the world, concern for the environment has become predominantly a problem of urban pollution, of the air and the availability and quality of water. In addition, in Brazil, as in some other forested countries, deforestation is a concern. The prospect of continued deterioration has led to renewed

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efforts of international co-operation and the intensification of concrete actions in most nations. It is surprising that discussions have not given much attention to the fact that harm to nature is a consequence of all human undertakings aimed at producing goods and services, especially energy. Nevertheless, in a practical appreciation of generally large projects involving energy, three complex issues emerge: • •

•

There are usually several options for attaining a certain target whose pros and cons should be compared. Projects of public interest, even those with a wide scope, cause material or moral damage to specific groups of people not necessarily benefited by the project. It is difficult to weigh and legally draw a line between the interests of the public and the individual.

In Brazil, an analysis of opinions on various environmental problems points more to agreement than to controversy. There are, on the one hand, issues acknowledged to be important on which opinions agree, but whose solution in the majority of cases is hampered by a lack of information regarding the environment. Also, the teams of experts are insufficiently trained to deal properly with these issues, both those responsible for the projects and the staff of public agencies concerned with licensing and controlling potentially polluting, productive activities. In a country like Brazil, with a medium income level, there is also a shortage of funding for the necessary actions to be taken. On the other hand, there are the essentially controversial issues. Highlights among controversies regarding the production of energy in Brazil are those that refer to the merit of the utilization of major hydro energy resources that involve changes in the course of rivers, the construction of reservoirs and the relocation of populations. Also relevant are those regarding the worldwide disagreement over nuclear power, the onecrop sugar cane and soybean farms, and extensive cattle raising with its impact on the extent of deforestation. Finally, there are still fairly major discussions on solutions originating in developed countries that are not immediately applicable to the Brazilian scenario or, at least, not yet opportune, such as certain new technologies that are still too costly for a country so far insufficiently developed. In Brazil these issues are clearly observed in the Amazon region, due to its still sparse settlements intermingled with large forests that are invaded and destroyed, and in other regions of the country where urban agglomerations are located and the native forest has long since ceased to exist. This difference, already referred to in Chapter

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6, is not explicit in the majority of the documents relating to the impacts on the environment and should be tabled when environmental problems are discussed.

Climate change At the United Nations Conference on the Environment and Development, held in Rio de Janeiro in 1992, the United Nations Framework Convention on Climate Change was established and opened to adhesion; it went into effect in 1994. Understandings concerning possible directives for measures to be taken over the long term continued. Among others, steps for curbing emissions that pollute the environment were proposed. No one could imagine at that time how difficult it would be for the interested parties to reach an understanding, both on a level of individual countries and on a worldwide scale. Convention parties held successive conferences, in Berlin in 1995 and in Geneva in 1996, without much progress in reaching an understanding. Brazil played a key role, proposing practical measures in the form of a Fund for Clean Development. In Japan in 1997, following lengthy and acrimonious debates, the Kyoto Protocol was signed, containing targets for restricting the emission of six greenhouse gases, differentiated by groups of countries and the adoption, in another format, of Brazil’s original proposal, which became the Clean Development Mechanism (CDM). The implementation of the Kyoto Protocol was the object of subsequent conferences: in Buenos Aires in 1998, in Bonn in 1999, and in the Hague in 2000, where an impasse between the European and US positions resulted in the USA refusing to ratify the Protocol. Their refusal was important, because the entry into force of this crucial agreement depended on its ratification by at least 55 Parties to the Framework Convention of the United Nations on Climate Change and by the Parties of Annex 1, representing 55 per cent of equivalent carbon dioxide emissions by these Parties in 1990. The absence of the USA, the largest emitter of greenhouse gases worldwide, gave Russia, successor to the Soviet Union, major bargaining power, as it ranked second according to these statistics. Russia only ratified the Protocol eight years later, in 2004. The requirements for putting it into effect were now met since 124 nations, responsible for a total of 62 per cent of emissions, were in favour. The USA and Australia, responsible for 36 per cent, were then not yet a part of it, but China was included, although it was not mentioned in Annex 1. Australia finally ratified the Protocol in December 2007.

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With the adherence of Russia, the Protocol came into force in February 2005; however, many countries and organizations had already taken measures within the spirit of the Protocol prior to that date. The Protocol created mechanisms for economic measures to achieve its objectives. Compensations were foreseen for polluting entities and others that could counterbalance, in one way or another, the actions of the former. Trading rights were established and, by means of the already mentioned CDM, companies in industrialized nations could invest in projects to reduce or capture emissions in developing countries, thereby obtaining credit certificates for usable emissions to compensate part of the respective target for reduction of emissions. A second mechanism, Joint Implementation, similar to the CDM, allowed credit operations between companies in nations included in Annex 1. Among the obligations of the Framework Convention was member nations preparing a National Inventory of Greenhouse Gas Emissions and keeping it up to date. Brazil submitted the respective Communication.1 A great effort to gather and analyse information had been made in order to meet this requirement. Carbon dioxide emissions were evaluated at 1,030,000 tons, including 237,000 originating in the energy–fossil fuel segment, 17,000 in industrial procedures, and 776,000 resulting from changes in the use of land and forests. This document also mentions that forest plantations in Brazil counterbalanced these emissions in the proportion of 6 per cent.

Reports of Intergovernmental Panel on Climate Change The work of the Intergovernmental Panel on Climate Change (IPCC), which was formed in 1988 on the initiative of the World Meteorological Organization (WMO), and the United Nations Environment Programme (UNEP), was carried out in parallel with international meetings. The results of this work are announced periodically; the third, released in 2001, was based on studies undertaken over many years, and finally organized according to nine issues raised by governments of the participating nations and approved by the IPCC at a meeting held in Costa Rica in 1999. There is no room here to transcribe the entire document.2 The key issue refers to the contribution that scientific, technical and social-economic evaluations can provide to determine ‘dangerous anthropogenic interference’ in the climate. An integrated view of climate change considers the dynamics of a cycle that involves: emission and concentration of gases and aerosols; climate changes, due to the rise in earth and

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sea-level temperatures; changes in rainfall, droughts and floods; impact on natural and human systems, water and food, as well as on ecosystems and biodiversity, human occupations and health. An ever-cautious, step-by-step analysis takes uncertainties and risks into account and leads to important conclusions, not all of them quantified. It dispels doubts and reduces controversies in subjects that have caused a number of individual and collective demonstrations ranging from the highest scientific level to simple political populism. These analyses are impartial. Six years later, in February 2007, the fourth report was issued, incorporating the results of work carried out within this time interval.3 Its presentation, even in a summarized form, contains extremely complex details. I venture to translate into common language the principal conclusions which, in general terms, substantiate those of 2001: 1 Global atmospheric concentrations of carbon dioxide, methane and nitrogen oxide increased significantly after 1750 as a result of human activity and today exceed, by a high margin, the pre-industrial values (established by ice core samples). The increase in the concentration of carbon dioxide is mainly due to the use of fossil fuels and to changes in the use of the soil, while the increases in methane and nitrogen oxide are principally due to agricultural activities. 2 There is no doubt that the climate is getting warmer, evidenced by the observed increases in average air and sea temperatures, the melting of snow and ice and the increase in sea level. 3 On a continental, regional and ocean-basins scale, numerous changes in the climate have been observed over the long term. They include changes in Arctic temperatures and ice, generalized changes in rainfall, in the salinity of oceans and in wind systems, besides climate extremes, including droughts, high precipitation, heat waves and the intensity of tropical cyclones. A table was submitted, summing up the phenomena observed and the conclusions reached, with an indication of their reliability.

Clean Development Mechanism Within the specific sphere of matters pertinent to the Climate Convention, Brazil was the first nation to establish the entity included in the CDM, namely the Designated National Authority, to coordinate actions in this sphere. The Inter-ministerial Commission of Global Climate Change was

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appointed with the ‘objective of articulating government actions resulting from the United Nations Framework Convention on Climate Change’. This Commission congregates all ministries under the presidency of the Minister of Science and Technology. Included among its attributions is the analysis of projects that result in a reduction of emissions and are eligible for the MDL. In March 2008, there were 3,100 projects worldwide undergoing a process of validation. Already registered at the CDM Executive Council were 891 projects, among which were, 160 from China and 121 from Brazil. The reduction of emissions attained by Brazilian projects during the first credit-obtaining period totalled 144 million tons of carbon dioxide, equal to 10 per cent of the world total. Mainly responsible for this reduction were the electricity-generating sector (two-thirds), pig farming and garbage dumps, reducing, respectively, carbon dioxide and methane gas.

Water A number of international meetings had been held prior to the 1992 United Nations Conference to discuss the availability and the quality of water for human use. The International Water Resources Association (IWRA), founded in 1972 by professionals in this area, held successive World Congresses at three-year intervals. The suggestion to form a World Water Council, which had arisen at the Cairo Congress in 1991, was consolidated at this Conference. The organization, open to adherence by entities concerned with water, was concluded in 1996 and headquartered in Marseilles. The First World Water Forum was held immediately thereafter, in Marrakech (1977), and had great repercussions. There followed a series of events: The Hague (2000), Kyoto (2003) and Mexico (2006). Continuity and intensified studies led to considerable progress in understanding the earth’s water cycle and the disturbances it undergoes. It is understood that water is scarce and that this causes critical situations in specific regions where per capita availability is decreasing. The quality of drinking water is deteriorating, mainly due to insufficient basic sanitation in poorer regions. Worldwide, however, requirements for domestic, presumably potable, water consumption amount to only 10 per cent of the total, 20 per cent being channelled to industry and 66 per cent being used for irrigation. Losses due to evaporation in reservoirs appear to be 4 per cent. In the opinion of experts, the shortage of water in critical regions is aggravated by poor administration.

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There are two types of electric power generation in the water cycle: one in thermoelectric plants, where water vapour is produced during the process and released into the atmosphere; the other in the use of energy resulting from waterfalls and the construction of reservoirs to regulate the river flow. This activity is not neutral; it affects the quality of the water, depending on the nature of the watercourse and its utilization. Within the sphere of the United Nations, activities related to water are concentrated under UNESCO, and focus mainly on the quantity and quality of its supply for direct human consumption. It includes the Institute for Water Education, the World Water Assessment Programme and the International Hydrological Programme. The situation still continues to be discouraging, however, directly affecting billions of people.

The bases of Brazil’s institutional framework Until 1981, the environmental issue in Brazil was limited to the creation of the Special Environmental Secretariat (SEMA) within the sphere of the federal government, which carried out pioneer work. Later, it gained ministerial status in various forms of organization and scope, until it became the Ministry of the Environment. The 1988 Constitution dealt for the first time explicitly with the environment in general terms in Articles 23 and 24, and in more detail in Article 225: Art. 23. The Union, the States, the Federal District and the Municipalities are jointly responsible for: VI – protect the environment and combat pollution in all its forms; Art. 24. The Federal Government, the States and the Federal District are responsible for jointly legislating on: VI – forests, hunting and fishing, fauna, nature conservation, defence of the soil and of natural resources, protection of the environment and pollution control; VIII – responsibility for harm to the environment and to the consumer. These two provisions of joint authority caused the federal and state governments considerable problems in attempts to implement the system: Art. 225. Everyone has the right to an ecologically balanced environment, an asset of common use by the population and essential to a healthy quality of life, attributing to the government and the

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community the duty to defend and preserve it for present and future generations: § 1 to ensure the effectiveness of this right, the Public Administration must: IV – demand, according to the terms of the law, that there be undertaken a prior study of the impact on the environment, to be made public, for the installation of any project or activity with a potential to cause significant deterioration of the environment. The Constitution created simpler rules in the sphere of water and its relationship to energy: Art. 22. It is the exclusive responsibility of the Federal Government to legislate on: IV – water, energy, information technology, telecommunications and radio broadcasting. Conditions regarding productive activities within this framework were also expanded, with specific reference to the issue of Native Indians, which is of particular importance in the Amazon region: Art. 231. Native Indians have the acknowledged right to their social organization, customs, languages, beliefs and traditions, as well as to the territories which they traditionally inhabit, it being the responsibility of the federal government to delineate them, protect them, and oblige everyone to respect their possessions. § 3 – In Indian territories, the use of hydro resources, including energy potentials and mining of mineral resources, may only be undertaken with the authorization of the National Congress, after listening to the communities affected, and assuring their share in the profits of the exploitation within the terms of the law. The complexity of this set of norms, involving the environment, water and energy and Indian territory, became evident in practice, especially insofar as licences for hydroelectric projects were concerned. Furthermore, the scenario involved a new and original concept of the Ministério Público, an institution in existence since the 1988 Constitution which has no equivalent in English-speaking countries. It could be called the ‘Federal Office of Advocates-General’. It is an independent office (funded directly by the federal budget) that exercises a function essential to the legal system (Brazilian Constitution, Articles 127–130). It is in charge of upholding the juridical order and the interests of society as a whole. The office is directly

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responsible for holding civil enquiries and promoting a public action for the protection of the environment, including relevant rights and social interests. Difficulties can arise from the action of members of this institution, the procuradores, a title that could be translated as ‘advocates-general’, as a result of the independence that was attributed to them (Article 127) as a functional institutional principle. If, on the one hand, this independence in relation to the government is justified in theory and has proved to be efficient in many instances and, on the other, in the domain of environment and energy, its application in practice has resulted in a variety of individual interpretations of both the legislation and the assessment of projects and technical reports referred to in Article 225 of the Constitution. Experience has shown that advocatesgeneral frequently have not given sufficient thought to comparing local damage and the overall benefits of the projects, causing problems in the implementation of initiatives of the greatest national interest, generating a scenario of legal insecurity for entrepreneurs and losses for the community over the long term. In imposing difficulties, justified or otherwise, to the productive projects, especially those of infrastructure, the advocates-general have been helped by a number of non-profit organizations, NGOs dedicated to environmental issues and to the Native Indian population.

Building the environment’s institutional framework The National Council on Environment (CONAMA) was created to carry out constitutional provisions concerning the environment, both as an advisory and deliberative body, using the IBAMA as its executive branch. Regulations introduced by means of CONAMA resolutions were attributed the power of law, their highlight being the legal definition of environmental impact as any alteration to the physical, chemical and biological properties of the environment caused by any substance or energy resulting from human activities that directly or indirectly affects: health, safety and the well-being of the population, social and economic activities, animals and vegetation, aesthetic and sanitary conditions of the environment, and the quality of environmental resources. (Resolution 1 of 1986)

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The definitions of the Study of Environmental Impact (EIA) and its respective report (RIMA), on which the licence of activities that modify the environment depends, result therefrom: an analysis of the project’s impact on the environment and its alternatives through identification, a forecast of the magnitude and interpretation of the importance of probable impacts, detailing the direct and indirect positive and negative impacts (benefit and harm), whether immediate, or over the medium and long-term, temporary or permanent, as well as their degree of reversibility, their cumulative and synergic properties, distribution of the social onus and benefits. An environmental compensation was introduced for projects with a significant environmental impact, which includes two controversial items: one stipulates only a minimum of 0.5 per cent of the total cost of the project, leaving the entrepreneur at the mercy of the licensing authority’s criteria as to the true value of compensation; and the second does not establish a link between the compensation and the measures adopted by the entrepreneur to mitigate the noxious effects of the project. The complementary regulation was clearly differentiated among the states in line with the respective level of development and the more important regional problems. In Brazil, an institutional framework was concluded by founding the National Water Agency, dealt with below.

National Water Agency In Brazil, concern with water preceded a comprehensive environmental vision. The former Geological Service, created on the lines of the US Geological Survey, included a Water Division where the first river-flow measurements in Brazil were carried out. Later this service changed, due to successive modifications, until it became the National Department of Water and Electric Power. The Water Code (Decree 26,234) dates back to that time. Although the Code covers considerable ground, the water issue in the federal administration remained in principle linked to its use for generating hydroelectric power. Water for supplying the large urban centres was the responsibility of state departments or municipal administration. In view of the growing awareness that water would become a scarce commodity in the 21st century, the administration of water gained importance, justifying the introduction of a National Policy for Hydro Resources

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and the forming of its own specialized structure under the Ministry of the Environment, which encompassed the Secretariat of Hydro Resources and the National Council for Hydro Resources. Next, the National Water Agency (ANA) was founded and given a mission to regulate the use of water originating from rivers and lakes under the jurisdiction of the federal government, ensuring quantity and quality for multiple uses, according to directives of the National Management of Hydro Resources System, and aiming at rational planning of water use with the participation of municipal and state governments, as well as civil society (Decree-Law 9,984/2000). The National Water Resources Agency (ANA) proceeded to coordinate the already existing grid of hydrometric stations with a view to their maintenance, under the jurisdiction of several federal public administration entities. The definition of a hydrographical basin as a territorial unit for the implementation of the Hydro Resources Policy was consolidated by the corresponding appointment of Basin Committees. These were in charge of the preliminary work on Hydro Resources Plans. The organization of the Agency was jeopardized by the uncertainty of the budgets on which the proposed programmes were based. Nevertheless, significant targets were attained. In 2000, procedures for granting the right to the use of water were established. A register of users was introduced, which made it possible to start charging for its use. The network of fluviometric and meteorological stations was coordinated among the multiple agencies that operated them.

Environmental licensing The specialized State Secretariats are in charge of most environmental licensing. IBAMA only concentrates its attention on large projects, especially those with an impact on more than one state, based on norms issued by CONAMA. This system frequently causes authority conflicts arising from concomitant actions. Licensing applications submitted together with the respective RIMA are analysed by the authorized environmental agency. A summarized form of the RIMA must be made known to the interested parties. Depending on the case, it could become the object of a Public Hearing. Licensing is required for each of the three stages of the undertaking: design, installation and operation. The latter sometimes has to be renewed periodically. More detailed norms and definitions as to environmental licensing were the object of a later CONAMA Resolution (Decree 88,351, regulating Law 6,938 and CONAMA Resolution 237).

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Entrepreneurs, as well as the government and the NGOs involved in the environmental problem, have failed to clearly differentiate between the issue of the environment and the physical and moral damage to third parties affected by the project under discussion. Yet these are aspects that demand as much differentiated treatment as possible. On the one hand is a comparison between the harm to the environment and collective benefits on a regional or national scale to find the best solution to meet the objective in mind; on the other, the benefits that the project provides for the collective and the harm to the people who are negatively affected must be compared in order to arrive at the required compensations. Over the 20 years that followed the first federal legislation on the environment, the system was perfected by improved technical skills within the environmental agencies and non-governmental organizations, as well as designers and promoters of projects subject to prior licensing. Despite this progress, the quality of many of the studies submitted is still poor.

Hydroelectric plants and the environment Environmental studies were already being carried out long before the controversy involving the construction of major hydroelectric plants arose. Between 1986 and 1988, ELETROBRÁS, with the collaboration of an Environmental Advisory Committee consisting of personalities unconnected with companies in the electric power sector, assisted ELETROBRÁS in such studies. Under debate was the extension of the concept ‘environmental costs’ to include ‘social–environmental costs’. At the time, as a member of this Committee, I submitted my opinion contrary to the non-segregation of environmental costs from those referring to social problems. This issue would later take on more importance in the licensing process, but, unfortunately, discussions ended by sanctioning the social– environmental concept in our current vocabulary. Environmental licensing, especially in the case of large hydroelectric power generating projects, started when the traditional inventory studies did not meet the needs of the new environmental vision. They increasingly require an integrated assessment of hydrographical basins. During the long history of successful Brazilian hydroelectric projects, two negative events occurred, allowing generalized simplistic feelings to emerge against the construction of hydroelectric plants. The first was at the Sobradinho plant on the São Francisco River, where social harm resulted from a badly administered relocation of the population displaced by the construction of the lake; the second was the construction of the Balbina plant, close to Manaus in the state of Amazonas, proved wrong

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from an environmental point of view since the harm done by the extensive flooded area was disproportionate to the small benefit the power generated. Finally, there are issues that are not connected to pertinent legal definitions, as well as others of a legal nature, that do not refer to the environmental legislation and are usually caused by federal and state advocates-general, and representatives of specific social groups. Yet the definitions for the issue of licenses are clearly stated in the CONAMA Resolution: Environmental Licence: an administrative act by means of which the authorized environmental agency establishes conditions, restrictions and measures of environmental control that individual entrepreneurs and corporations must comply with to situate, install, expand and operate projects or activities that make use of environmental resources considered polluters or potential polluters, or those which can, in any manner, degrade the environment. Notwithstanding the concentrated efforts of ELETROBRÁS, which has been giving ever increasing importance to the environmental impacts of projects and already has much experience in the preparation of RIMAs and the corresponding decisions, problems are frequently caused by the lack of clear criteria adopted or by the still insufficient knowledge on the part of the interested parties and/or authorities as to the nature of the issues to be considered. It also often happens that the options considered are not included in the preparation of a project designed to meet a specific objective, or that the benefits that result from it are not put in juxtaposition with the environmental and social harm they cause. Especially, the lack of clarity of social aspects leads to legal proceedings, with the intervention of advocates-general who have not been trained to deal with specific problems and alternatives in the energy and ecology sphere.

Licensing of hydroelectric plants Former discussions on the impact of hydroelectric projects were intensified due to the emergence of large new utilizations in the Amazon region, especially of the Porteira waterfall, which failed to go ahead, and of the Belo Monte on the Xingu River, which has been the object of a number of alternative projects in an effort to reduce the flooded area. A large meeting of parties interested in the Xingu River project was held in Altamira in 1989. Present at the meeting was the director of ELETRONORTE, who was the target of an unusual protest by an Indian

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woman who, to demonstrate her willingness to fight the project, brandished a cutting device close to the engineer’s face. In the 1990s, another concept for the utilization of power from the Xingu River significantly reduced the flooded area to 1,200 km2, being then given the name of Belo Monte, with a capacity of 11,000 MW. As a result of financial difficulties and the in-depth reorganization of the electric power sector, the project was slow in going ahead. Preparatory work was taken up again in 2000 by contracting environmental studies. In its development, the project became something of a paradigm of the difficulty in conciliating national interests, represented by ELETRONORTE (not entirely blameless), with the various groups of private interests, some legitimate and others less so. Among the surprising turn of events in the process, the highlight was the civil suit filed by an advocate-general of the state of Pará against ELETRONORTE in an effort to stop the preparation of the EIA study for the project. Later in this process, an engineer of ELETRONORTE, in another attempt to explain the project during a public hearing, was submitted to physical aggression. Notwithstanding its vicissitudes, licensing of the Belo Monte project was expected for late 2008, allowing a possible auction in 2009. Meanwhile, the two Madeira projects (Santo Antonio and Jirau, with 3,300 MW each) were completed and auctioned in 2008. In less dramatic ways environmental issues of another nature also arose in licensing projects for hydroelectric plants. They were related to the emission of greenhouse gases caused by the decomposition of biomass that already existed or was growing in the respective reservoirs. Studies undertaken in the USA showed gas emission levels (99 per cent carbon dioxide and 1 per cent methane) corresponding to 10,000 tons/TWh in plants there. In the absence of more information, it was felt that this level could be four times greater in tropical regions. Nor do these estimates consider, also for lack of measurements, the counterpart of the seizure of carbon that could be substantial. If these levels of emissions are valid, the production of hydroelectric power in a plant with a reservoir would emit ten times less greenhouse gases than the thermoelectric power plants that may replace them in the case of gas-fired plants with a combined cycle, and 25 times less than in the case of coal-fired plants.4 The difficulties encountered in licensing hydroelectric plants have their origin in environmental questions and legitimate social claims, as well as in artificially created controversies. Such controversies derive mostly from uninformed or unethical actions initiated by NGOs. As a result of these licensing difficulties the hydro projects suffered systematic delays. Due to these delays, energy authorities were worried and

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induced offers of a number of thermal plants at the seventh auction of energy to be supplied in 2013. There was very little questioning about the entry of heavy oil into the energy matrix by the usual contesters. The strange outcome of this process is that available renewable energy (hydro) is being replaced by fossil fuels (fuel oil). Once again there is an obvious need for a comparison between alternatives to achieve the same objective. In the relationship between the management of hydro resources and the generation of hydroelectric power, there is also a need for coordination between the ANA under the Ministry of Environment (MMA) and the National Systems Operator under the MME. The multiple use of water is the responsibility of the former, and the optimization of the integrated electric power system is the responsibility of the latter. It is also possible that the management of water by basin will prevail over the concept of optimization, on a national scale, of the hydro resources for the purpose of generating energy. PCH are a case apart, characterized in the sphere of international entities as those driven by natural flow of small streams with a capacity of less than 30 MW. In Brazil, simplified procedures of authorization issued for the use of these potentials and the construction of the corresponding plants are assured.

Efficiency in energy production and use Over the medium term, conservation is the most important source of future energy. It is understood to be the sum of the measures taken to contain the waste of energy and materials. Conservation concepts and energy efficiency are closely related and encompass the construction and use of buildings, the operation of machinery and utensils, the design and the manufacture of equipment for the production and transformation of energy, and the actual machinery and installations, as well as the equipment in which energy is utilized. The result of measures in the search for energy efficiency can be expressed in physical and in economic terms, which do not always coincide. When drawing up efficiency programmes, there are instances of damage to the environment of such importance that require technically efficient solutions, regardless of the cost. In general, however, priority must be given to technical measures that are also economically favourable and, fortunately, there are many opportunities in this category. Despite the difficulties encountered in the quantitative assessment of the margins of a possible reduction in energy consumption in the extraction or

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capturing primary forms of energy to its final consumption, all the projects that are submitted with this objective in mind show surprisingly good results. Spending double or triple of what would, theoretically, be technically possible is a common occurrence. The World Energy Council have published an assessment of current energy conservation programmes in 76 countries.5 They conclude that the efforts made over a period of 15 years, between 1990 and 2006, provided in 2006 energy savings of 4.4 billion TOE, corresponding to a 30 per cent reduction in consumption in relation to the potential demand in that year. Five studies were analysed in greater depth, respectively: mandatory energy audits; Energy Conservation Services Companies (ESCOs); energy incentives for motor cars; efficiency obligations for energy utilities; and a package of measures for solar water heaters. This document does not, however, predict the total possible results of a conservation policy. However, when the IEA forecasted the future world demand for energy, it showed a difference between the projection under reference and a conservationist projection of 4 per cent for 2015 and 10 per cent for 2030.6 Let us now look at the practical side. The paths to follow in the search of efficiency are technically and economically simpler in the sphere of energy-producing companies that deal with procedures within their own specialty, involving waste at thermoelectric plants and losses in transmission and distribution. The older large hydroelectric plants in Brazil may be the object of significant re-powering projects. As a result of their business orientation, large industries are accustomed to economic calculations and have been in the vanguard of innovations and improvements, especially in market economies and/or in industries where the cost of energy is a significant item in the total cost of production. Competition forces others to follow in their footsteps. Markets where energy prices are controlled by the public administration and artificially kept at low levels, on the contrary, do not encourage the conservation of energy, and this is what happened in Brazil’s electric power sector between 1975 and 1996. The problem is more complex with regard to transportation. Each means of transportation provides a service different from that of the others and, therefore, they only partially compete amongst themselves. In systems that supply public transportation, the most frequent characteristic is a monopoly requiring either the direct presence of the state or of regulating agencies. In this case, it competes with privately-owned cars as well as, possibly, with other means of transport such as buses and the underground. The transportation of cargo is closer to market economy conditions. In all these circumstances, there is a fundamental issue of cost

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allocation that, unfortunately, does not allow simple solutions. The user of motor vehicles benefits from the infrastructure built with funds from society as a whole by means of taxes, and pays a specific tax for a licence to transit and consume fuel, as well as motorway tolls that may or may not be fair. The public railway and underground transportation systems bear the burden of all these costs and receive subsidies from the public budget whose appropriateness is also difficult to assess. For example, knowing that rail travel consumes less energy per passenger per kilometre than road travel is of little use because in individual decisions the autonomy and freedom of movement provided by a car is likely to prevail and is not quantified by the user; but this information is essential for possible transportation coordination and planning. The use of energy in commercial and residential buildings involves two stages: construction, including production of the construction materials; and their lifespan. The production of materials is part of the industrial sector and conforms to it. In civil construction, more than in any other productive activity, there is an intrinsic contradiction between current and future costs resulting from architectural concepts and the characteristics of the materials employed. The choice between two heat- or light-insulating materials based on current market prices may, for example, result in greater future energy consumption by the tenant of the building, and is therefore a cost that, had it been originally assessed, may have resulted in choosing the other material. Designing a glass wall for an office may, depending on its location in relation to the sun, cause an excessive consumption of energy for cooling the air and, if associated to venetian blinds or curtains that block the entry of light, may require artificial illumination during the day, wasting freely available sunlight, as well as leading to more electricity consumption and a greater demand for cooling the environment. This difficulty in quantitatively assessing energy savings in buildings is exacerbated by the fact that, in general, consumption and costs for comparing the initial value with operational costs originate from different people, namely the builder and the owner of the property. Yet, according to the IEA, the portion of total primary energy consumption attributed to buildings is to the order of 50 per cent. Much of this energy could be saved by applying more efficient technologies.7

Initiatives for promoting efficiency in Brazil There were many governmental and private initiatives in Brazil for promoting energy efficiency. PROCEL was founded in 1985 under ELETROBRÁS, and PETROBRAS introduced the National Programme

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for the Rationalization of the Use of Oil and Gas Products (CONPET) in 1991. The National Institute of Energy Efficiency (INEE) was organized as a private entity in 1992, and there are others that were introduced later. In a wider sense, and at the time of the peak of the 2001 electric power crisis, Congress approved a National Policy on Conservation and the Rational Use of Energy. This programme included establishing minimum energy efficiency indices to be imposed on equipment sold in Brazil and on the construction of buildings (Law 10,295 and Decree 4,059). It had the merit of motivating steps for taking the necessary constructive measures. From this law resulted a fundamental operation of labelling equipment, conducted under the auspices of PROCEL and CONPET. The programme is oriented to domestic savings and its implementation is based on certification by INMETRO, regarding the energy efficiency of appliances. Its main purpose is to pass information on to the consumer and interest them in the performance of electric domestic appliances from the point of view of energy conservation. The programme involves manufacturers and their respective associations. Several companies have dedicated themselves to the task and to improving their products. Twenty-two programmes were developed with the voluntary assistance of manufacturers, including those relating to home appliances, electric showers, electric and gas heaters, incandescent bulbs, efficient bulbs and electromagnetic reactors for fluorescent bulbs. In the industrial field, only triphasic motors were considered. Finally, modern solar panels and thermal solar reservoirs were included. So far, however, no estimate of their global effect exists. Taking another line of action, IBAMA introduced a Programme to Control Air Pollution by Automotive Vehicles (PROCONVE) in 1986, establishing technological requirements. With the co-operation of motorcar assembly companies, domestically produced vehicles were submitted to standardized emission tests with increasingly strict criteria. Results were significant regarding light vehicles consuming petrol-ethanol, as will be seen later in this chapter.

Efficient use of electricity PROCEL was created as an official programme to promote the efficient use of electricity and the reduction of waste, making funds available for the necessary investments. Activities developed continuously, although not always at the same pace, and included quantitative assessments in a number of opportunities as well as the potential for the conservation of electric power in Brazil, taking into account separately the correctable wastes

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in the electric power sector itself and savings from the point of view of consumers. The evaluation of waste and losses in the electric power sector pointed in 2004 to 16 per cent of the total available energy at the generating plants. This total included intrinsic technical losses resulting from the energy dissipated in the transmission and distribution of electric power, and avoidable commercial waste such as the lack of electric metres, criminal sidetracking and theft. In industrialized nations the rate of losses amounts to only half of that figure. It is important, however, to keep in mind the vast transmission lines in Brazil and the location of the hydroelectric plants far from markets in mind, both of which cause losses to rise. For a hypothetical total demand of 800 million MWh in 2020, a continuous electricity conservation programme based on a potential 8 per cent could theoretically result in a saving of 64 million MWh, corresponding to a capacity of 13,000 MW, with a capacity factor of 0.56. It is not possible to forecast what part of this total is politically and economically achievable. A PROCEL energy-saving stamp was introduced as a promotional device and is awarded annually. It is applied to equipment checked for the best indices of energy efficiency in their category. This stamp has been awarded to lamp bulbs, reactors for fluorescent and sodium vapour bulbs, high-efficiency engines and a varied range of home appliances. The stamp is bestowed on the basis of technical criteria established by a mixed commission that, besides PROCEL and INMETRO, includes a number of other entities, institutes and class organizations interested in the process. In 2007, the stamp was granted to 21 categories of products, mostly industrial motors, household equipment and home appliances. Depending on their type, the proportion of the stamped products varied between 40 per cent and 70 per cent, except for lamps and solar waterheating panels, where it was only 20 per cent. By means of the PROCEL programme, a network of 22 testing laboratories was built in universities and research centres with the support of the World Bank, with funds provided by the Global Environment Facility (GEF). A National Prize for Conservation and Rational Use of Electric Power was also introduced, to be awarded annually to various categories of users, with the support of entities representing each class. The purpose of this prize was to encourage segments of society to implement measures that would reduce the consumption of electric power, as well as demand at peak times. According to ELETROBRÁS, highly significant efficiency results were obtained (Table 8.1), but these should be accepted with caution, as it is very difficult to correlate the improvements obtained with the investments

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Table 8.1 Results from PROCEL initiatives Years

1986–2002

625 Investments (R$ million)a Energy saving (GWh/year) 15,405 Equivalent plant (MW)b 4,180 Demand reduction (MW) 3,597 Savings on investment (R$ million) 8,646

2003

2004

2005

2006

41 1,817 453 436 2,007

94 2,373 622 569 2,492

98 2,158 585 518 1,786

113 2,845 772 682 2,231

Note: The savings converted to US$ millions were: 652 in 2002; 850 in 2003; 735 in 2004; and 1,083 in 2005. aIncludes resources from the Global Reversion Reserve and complemented by the GEF, from the World Bank. Does not include expenditures with ELETROBRÁS staff. bA 0.56-capacity factor and a 15 per cent loss were adopted Source: ELETROBRÁS, PROCEL, ‘Apresentação e Introdução’, 2008

that presumably gave rise to them. With this proviso, however, the scenario is valid as an indication of the extent of this ratio. An excellent annual result was achieved in 2001, at the time of the electric power supply crisis. Shortly afterwards, results were less significant but they improved again later, reaching their peak in 2006. The impact of the crisis resulted in the side effect that society responded beyond all expectations to the need to reduce consumption. Some of the savings were due to temporary sacrifices, but there were also savings of a permanent nature, as shown by the evolution of domestic consumption in Table 8.2. Commerce responded to a lesser degree and their consumption soon reverted to 2003 levels. A highlight among the initiatives taken under PROCEL was the National Programme for Efficient Public Lighting (RELUZ), launched in 2002. Due to its geographic dissemination and by meeting the needs of poorly served areas, it led to social benefits aside from energy savings, with a view to achieving by 2010 the substitution of existing lamp bulbs by new, more efficient types in a significant portion of the approximately 14.5 million points of public lighting. Funds of as much as 75 per cent were assigned by ELETROBRÁS to these projects, and at least 25 per cent were contributed by the interested utility or township. By 2008, 1,446,000 light points had been replaced, corresponding to an annual reduction in consumption of 598 GWh/year, which is equivalent to 1.8 per cent of total consumption by the public sector in 2006. Table 8.2 Household consumption of electricity Year

2000

2001

2002

2003

2004

2005

2006

2007

Index

100

88

87

91

94

100

103

109

Source: MME, ‘BEN’, 2008, Table 3.4

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Since 1998, according to Brazilian legislation, a minimum of 1 per cent of the net annual revenue of electric power companies has to be invested in energy efficiency and technological development. The investment of half of these funds is the responsibility of the companies themselves and the other half is incorporated into the Electric Power Sector Fund, instituted by the MCT for use in increasing energy efficiency for final uses. BNDES introduced PROESCO in 2005, a specific funding programme for self-sustainable efficiency projects, targeted at the support of companies providing energy conservation services, the ESCOs. By 2006, 72 private companies were mobilizing consumers to participate in energy conservation projects. Annual billings amounted to R$600 million. In recent studies the MME estimates that, as of 2007, the potential gains of electricity through efficiency improvements in industry, commerce and households could be as high as 7 per cent of the total consumption.

Quality of electricity Successive changes in industrial procedures and business habits, as well as in society itself, were made at the end of the 20th century in activities related to electronics. The first wave came with the introduction of information technology and the in-depth technological changes in communications. The second followed due to the emergence of a digital society that increasingly depends on information and communication technologies for using the Internet, mobile telephones and personal computers. They also include automatic industrial production procedures and new trading methods by means of electronics. They have several consequences in terms of energy. Electricity is saved as a result of greater efficiency in operations carried out through programmed digital instruments. Consumption increases with the introduction of new types of equipment. It will only be possible to evaluate the balance with any precision over the medium term. It is certain, however, that in a digital society, due to the chain of interconnections and the sensitivity of the instruments, there is an increase in the responsibility of the electric power sector for the safety and quality of supply without interruptions and fluctuations. Therefore, there arises within it, besides the constant search for energy efficiency, a new vision of the quality of services rendered to consumers who have become more demanding. In Brazil, this problem is accentuated by the complexity and the extension of the electric power transmission grid. Since the beginning of the 21st century, investments in the transmission system have increased, as shown in Chapter 3.

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Energy efficiency in the transport system In Brazil, the predominant transportation system for both individuals and cargo is the motorway, using petrol and ethanol for fuel in motor cars and light vehicles, as well as in motorcycles, and diesel in lorries and buses. Its proportion in the total transportation system is higher than in most industrialized nations, mainly due to the dominance of heavy trucks in freight transportation. In 2007, total fuel consumption in transportation was equivalent to 58 million TOE, 54 million of which was used on motorways. The share of diesel in the total consumption for transportation was 50 per cent. The Otto cycle vehicles used 25 per cent in the form of petrol, 15 per cent in anhydrous and hydrated methanol, and 4 per cent in natural gas (in taxicabs). Airlines absorbed 4.5 per cent in aviation kerosene; and other fuels were used in the proportion of less than 2 per cent. The search for efficiency in the use of energy in transportation is closely linked to efforts to reduce polluting emissions of internal combustion engines. It involves several aspects, besides technological innovations: urban planning and the regulation of vehicle traffic by the public administration of megalopolises, as well as the quality and conservation of the motorway infrastructure. All of them directly affect the unitary consumption per kilometre covered by automotive vehicles. In a wider sense, reduction of energy consumption in transportation can result from the highly political decisions made over the long term in dividing the costs of the transportation infrastructure among users and society as a whole. These are difficult decisions, especially regarding the intensification of public transport systems on rails, and the structuring of interacting cargo transportation systems involving motorways, railways and waterways. Concern with atmospheric pollution caused by automotive vehicles resulted, within the sphere of the state, in the definition of acceptable emission limits. It also led to programmes for promoting efficiency, both in the manufacture of vehicles in close co-operation with the automotive industry and in their operation, especially in the case of heavy vehicles that consume diesel oil. It was left to PETROBRAS to improve the quality of fuels. Implemented in 1986 by CONAMA, which delegated its execution to IBAMA, the PROCONVE programme played a vital role within this group of measures. There followed norms concerning the maximum emissions permitted for each type of pollutant, with specific schedules for their implementation. These limits, progressively stricter, characterized regulatory phases I–IV and corresponded, with a time lag, to European

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regulations from zero to II (CONAMA Resolutions of 1985, 1993, 1997 and 2002). Phase V corresponding to European regulation III is now in force; however, targets have been postponed. A similar programme for motorcycles dates from 2002. CONPET, which was introduced as a promotional programme to foster an anti-waste mentality in the use of fuels, launched in 1996 the Save project, based on technical co-operation provided by the MME, the MT and the National Transport Federation, to offer technical assistance to cargo and bus companies. It was later (2002) expanded to transporters of fuel from the refineries, under the Transport project. In support of these programmes, PETROBRAS operates 46 mobile service units that reach as many as 100,000 heavy vehicles driven by diesel engines, out of a total of 1.4 million in the country. Diesel oil continues to be the worst pollutant. In Brazil, PETROBRAS is carrying out improvements in the treatment installations of their refineries and include investments in their strategic plan for 2004–10 to the order of US$3.3 billion for improving the quality of diesel and petrol. Attention has been given to the quality of diesel oil by installing new hydro-treatment units (HDT) for reducing the content of sulphur from 2,000 ppm to 500 ppm SO2 in diesel intended for distribution in large urban concentrations, where the negative effect of emissions is strongest. The sulphur content of other diesel, for use in rural areas in the interior, was reduced from 3,500 ppm to 2,000 ppm SO2. Although some investments have been made in the PETROBRAS refineries for quality improvement, the results are still far behind the European norms. This is an example of the contradiction between the company’s economy, which is growing, and the benefits to the environment, which are unsatisfactory.

Progress in automotive vehicles The Brazilian automobile industry, which completed half a century of existence in 2006, is eclectic: it includes subsidiaries of US, European and Japanese manufacturers. Some of them opened local design engineering departments that develop technologies designed for the Brazilian market. Similarly to what happened in their countries of origin, the manufacturers adopted the electronic injection system, which replaces the carburettor to great advantage, an operation concluded in Brazil around 1996; also the oxygen sensor (lambda), which sends information on escape gases to the computer on board and whose functions are becoming more and more encompassing; and they introduced the catalyser in locally produced cars, whose use has been expanding since 1992.

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Motors for a set of two different fuels have been developed since 2000 under several brand names but are generically termed ‘flex’. They make efficient use of either petrol or ethanol and have been very popular since their introduction in 2003. Furthermore, they have contributed to the consolidation of the use of ethanol. In compliance with norms issued by CONAMA, and due to the technological progress made by the manufacturers of light vehicles, not only has efficiency improved but fuel consumption has also been reduced, with positive repercussions in the reduction of carbon dioxide, as well as of other greenhouse gases and the emission of air pollutants. Elsewhere, diesel motors were also the object of technological progress that comprehends turbo-charging, inter-cooling and electronic injection. But manufacturers have not yet introduced in their Brazilian factories all the technological changes that are already in use in their countries of origin. As CONAMA and PETROBRAS are also lagging behind in enforcing quality standards for diesel oil, established in 2002, the maximum emission limitations for 2009 have been postponed. This setback in the progress of emissions control coming from diesel heavy vehicles was the joint responsibility of the ANP, the regulatory agency, PETROBRAS and the vehicle manufacturers. As a consequence of this setback, results obtained since vehicular emissions became an important issue differed: they were extremely positive in light vehicles and only moderate in diesel vehicles. The MME currently estimates that more than half of the potential efficiency gains in the consumption of oil products would come from the use of diesel by the transportation system. Together with the use of diesel motors by the rural sector, they would account for about 10 per cent of total consumption of diesel. A recent development in Brazil is the increasing popularity of motorcycles. Production jumped from 275,000 in 1996 to 1.6 million in 2007. Motorcycle use in large cities, mostly São Paulo, is to a certain extent offsetting the gain in reduction of emissions from automobiles and other light vehicles. The regulation of emissions has been in force since 2003, but its implementation has proved to be very difficult. Regarding fuel efficiency, there exists no reliable information in terms of grams per kilometre for light vehicles and grams per kilowatt-hour for heavy vehicles. An approximation of what has happened since 1995 is presented in Table 8.3. According to estimates of the National Syndicate of Spare Parts for Cars, the fleet of motor cars and light commercial vehicles has grown continuously since 1995, from 17 million to 24 million in 2007. The consumption of petrol, ethanol and gas increased much less, which reduces

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Table 8.3 Number of vehicles and fuel consumption, 1995–2007 Type of vehicles

Number of vehicles (x000) Fuel consumption (x000 m3) 1995 2007 1995–2007 (%) 1995 2007 1995–2007 (%)

Light and vans Heavy and buses

16,718 1,43

24,279 1,527

45 6

17,970 19,280

21,127 27,695

18 45

Sources: National Motorcar Spare Part Syndicate (SINDIPEÇAS), ‘Frota Circulante’ 2008; MME, BEN, 2007

the apparent consumption per vehicle. The generalized increase in efficiency and the tendency to a greater participation of locally manufactured vehicles with engines under 1,000cc almost certainly have been major factors. Licensing of these models was insignificant in 1990. Licences reached a maximum of 74 per cent in 2001, after which the percentage dropped to 56 per cent in 2006.8 This had a cumulative effect on the fleet. It must also be considered that motorcycles were responsible for part of the fuel consumption. The lorry and bus fleet remained unchanged for some time, between 1.4 and 1.5 million (1,476 in 2007). Consumption of diesel oil per vehicle increased substantially. The explanation for this lies in the notorious deterioration of the national motorway system, the increasingly congested urban traffic and the increase in domestic sales of heavy and semi-heavy vehicles from 41 per cent of the total in 2001 to 56 per cent in 2005, and 52 per cent in 2006.

New technologies in motorway transport Alternative forms of automotive vehicle traction arose at the beginning of the 21st century, some of which have already reached the commercial stage, while others are still a promise for the future over the medium- to long-term: 1 Electric, clean and silent traction, together with rechargeable batteries by means of a connection to the electric grid, is already accepted for specific uses, provided weight is not a relevant factor. Its use in cars is limited due to insufficient improvement of the batteries which, mainly due to their weight, restrict the range of action between recharges. 2 Hybrid traction, using two forms of energy, is a concept based on the fact that the greater demand for power and torque takes place at times of acceleration and uphill driving. Aside from these, there is always excess power. The association of an internal combustion engine with an electric traction motor and batteries permits the use of specific positive

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characteristics of each component, optimizing the efficiency of both. As a corollary, emissions are reduced. This solution has received much attention and has been the object of experimental vehicles introduced by several manufacturers. Even before the concept has been consolidated and large-scale marketing of the hybrid vehicle begins, the idea has already arisen to allow it to be connected to the electric grid at times of reduced demand in order to recharge the batteries. This is possible thanks to some progress in the composition of batteries. The new vehicle theoretically makes the best of two worlds: charging on the grid, a characteristic of a purely electrical vehicle; and having the range of a hybrid vehicle. Technological development in Brazil is concentrated on buses equipped with the hybrid system. Most noteworthy are two national prototypes manufactured by Eletra, a pioneer industry, which are comprised of a diesel motor connected to an electric generator, electric traction motors on the wheels and conventional batteries placed on the roof of the vehicle. The motor is much smaller than that used in traditional vehicles. Fifteen of these buses have been in circulation in the city of São Paulo since 2004 along the same urban transport corridor. At their present stage of development, the buses cost about 40 per cent more than a traditional vehicle of equivalent capacity. In the long term, replacing the internal combustion engine by a fuel cell that provides clean and silent traction is under consideration. Notwithstanding the progress in stationary installations, its use in vehicles has not yet reached the commercial stage. The major problem in disseminating this new technology for light vehicles is its high price in comparison with conventional vehicles, which is to the order of US$3,000. Similarly to other countries, Brazil is doing pioneer work with a view to the future after 2010. A project is being developed at the Federal University of Rio de Janeiro (UFRJ) – Alberto Luiz Coimbra Institute – Graduate School and Research in Engineering (COPPE), together with several public institutions and private industries. Under this project, cells are fed by natural gas. Another project is being developed in São Paulo, in partnerships coordinated by the Municipal Urban Transport Company (EMTU), and is part of the MME’s hydrogen programme. In this case, cells are fed by hydrogen manufactured in a stationary hydrolysis installation. Five vehicles are expected to be in operation this year (2008) for an evaluation. The development of all these electric/hybrid vehicle projects requires renewed efforts regarding the production of longer-lasting batteries with an improved capacity to weight ratio. Investigations are based on new battery

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concepts developed for use in communication and computer devices pertaining to one of two main types: 1 nickel-metal hydrate (NiMH); 2 lithium (Li ions). Both of these assure greater capacity and longer life. More specifically, for a certain electric power accumulation capacity, the nickel battery weighs half of the lead/acid battery and can accumulate two to four times its power. The lithium battery, on the other hand, weighs half as much as the nickel battery and can store up to 100 per cent more power. There still are obstacles to be overcome; the price also continues to be very high and will certainly only drop once mass production is initiated. In Brazil, conventional batteries are being improved with good practical results.

Improvement of external combustion installations The evolution of heat-producing installations from the external combustion of fossil fuels and/or biomass was extraordinary during the more than 200 years since the invention of the Watt steam engine with a 5 per cent efficiency rate. Successive changes in the thermodynamic cycle achieved significant increases in efficiency, mainly due to the high temperatures reached while searching for the theoretically possible maximum before arriving at the sub-critical boiler in 1960, with an efficiency rate of close to 60 per cent. The gas turbine was the key to subsequent development. The simplicity, rapid installation, lesser investment and accompanying growth of the availability of natural gas in the majority of industrialized countries contributed to the rapid expansion of the installed capacity. Another great leap occurred by using a combined cycle consisting of a gas turbine whose escape gases heat a boiler that feeds the classic steam turbine. An efficiency rate of 50–55 per cent was achieved in these installations at the beginning of the 21st century. Improvements specifically aimed at reducing potentially noxious emissions occurred by means of two successful procedures: particle collection of the gases through electrostatics in the gas exhaust chimney; and the desulphurization of these gases. Two other developments originated in research aimed at the reduction of emissions resulting from the external burning of mineral coal: combustion in a fluidized bed and its gasification, the latter associated to a combined gas–steam cycle.

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In Brazil, the use of coal, fuel oil and natural gas in stationary installations for producing electricity or heat is of secondary importance when compared with what happens in industrialized nations and in a number of developing countries. Nevertheless, the issue of particle emissions, sulphur dioxide and other pollutants within these installations is subject to CONAMA regulations. In 1995, the CCEE and ELETROSUL, two companies that owned the largest group of coal-fired thermoelectric plants, signed an agreement of technical co-operation with the Japan International Cooperation Agency under the supervision of the MME, with a view to monitoring the environment in regions within the influence of their respective thermoelectric plants. This first fieldwork carried out systematically was concluded in 1997. A Protocol of Intentions signed in June 1996 by the US Energy Department and, in Brazil, by the governments of the states of Rio Grande do Sul and Santa Catarina, the Coal Industry Syndicates, ELETROBRÁS and the MME, played a significant role in later investigations regarding the implementation of joint activities aimed at developing and applying clean technologies for generating electric power by means of mineral coal. Improvements were achieved in some of the old (domestic) coal plants in the south of Brazil, particularly in respect to particle material. Since the end of the 20th century, substantial amounts have been spent in search of procedures for the prior preparation of solid fossil fuels of a lesser quality that are economically viable. A number of methods were developed with technical success, but only a few are economically acceptable. This question did not attract much attention in Brazil due to the relatively small participation of such plants. Thermoelectric installations that burn fuel oil are of little importance in Brazil. Many have been converted to natural gas. Their operating capacity at the beginning of 2008 was 1,184 MW, 472 MW of which was in the old Piratininga plant in São Paulo, and 476 MW in the Amazon region, approximately half of which was in Manaus. The new gas turbine installations totalled 10,200 MW, the majority of which were single-cycle and could possibly become more efficient if converted to a combined gas–steam cycle.

Notes 1 MCT – Ministry of Science and Technology (1994) Comunicação Nacional Inicial do Brasil à Convenção Quadro das Nações Unidas sobre Mudanças do Clima, Brasília 2 IPCC – Intergovernment Panel on Climate Change (2001) Climate Change 2001, Summary for Policymaker, Paris

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3 IPCC – Intergovernment Panel on Climate Change (2007) Climate Change 2007, Paris 4 Taylor, R. (2004) ‘Climate Change and Reservoir Emissions’. In: World Energy Council, Survey of Energy Resources, London: WEC 5 World Energy Council (2008) Energy Efficiency Policies around the World: Review and Evaluation, London: WEC 6 IEA – International Energy Agency (2006) ‘World Energy Outlook 2006’, Press Release, Paris 7 IEA – International Energy Agency (2007) ‘Energy Efficiency Policy’, Paris 8 ANFAVEA – Associação Nacional dos Fabricantes de Veículos Automotores (2007) Anuário da Indústria Automobilística 2007, São Paulo

Chapter 9

Brazil’s Energy Prospects within the World Context

Globalization The outlook for the future of the Brazilian energy balance is becoming more and more linked to what is taking place in the industrialized world, where efforts to restrict damage to the environment are being intensified. Since the results of climate change studies became available, the conviction that it is necessary to reduce dependence on oil is gaining ground. Technological development in search of efficient use of traditional energies is accelerating, while new technological opportunities arise even though many of them are not yet commercially viable. But energy balance prospects are not only linked to physical conditions. On the supply side, investment capacity for expanding facilities has to be taken into consideration, and this factor differs widely among countries. In turn, demand accompanies the rate of each nation’s economic growth, as well as the composition and distribution of the national product. Before examining Brazil’s energy prospects, it is important to take a look at what is happening and what is expected to happen worldwide. At the beginning of the 21st century, the scenario is a cause for concern. The feeling one has is that the Earth can no longer bear the still-growing population and its destruction of the environment. Efforts to restrict harm to the environment and to control human actions leading to climate change are slow and not radical enough.

Population, economy and energy trends On the positive side of conserving the environment, the population growth rate is decreasing, although its absolute increase is still significant, rising from 2.5 billion in 1950 to 4.1 billion in 1975, and 6.4 billion in 2005.1 The increase differs from country to country proportionately to their income. Over a period of 30 years, the average annual population growth rate in low-income nations (1.75 per cent p.a.) was more than triple that

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in high-income nations (0.49 per cent). In very poor countries, population increased 2.6 per cent p.a. The current population distribution among countries according to income may become even more asymmetrical in future decades if the predicted reduction in the total population of some European countries materializes. The generalized migration from the country to the cities has been amazing. Between 1950 and 2005, urbanization increased from 52 per cent to 74 per cent in developed countries, while it rose from 18 per cent to 42 per cent in developing nations. This phenomenon occurred even in very poor nations. In Brazil, urbanization has been very substantial, increasing from 36 per cent to 84 per cent.2 Urbanization, which began in today’s industrialized countries and spread throughout the world, has had major negative impacts on the environment in low-income countries that are unable to supply water and basic sanitation systems. After the First World War, newly formed international institutions began to systematically analyse each nation’s economy according to uniform and therefore comparable criteria. The main indicators of income and energy in the world quantify the notorious international imbalances and provide a marker for an analysis of the outlook for the 21st century (Table 9.1). The 1,172 million inhabitants of the high-income nations that are, in their majority, members of the OECD correspond to merely 18 per cent of the world population, but have slightly more than half the total available energy at their disposal. Consumption per inhabitant in OECD nations (4.73 TOE/capita) is thus four times that of any developing or underdeveloped nation (1.11 TOE/capita). On the other hand, there is a strong relationship between income and energy, regardless of the income level: it fluctuates between 0.18 TOE/US$ in the OECD and an average of 0.24 TOE/US$ in nations that are not members of the OECD. With a ratio of 0.15 TOE/US$, Brazil seems unconnected from this group, even though

Table 9.1 Total primary energy, population and GDP (% of world total) Indicators Total primary energy supply Population GDP, ppp (2005) CO2 emissions (2004)

OECD Total

Non-OECD Total

China

Others

48.5 18.2 55.5 50.0

51.5 81.8 44.5 50.0

15.2 20.4 14.8 17.4

36.3 61.4 29.7 32.6

Note: GDP, ppp – Gross domestic product, purchasing power parity Sources: IEA, Key World Energy Statistics 2007; US Department of Energy (DOE)/Energy Information Administration (EIA), International Energy Outlook 2007

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203

its per capita consumption of 1.12 TOE is very close to the average. Part of the reason for this is the universally adopted criterion for converting hydroelectric energy into TOE, which reduces the relative value of that energy and which is of major importance in this country. In the unlikely event that the ‘non-OECD’ nations attain OECD consumption standards even without an increase in their population, the energy increase required would be equivalent to 24 billion TEP/year, almost quadrupling today’s production. The proportion of carbon dioxide emissions from energy follows closely that of the total primary energy supply (TPES) and is more intense in the OECD. Within the non-OECD group, China stands out as producing the most intense emissions compared with other countries in the same group. Comparing on a world scale the historical evolution of the population, of income and of energy in the second half of the 20th century, a scenario of a progressive decline in the growth rate may be seen (Table 9.2). But at the beginning of the 21st century income has increased again, while energy use has continued to develop at the same rate. In Figure 9.1, a comparison of the ratio between energy and income, encompassing a few countries representing different stages of development, completes the traditional panorama. Four conclusions can be drawn from this international comparison: (1) confirmation of the disproportionate level of per capita consumption in the USA which, however, seems to stabilize around the 350 GJ per capita level; (2) a trend towards a decline in the growth rate of consumption in the European Union, apparently stabilizing at the 150/200 GJ per capita level; (3) consumption in Brazil close to 50 GJ per capita, and a high consumption to income ratio prevails mainly due to its poor economic performance since 1980; and (4) the still low energy consumption per capita in China, below 50 GJ, notwithstanding the substantial increase in income. The trend towards stabilization of consumption in the industrialized nations is mainly due to the high-income level they have already reached. These countries have economic resources that not only fully satisfy their needs, but also the capacity to promote the development required Table 9.2 World population, GDP and primary energy growth rates (%/year) Period Population GDP Primary energy

1965–80

1980–90

1990–2000

2000–05

1.8 3.7 3.5

1.7 3.3 2.1

1.6 2.7 2.1

1.2 3.6 2.2

Sources: World Bank, World Development Indicators 2006; International Monetary Fund, revised GDP for 2000–05

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400

Giga Jaule per capita

350 300 250 US EU China Brazil

200 150 100 50 0 0

10,000

20,000

30,000

40,000

GDP per capita (US$ ppp of 1997) Note: This figure includes only six countries chosen by the author among those in the original graph ceded by Shell Source: Shell Brasil, Energia para Gerações, 2003

Figure 9.1 Ratio between energy per capita and GDP per capita, 1965–2000

in order to achieve greater efficiency in the production and use of energy. When looking at the point of view of nations such as Brazil that still strive to attain a significant economic growth, it must be taken into account that they need a prudent anticipation of the energy supply in relation to the expected demand. Otherwise, if the expected impetus in growth occurs, there will not be sufficient time to expand the supply of energy, which always involves investments of long-term maturity. This partly explains the fact that the increase in energy in the 1980s and 1990s did not accompany the slower growth of the economy.

Speculations concerning the future world energy balance Countless studies are being undertaken and countless hypotheses are being considered regarding the possible evolution of the final worldwide consumption of energy according to type of consumption and sources of supply. The main objective of speculations about the future is to forecast demand and indicate the most probable possibilities of energy supply, including an analysis of technological innovations.

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The probability of being right decreases in proportion to the length of the period of the forecast. Quantitative projections that cover more than 20 or 30 years are subject to a high margin of error. In that period and in general terms, the predominant global vision is that per capita energy consumption in the high-income nations will be contained. Although there is a reduction in the population’s growth rate in developing countries, they continue to require more and more energy. At the other extreme are the underdeveloped countries, in their majority without prospects of economic development, which consume an extremely low volume of commercial energy. Energy demand worldwide thus results in a composition of at least three elements with very different characteristics. If the current international economic structure continues, the poorer section of the world population will not even achieve a minimum level of material living or energy-consumption conditions in the foreseeable future. On the other hand, some or many developing nations will succeed in breaking through the barrier of poverty and will become larger consumers of energy. All institutions specialized in forecasts generally start with a set of basic hypotheses concerning the probable behaviour of the factors that influence energy supply and demand according to the different types of consumers and the different sources of primary energy, including analyses of economic development, energy efficiency, globalization of new technologies, and improved institutions and funding for development. They use them for reference and later analyse variables to determine a range wherein they expect the actual evolution to be found. In these structures, the levels of reliability of forecasts relative to each of the factors under consideration differ greatly. Population is the factor that involves the least uncertainty. The world population should increase to 7.6 billion and 8.2 billion in 2020 and 2030 respectively. Urbanization is expected to continue, increasing to 56 per cent in 2020 and 61 per cent in 2030.3 Expectations of technological progress and its geographical spread depend on the evolution of income. Assessing its trend involves major problems. The critical factor in speculations about worldwide energy is oil, due to both the volatility of its price and the evaluation of reserves. The evolution of prices since 1970 in a constant currency illustrates this. Besides significant fluctuations from year to year, there occurred repeated major oil crises in 1974, 1980 and 2006, and at the beginning of 2008. The times when prices are considered high cause bursts of energy and technological policies directed to the development of alternative sources of energy. In periods of relative stability, there is a tendency towards complacency regarding oil dependence. Discussions about the future of oil supplies and prices necessarily lead to speculation on world

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reserves. According to the predominant theory, the possible production in a certain region grows at an increasing and then decreasing rate, until it reaches a maximum. The shape of this curve has not been contested. Discussions concentrate on the date of the peak, whether it has already been reached in the first years of the 21st century and on the speed of the drop.

World prospects from an energy point of view A review of the scenarios considered here is concentrated on four traditional institutions that follow up on the market and the availability of energy, and investigate what may occur in future in this respect. In view of the impact of the Rio conference in 1992, it seems opportune to start by mentioning the comprehensive study of the WEC undertaken immediately after that event. The title and subtitle of that report give an idea of its content: Energy for Tomorrow’s World – The Realities, the Real Options and the Agenda for Achievement.4 It does not merely deal with what was taking place or could take place, but also with what needed to be done. This study included an ecologically motivated projection to illustrate the size and the consequences of measures necessary to stabilize carbon dioxide emissions around 2020. In a publication issued seven years later under the same title, another subtitle was added, ‘Acting Now’, stressing how little had been done since in concrete actions.5 When the IEA presented the World Energy Outlook in 1995, they declared their objective to be to stimulate the discussion of possible developments in the energy market over the next fifteen years in order to serve as a starting point for political discussions that could arise in the event that markets develop as herein presented. In their 2004 Report, the IEA included a reference scenario that projected a slower global growth than that which had taken place earlier, with income-elasticity continuing to drop as a result of energy efficiency and the reduction of the consumption of energy by intensive heavy industries. Fossil fuels would continue to predominate, although their participation would tend to diminish. They calculated that two-thirds of the increase in the global consumption of energy would originate from developing nations. The EIA of the US DOE constantly revises its projections regarding the future of energy in the world and also provides, aside from general and regional data, a breakdown by country according to uniform criteria.6

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Proceeding now to a panoramic and comparative view of the various projections made between 1993 and 2006 for as far as 2020, a compact table was drawn up which shows the average growth rates of energy consumption, classified according to the primary sources of energy and represented by three groups: non-renewable, nuclear and renewable. Table 9.3 also includes a forecast of total energy for the year 2020. Total-demand forecasts for 2020 in gigaton oil equivalents (GTOE) made by various institutions are fairly similar, but increase progressively. The highest, by the EIA in 2006 (Figure 9.2), exceeds the lowest, by the WEC in 1993, by 15 per cent. However, they have markedly different outlooks in regard to energy sources. The most recent IEA and EIA studies predict a growth of between 2.06 per cent and 2.09 per cent p.a. in the demand for energy by 2015, with a higher rate in non-OECD countries. This rate is expected to drop between 2015 and 2030 to an average annual figure between 1.3 per cent (IEA) and 1.5 per cent (EIA). Table 9.3 Growth forecasts of worldwide energy consumption (%/year) Estimate

Period

WEC 1993 IEA 1998 IEA 2004 EIA 2006 EIA 2007

1990–2020 1995–2020 2002–20 2003–20 2004–20

Total

Nonrenewable

Nuclear

Renewable

GTOE in 2020

1.41 2.00 1.90 2.25 1.95

1.22 2.18 2.86 2.25 1.17

2.34 0.00 0.60 1.27 1.64

1.88 2.50 2.05 2.38 2.13

13.4 13.7 14.4 15.4 15.3

Energy consumption (quadrillion BTU)

450 400 350 300 250

OECD

200

Non OECD

150 100 50 0 2004

2010

2015

2020

2025

2030

Source: EIA/US DOE World Energy Outlook, 2007

Figure 9.2 World total primary energy consumption (quadrillion BTU)

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According to their forecasts, the relative position of energy use will become inverted between the OECD and non-OECD groups between 1990 and 2020 within the world context, after having passed through a balanced period in 2010. The shift is mainly due to demand in China and India. Projections regarding the emission of greenhouse gases and the Kyoto Protocol commitment to revert to 1990 levels are pessimistic. By 2020, emissions in the OECD nations will have increased by 34 per cent, while those in the non-OECD group will have increased by 64 per cent in relation to 1990, with China rising 292 per cent and the others in the group by only 69 per cent. According to the EIA, the oil and gas consumption rate will rise and then shrink, coal will recover and nuclear power will have the lowest growth rate. The other sources will have an impetus up to 2010, but will be unable to sustain it. The first of the WEC 1993 reports was optimistic in regard to a containment of non-renewable energies, while that issued by the IEA in 2004 admitted a probable increase in non-renewable energies larger than the global increase of all sources. Later reports from the IEA and the EIA point to a more balanced evolution between renewable and non-renewable energy sources. In view of the increasing concern regarding the dependence on oil and the emission of greenhouse gases, it is surprising that all projections from those who look at the future from the energy point of view adhere to the hypothesis of a continued growth in fossil fuel consumption. Except for the WEC’s first report, all of them cite the growth rate of fossil fuels as equal to, or higher than, the total increase in energy. The institutions register a growth trend of carbon dioxide emissions. A selection of EIA data for some countries shows this general trend, in Figure 9.3, although the intensity varies. The World Energy Council summed up the point of view of the energy industry as follows: Global growth in the recent period, especially in emerging economic giants such as China and India, has been much stronger and sustained than expected, putting the issue of energy availability at the forefront of the global agenda. Looking forward, experts concur that more primary energy will be needed until 2010, and expect a doubling of world energy demand by 2050. ...This calls for an in-depth reassessment of our goals and priorities, which some qualify as the third energy industry revolution.7

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209

9 8 7

billion tons

6 5 4 3 2 1 0 1990

2003

OECD North America

2010 OECD Europe

2015 China

2020 Russia

Brazil

Source: EIA, US DOE, International Energy Outlook, 2006–07

Figure 9.3 Projection of carbon dioxide emissions (reference scenario)

World prospects from an environmentalist point of view In view of this prospect of increased carbon dioxide emissions predicted by analysts of the probable evolution of the demand for energy, it is necessary to also look at what is being said by those who study the same phenomenon from the point of view of climate change, quantifying everything that can be measured. The Intergovernmental Panel on Climate Change (IPCC) plays the main role in this other scenario to which Chapter 7 has already referred. According to the projections of this institution: 1 In each of the next two decades, and according to the majority of emission scenarios analysed, there will be a 0.2°C increase in temperature. 2 Continued greenhouse gas emissions (or emissions above the present level) will cause greater warming that will lead to many changes in the global climate system during the 21st century, and will ‘most probably exceed those in the 20th century’. 3 There is currently more confidence in projections of warming and other effects on a regional scale, such as a change in wind systems, rainfall and some aspects of ice.

210

Energy in Brazil

4 Anthropogenic warming and an increase in sea level will continue for centuries due to the timescale of climatic processes and respective reflexes, even if the concentrations of greenhouse gases stabilize. The 2007 report includes a synoptic picture of the trends observed at the end of the 20th century, associated to the respective level of the probability of continuation. Long-term scenarios vary considerably regarding the prospects of emissions in quantitative terms, which proves the inherent unreliability of quantitative projections. Even over the short-term, there are major differences in the results, to the order of 30 per cent. They serve, however, to identify a dangerous or even inadmissible direction. It is important to keep in mind that the relationship between emissions and atmospheric stocks is not simple, nor is the relationship between them and the harm to the environment due to the interaction between the climatic, ecological and social-economic systems. At any rate, the resulting inertia points to a continued increase in carbon stocks until the end of the 21st century. The IPCC analysed the issue of mitigation comprising actions that could contain the implacable course of climate change and evaluated the cost of the measures necessary up to 2030. The concept of ‘potential mitigation’ was created to assess the possible reduction in the emission of greenhouse gases founded on basic projections of the economic evolution of the world and of each region in particular. A substantial mitigation potential was forecasted for the coming decades according to levels of increasing costs. A great concern in the developed countries is the possible reduction of the GDP as a result of mitigating measures. It is estimated that the global GDP may either increase slightly or suffer a loss of up to 3 per cent. The loss would be greater if the target for reduction of emissions were more ambitious. Notwithstanding their inevitable lack of precision, estimates for the period up to 2010 have been made of the onus for the industrialized countries caused by the loss of economic growth due to the recommended measures for mitigating emissions. Results are coherent with the concerns of public opinion and of the governments of these countries as to the cost of more forceful conservationist policies. Despite the many scientists and technicians from everywhere in the world who took part in preparing the IPCC report, it still raises conflicts.

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211

The outlook for energy in Brazil The above review of worldwide prospects, from both the energy and the environment point of view, is an attempt to identify the concerns that are dominant in the developed part of the world. Brazil is endeavouring to insert itself in the world context but, as any other country, it has specific challenges. Brazil has traditionally undertaken studies on the prospects of energy as a basis for sustained energy planning. ELETROBRÁS, assisted by the utility companies, coordinated these studies in the electric power sector, while in the oil sector the entire task was carried out by PETROBRAS, which had an almost total monopoly on the corresponding activities. Due to the privatizing programmes of the 1990s, it was felt in the sphere of the federal government that it would no longer be necessary to make plans for the electric power sector, and the former practice was abandoned. The CNPE, founded as a planning entity on an initiative of Congress in 1997, was not given much attention by the administration. After the change in government in 2003, thoughts reverted to planning, this time of an indicative nature. The EPE was founded and made responsible for drawing up a comprehensive plan covering both the macroeconomic and the physical angle, in line with the new situation in the international and the domestic scenario. This was a difficult task, considering the interruption of systematic studies on electricity in the 1990s and the worsening of some international and domestic critical factors. It must also be remembered that it was always difficult to integrate projections from ELETROBRÁS, centred on electric power, and from PETROBRAS, centred on oil. The EPE studies and plans were initiated in 2006, using staff previously employed by ELETROBRÁS, and they began to recruit and train new professionals. In the electric power sector, viability studies of the hydroelectric potential and projections of electricity demand were once more undertaken along the lines of those carried out by ELETROBRÁS. The ongoing programme of technical, environmental and economic studies of possible sites for construction of hydro plants began with contracts signed with specialized engineering companies and included a potential of approximately 3,200 MW. The EPE started its activities with a revision of electric power demand projections, adopting plausible reference trajectories of major and minor growth for the period 2005–15. The forecast of the necessary expansion for a guaranteed supply adhered to the CNPE criterion that the risk of insufficient electric power supply in the National Interconnected System must not exceed 5 per cent in any one of its subsystems.

212

Energy in Brazil

The plan also focused on the large transmission trunks, including those connecting the North–Northeast, to be completed in 2009, and those connecting the North–South and South–Southeast–Central-West, targeted for completion in 2010.8 Already at its initial stage of operations, the EPE drew up an ambitious National Energy Plan covering the years up to 2030,9 which generated great expectations since never before had all the hydrocarbon, electric power and biomass energy been dealt with in one single document. The first one included the uncertainties involved in the entry of natural gas, and the others involved the various new primary sources. This attempt was actually a choice of procedures as a first step in the task to be undertaken during the preparation of the Decennial Energy Expansion Plan 2007–1610 in a more objective manner. This task was further pursued within the 2008–17 plan, that had not yet been published at the time when this book was completed.

Decennial energy expansion plan 2007–16 In this document, which was released at the end of 2007, an effort was made to cover the entire national energy scenario. It starts with a retrospective of Brazil’s economic and energy evolution and inspects the national economic scene, comparing short-term forecasts made by various national institutions. In the expectation of a moderately decreasing rate of population growth, as well as in view of the forecasts of energy consumption and the national economic growth up to 2016, two trajectories are considered in Table 9.4. The total consumption of energy of 174 million TOE in 2006 is expected to increase to 264–280 million TOE in 2016. Throughout the two periods under consideration, elasticity would remain a little above unity (1.03–1.06) and the energy intensity would remain at the present

Table 9.4 Economic forecasts for Brazil, 2006–16 (growth rates % p.a.) Indicator Population Lower GDP Higher GDP Lower energy consumption Higher energy consumption

2006–11

2011–16

2006–16

1.3 4.0 4.8 4.1 4.8

1.1 4.5 5.0 4.8 5.3

1.2 4.2 4.9 4.4 5.0

Note: The actual growth of the economy was 5.4 per cent in 2007 Source: EPE, Plano Decenal de Energia, 2006, Table 46

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213

level of 0.08 TOE/R$ thousand until 2016, corresponding to approximately 0.15 TOE/US$ thousand ppp, in contrast with worldwide expectations of a continued decrease in intensity. To simplify, and bearing in mind the small difference between growth rates, the following considerations on final energy consumption by source are based entirely on the lower projection (Figure 9.4). In Figure 9.4, ‘Other’ includes mineral coal and other less important sources. The expected overall annual rate of growth, a little above 4 per cent of total energy consumption, between 2007 and 2016, is the result of 2007

14.2 4.1 40 9.1 6.2 8 18.4 Oil products

Electricity

Bagasse

Wood

Ethanol

Other

Natural gas

2016

14.1 1.4 38

5.5 6.3 6.9 7.7 20 Oil products

Electricity

Bagasse

Wood

Ethanol

Other

Source: EPE, Plano Decenal de Energia, 2006, Table 48

Figure 9.4 Final energy consumption by source

Natural gas

214

Energy in Brazil

different sartorial patterns. Ethanol would represent the fastest growth, followed by natural gas and electricity. Oil products would be growing at a slightly lower rate than the average; consumption of wood would stabilize. In Figure 9.4, ‘electricity’ stands for the generation originating in various forms of primary energy. When international comparisons are made, it is important to recall that in Brazil’s case hydropower corresponds to 87 per cent of the total. Where Figure 9.4 relates to electricity, the lower and higher projections do not differ much, leading to an estimate of average energy demand in 2016 of, respectively, 78.2 and 82.2 GW. Taking only the former into account, the growth rates predicted for the various indicators display merely minor differences. According to the expectations shown in Table 9.5, the capacity factor would rise from 50 per cent in 2006 to 54 per cent in 2011–16. The total installed capacity is expected to grow from 96 GW in 2006 to 112 GW in 2011 and to 145 GW in 2016. The share of primary sources would change due to a reduction of hydroelectricity and a significant increase in other renewable sources. Surprisingly, for a country that has constantly maintained the dominance of the renewable part of its electricity generation, an increase in non-renewable sources is also expected, mostly due to the re-entry of coal and the expansion of natural gas, notwithstanding its unreliable supply. This growth hypothesis is reinforced by the possible entry of diesel plants based on fuel oil that were auctioned after the abovementioned projections were made. A possible new nuclear programme now under consideration by the federal government could not start operations before 2016. Table 9.5 Electricity forecasts for Brazil (average growth rate % p.a.) Indicator

2006–11

2011–16

2006–16

4.8 5.5 3.1

5.2 5.1 5.2

5.0 5.3 4.2

Energy load (average GW) Demand (GWh/h) Installed capacity (GW)

Source: EPE, Plano Decenal de Energia, 2006. Load and demand, Tables 40 and 42. Generation, Table 34

Table 9.6 Forecasts for electricity-generation capacity (%) Source

Renewable 2007 2011

2016

Source

Hydro Other Nuclear

83.5 0.8 2.0

79.4 3.0 2.3

Natural gas Coal Oil

79.4 2.5 1.8

Source: EPE, Plano Decenal de Energia, 2006. Generation, Table 34

Non-renewable 2007 2011 9.5 1.9 2.7

10.9 1.6 3.7

2016 9.6 2.8 2.9

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215

A number of projects in various stages of development are counted upon to meet the market needs predicted in Table 9.6. The plants under construction programmed up to 2011 include two groups, one without any licensing or legal restrictions, and the other still facing problems. Starting with an installed capacity of 98.4 GW in 2007, the constructions for which data is shown in Table 9.7 would take the country to 112.6 GW in 2012, coinciding with the estimated needs according to the ‘lower’ projections. There are, however, reductions and additions to be considered. Some of the projects listed as having restrictions may not materialize. On the other hand, at the end of 2006, ANEEL was analysing viability studies corresponding to 20.4 GW, some of which may be in operation by 2011. Of the large Amazon projects under consideration, three are included in this set: two on the Rio Madeira already auctioned (Santo Antonio and Jirau), and the Belo Monte project on the Xingu River to be auctioned in 2009. Finally, the Serra Quebrada project on the Tocantins River has been technically resolved, but is still suffering the consequences of legal battles. Large, inter-regional transmission trunks are predicted in view of the increasingly widespread geographic dispersion of hydroelectric plants. The EPE considers that, besides the North–Northeast, North–South and South–Southeast–Central-West trunks already planned for in the Decennial Plan 2006–15, the Tucuruí–Altamira–Manaus 500-kV line with an extension of 1,155 km will be in operation by 2015, as well as the 275-km-long Belo Monte–Tucuruí line and a 1,625-km-long transmission line, as yet without a specified voltage, between the plants on the Madeira River and a location in the Central-West–Southeast Regions. Several supplementary interconnections totalling 4,438 km are also foreseen as of 2015, most of them in order to improve the safety level; therefore, an increase in the Tariff for the Use of the Transmission System (TUST) is predicted, especially for the main subsystem in the Southeast and CentralWest regions. Regarding oil and gas, the ‘EPE – Plano Decenal de Expansão de Energia 2007–16’ (Decennial Expansion Plan 2007–16) contains an attempt to develop independent statistical projections of reserves and Table 9.7 Power plants construction schedule (completion dates) Situation Without restrictions With restrictions Total

2008

2009

2010

2011

Total

2.8 1.8 4.6

2.5 1.4 3.9

2.3 1.5 3.9

1.1 0.6 1.7

8.8 5.3 14.1

Source: National Energy Agency (ANEEL), Resumo Geral das Usinas Geradoras, 2008

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production. It starts by analysing the possible trends of reserves and the ratio of reserves:production (Table 20 of Decennial Expansion Plan). The recent pre-salt discoveries are not included since their full-scale exploitation cannot start before 2016. The resulting estimate of the annual rate of growth of domestic oil production was 4.9 per cent, equivalent to the high estimate of GDP and equivalent to the high estimate of the total energy consumption during the same period. In the case of natural gas, the estimate is much higher, on the level of 7.8 per cent p.a. A continuous surplus is expected in the volume of exports and imports of oil and its products; but, in contrast, a continuous deficit is probable in the case of natural gas. The study includes a chapter dedicated to the challenge of energy efficiency.

Projections for electricity demand with emphasis on conservation Similar to the principal international studies, the Brazilian projections also show limited hopes for significant results in energy conservation and increased efficiency. The difference is that in most of the industrialized nations much has been done with this in mind, while in Brazil there is still much room for reducing waste; and such room exists in the electricity sphere as well as in the use of oil by-products, notably diesel. Among the many partial studies on electricity carried out in Brazil, the World Wildlife Fund (WWF) submitted an opportune study, which was carried out by a group of entities and individuals, with emphasis on conservation.11 The corresponding report deals with possible measures and assesses potential results up to 2020. Starting with a projected electricity demand in the event of a continuation of current practices to the order of 800 million MWh, it was calculated that ideally it would be possible to save one-third of this total. The best results are forecast for industrial motors, commercial lighting and household electric showers. The title of the report, Sustainable Electricity Agenda 2020, is modest. The proposals contained in the text are, in their majority, bold. It attempts to show that a strategy different from that traditionally adopted can be followed in order to decelerate demand for electricity and to drastically reduce the use of fossil fuels, indicating possible paths for this purpose, including the higher performance standards for equipment and more ambitious efficiency targets for the electric power companies. The largest savings would result from the substitution of motors in industry, from commercial and public lighting, elimination of electric showers, direct

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217

heating in industry, as well as from residential lighting, refrigerators and air-conditioning systems, with other smaller savings. This study exemplifies the size of theoretically possible savings, by indicating that the annual growth of electric power generation can be reduced from 5 per cent to 2 per cent by 2020. This ideal target is unattainable, but the assessment is cause for reflection that could result in some progress in containing the demand for electric power without jeopardizing economic development.

PETROBRAS plans and oil prospects According to tradition, projections for oil and gas continued to be carried out by PETROBRAS and were based on the expectations of supply for which the company itself was responsible, as they were then the only producers and importers of hydrocarbons. PETROBRAS submitted a ten-year plan, Strategic Plan 2015, and successive five-year plans: Business Plan 2006–10; Business Plan 2007–11; and Investment Plan 2008–12. The forecast of the growth of the national production of hydrocarbons from current fields and new sites that already had a probable inauguration date indicates continuity in the case of oil, where experience is longstanding and where physical self-sufficiency has to be maintained, while the expectation for gas was that there would be a leap up to 2012 (Table 9.8), but so far without any prospect of continuity. Comparing forecasts for the supply of oil and oil by-products, prospects are optimistic. On the one hand, an average 2.8 per cent annual increase in consumption is expected between 2006 and 2015, a rate partially due to the substitution of petrol and diesel by ethanol and bio-diesel; and, on the other, the probable production up to 2012 is already highly reliable since it is based on known reserves. The panorama of production, importation and export of oil and oil byproducts is also well known. PETROBRAS showed a consolidated picture for 2011 in the form of a graph (Figure 9.5). Table 9.8 Production forecasts for oil and natural gas Production forecast (thousand BOE/day) 2007 2012 2015 Oil Natural gas

1.809 321

2.421 637

Source: PETROBRAS, ‘Investment Plan 2008–12’

2.812 643

Production increase (%) 2007–11 2011–15 6 14

5 0.3

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Energy in Brazil

Brazil production 2374 584

80

Products consumption 2099

1710 Processed oil in Brazil 1877

Oil 167 Exports 584

Products 142 Imports 309

Source: PETROBRAS, ‘Business Plan 2006–10’. Extracted from the original, but without the part relative to the company’s international production

Figure 9.5 Probable flow of liquid fuels in 2011 (thousand BOE/day) This comparison shows the export of heavy oil and a moderate importation of light oil, as well as by-products, in order to harmonize the difference between the composition of supply and of demand. It is now the EPE’s responsibility to complete the data with information on the probable results of the private companies that already operate in oil exploration and are entering a productive stage. Ever since PETROBRAS went public and its shares have been quoted on the Brazilian as well as the foreign stock markets, much care is taken in regard to publicity about reserves. However, based on what is already known of measured oil reserves, they suffice to guarantee physical selfsufficiency until 2012. The next period also looks good. There are, furthermore, some fields in the hands of private companies that are about to begin operation. The outstanding event was, however, the discovery of the Tupi field in the pre-salt formation in the Campos Basin, in which PETROBRAS is associated with British Gas (25 per cent) and Petrogal (10 per cent). We are dealing here with a sample of a huge formation of 160,000 km2, which lies below a layer of salt. The Tupi field is located at a distance of 250 km from the coast. The initial well reached a depth of 7,000 m, comprising 2,100 m of water and two layers of post-salt and pre-salt of 4,900 m. Although the available information does not authorize as yet estimations of commercial reserves, this discovery points to a major find on a worldwide scale.

Brazil’s Energy Prospects within the World Context

219

This area is one of seven adjoining areas, of which four have already been the object of pioneer drillings. Besides the Tupi area, other partnerships include Repsol, Chevron, Shell and Galp. This has occurred just as Brazil, which has always been an importer, is reaching self-sufficiency in oil. It may be indicating a possible entry of the country into the group of exporters in the long term. In order for local oil processing to be in harmony with production and expected demand, expansions and improvements are underway in several existing refineries and, since 2007, two new refineries have been under construction, with a capacity of 200,000 bpd and 150,000 bpd, their operations forecasted to start in 2011 and 2012 respectively. Studies and designs have already begun for the construction of a new refinery with a capacity of 500,000 bpd beginning in 2014. According to EPE estimates in the Decennial Expansion Plan 2007, production will exceed demand, whose growth rate they predict at 3.9 per cent p.a. by 2012. After 2015, these deep pre-salt reserves will certainly propitiate an oil production capacity superior to the probable domestic demand. For natural gas, on the other hand, the outlook up to 2012 is less satisfactory due to the political uncertainty surrounding importations from Bolivia, the limited confirmed local supplies and their association with oil, a situation that affects their operational flexibility. Under current operating conditions, the local production of gas results in a net supply to the market of only half of what is extracted, since approximately 19 per cent is consumed in re-injection, 12 per cent in losses and flaring, and 18 per cent in internal use. Supply estimates up to 2012 are based on the capacity of the fields currently in operation, plus those that are still at a pre-operational stage. Uncertainties regarding the availability of gas are greater than those for oil since many reserves are of gas associated to oil. In any case, it is estimated that deliveries to the market of 27 million m3/day in 2006 will increase to 73 million in 2012. The average annual growth of supply would be to the order of 17 per cent p.a. The demand for gas encompasses two radically different segments. Within the industrial, commercial, domestic and automotive sectors, there already exists a tradition, and the expected trend is a growth rate of 13 per cent p.a., increasing from 40.2 million m3/day in 2006 to 86.1 million in 2012. It is practically impossible to predict the growth rate for the thermoelectric segment in Brazil because the demand of plants is sporadic. It depends on the behaviour of the interconnected electric power system which, in turn, depends on rainfall. The ONS, based on the situation of the reservoirs, defines the effective generating capacity of the hydroelectric

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plants (see Chapters 3 and 4). As a result, the 48 million m3/day cited for 2012, for the requirements of the thermoelectric plants as corresponding to their maximum output, must be accepted with reservations. Faced with the certainty of insufficient supply from national fields and importations from Bolivia, a system was devised for importing Natural Liquefied Gas and re-gasifying it in Brazil. Two facilities are under construction: one in Pecem, state of Ceará, of a 7 million m3/day capacity; and another in Rio de Janeiro, of a 20 million m3/day capacity. The supply forecasted for 2012 for the total of all sources is equivalent to the estimated demand of 134 million m3/day, in which a consumption of 48 million by thermoelectric plants is included. In this overall gas scenario, it must be remembered that, in the specific case of the Northeast, there are no prospects of a significant increase in reserves, and that the supply during that period depends on the completion of the interconnecting gas pipeline (Gasene) currently under construction, as well as on the already mentioned installation of a re-gasification facility.

Notes 1 United Nations (2004) World Population Prospects, The 2004 Revision, UN, Geneva 2 United Nations (2005) World Urbanization Prospects – The 2005 Revision, UN, Geneva 3 Ibidem. 4 World Energy Council (1993) Energy for Tomorrow’s World, London: St Martin’s Press 5 World Energy Council (2000) Energy for Tomorrow’s World, Acting Now, London: Atalink Projects 6 EIA – Energy Information Agency (2008) International Energy. Outlook, 2006–2007, Washington 7 WEC – World Energy Council (2008) WEC Statement 2008 – Generating New Momentum, London 8 EPE – Empresa de Pesquisa Energética (2006) Projeções do Mercado de Energia Elétrica 2005–2015, Rio de Janeiro 9 EPE – Empresa de Pesquisa Energética (2006) Plano Nacional de Energia 2030, Rio de Janeiro 10 EPE – Empresa de Pesquisa Energética (2007) Plano Decenal de Expansão de Energia 2007–2010, Rio de Janeiro 11 WWF – World Wildlife Fund (Coord.) (2006) Sustainable Electric Power Agenda

Looking Forward

The relationship between energy, environment and economic development has a different shape in every part of the world. Natural resources and challenges are unequally distributed, and it is therefore generally impossible to formulate and implement public policies that lead to the best results on all of these fronts. Compromise solutions must be sought, taking into consideration the recent worldwide trend of reduced trade barriers, freer capital displacements and increased speed of developing and transmitting information, with its impact on communication, as well as the automation that now exists in all activities. The ‘energy and environment’ scenario is no exception. This evolution, which originated in the most developed part of the world, contributed to establishing a certain worldwide solidarity among nations. Brazil is making an effort to insert itself in the world economy context but, as far as energy and environment are concerned, still concentrates on its specific challenges: (1) to maintain the dominant role of hydropower in its power system and a high proportion of biofuels in its transportation system; (2) to prudently and progressively incorporate the new technologies in its energy matrix; and (3) to overcome the difficulties encountered in protecting the Amazon Rainforest. In the past, Brazil lagged behind in the Industrial Revolution from the point of view of economic development. It missed the coal age. Its fuelwood basis of the economy lasted much longer than in the countries that pioneered industrial development. An energy breakthrough occurred at the beginning of the 20th century, when Brazil harnessed its hydropower potential for generating electricity. It pursued this process intensively and continuously and, as a result, occupies an outstanding position in the world in regard to this field. From the start, this involved the construction of some of the largest plants in the world, such as the 28-MW-capacity Fontes plant. At the end of the 20th century, the 12,000-MW Itaipu power plant, the largest in the world, was built. Another unique initiative was based on partially converting the centuryold sugar cane agribusiness to the production of ethanol. It led the country

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to assume a forefront position in the world and to become the most competitive producer of that renewable substitute for gasoline. Both government and business followed up on these initiatives and their corresponding policies. As a result, Brazil reached the highest level of renewables in its energy matrix, more than 45 per cent, compared with a world average of 18 per cent. Political changes in the government had no negative impact on the trend of good engineering and economics in the management of either electric power or ethanol. Another completely different development occurred in the oil business. It had, at its start, been a state monopoly, created in a climate of intense public mobilization and political campaigns, in line with similar movements in other countries. Oil continued to be a state monopoly until the end of the 20th century. It had a history of continuous but modest results while exploration was carried out on the continent. Success came when efforts were directed to the continental shelf, where a number of discoveries took place that, in 2007, resulted in balancing domestic production with demand. Since then, the first discovery of deep, pre-salt oil in the Santos Basin was publicly announced. A number of wells have already been drilled in one location, the Tupi Field, and have pointed, since the beginning of 2008, to the probability of large reserves on a worldwide scale. After overcoming the traditional dependency of imported oil and reaching self-sufficiency, the country may well become an exporter of oil in the near future. In the 1990s, the electricity sector was the object of radical change within a context of extensive political and economic reforms. State-owned companies were privatized and new power-plant projects were put up for auction. A partially competitive market was established. Since 2003, the system has suffered further changes, such as a return to greater government participation in energy contracts between producers and consumers. In the oil industry, the changes have been restricted to opening exploration and production activities to the private sector in competition with PETROBRAS, through a system of auctions of potential oilfields. In practice, there often occurred a partnership between the state-controlled company and the leading foreign oil companies. Investors responded positively by participating intensely in both electricity and oil ventures, and are now even entering into the ethanol production field. Now, let us look at the future. The world energy industry is the object of intensive technological research focused on harnessing clean sources of

Looking Forward 223 primary energy. Some of the innovations are reaching the commercial stage, but more daring adventures will still require some decades before entering the market. On a worldwide scale, this phenomenon leads to the need of energy policies based on improvement in the use of present sources and technologies while waiting for the entry of the expected innovations. The overall hope is that the greenhouse gas emissions will eventually cease to increase as a result of objective and uninterrupted actions. Such a pragmatic vision faces fierce opposition by organized idealists and/or ideological groups who envisage the possibility of immediate or at least short-term radical changes in technology, the behaviour of society and politics. In this context, Brazil occupies two opposed positions. In production and use of energy, the country already has one of the cleanest practices in the world. Offsetting this position, however, is its responsibility for large emissions of greenhouse gases that originate in the economic development of the Amazon region. Renewed control and law-enforcement efforts by the federal government are underway and deforestation has been reduced. Since the end of 2007, a new surge of deforestation has been detected and has caused great concern regarding the lack of effectiveness of government actions. But there is a positive side to it: the government is revising its control procedures and, as renewed attention is given to this issue, debates are being taken up. In such an all-encompassing and widespread process, the government’s task is not easy, especially considering the already mentioned lack of land definition in a territory comparable in size to the European Union. When analysing the occupation of the Amazon region, it should be recalled that free movement of people exists and has always existed in Brazil, as well as free choice of productive activities. Unfortunately, there has been insufficient action in the domain of land tenure, a fact which makes it difficult to control illegal exploration of natural resources. There are various explanations, not mutually exclusive, of this process. The mainstream interpretation is that internally the forest is submitted to the extraction of valuable wood, mostly through predatory methods. Externally, the expansion of sugar cane and soybean crops in the CentralWest states adjoining the forest drives cattle-grazing activities to the North. This process leads to a combination of predatory forestry and cattle raising that is responsible for most forest arson. The Amazon issue encompasses, however, several aspects aside from forest preservation. Unfortunately it gives room to radical and controversial positions, although there is total agreement in taking issue against a complacent attitude to forest destruction.

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Energy in Brazil

Into these controversies enters a critical question, namely that of developing and building new hydroelectric plants and their corresponding reservoirs in the Amazon region, considering that they are major assets for the country as a whole. Bearing in mind the total size of the conceivable plants of more than 30,000 MW and the Brazilian experience in this technology, the maximum area of possible flooding if all projects materialize and the reservoirs are built would correspond to the order of 10,000 km2, which would be flooded over a probable period of two decades. This area corresponds to 0.3 per cent of the area occupied by the Amazon Rainforest. There is, therefore, a great deal of misinformation on the importance of the relation between reservoirs of hydroelectric plants and forest destruction. Another aspect of the construction of hydroelectric plants is linked to population displacements that require negotiations between the people to be evacuated and the companies responsible for the construction. In some cases, Indian Reserves are involved and this widens the scope of the negotiations and makes solutions even more difficult. The licensing of hydroelectric plants involves not only regulatory government agencies, but also a large number of NGOs dedicated to specific objectives within the broad scope of the process, some of which are legitimate and constructive players in the public interest; but in their majority they are either unrealistic, or represent local or international commercial or political interests. The internal issues regarding the expansion of ethanol are less radical. Concern is mostly centred on the possible encroachment of sugar cane in the Amazon region, which is considered a danger to the environment. Almost all parties, both in the government and in the agribusiness, consider this concern valid. Criticisms of another nature coming from abroad as a result of misinformation are based on the belief that excessive plantation of sugar cane endangers the future of food-stock crops. But, in fact, the continued expansion of the Brazilian ethanol production due to land occupation and increased productivity does not hinder the growth of the production of food stocks, which has been expanding and even allows export transactions. Sugar cane occupies only 1 per cent of the total area of Brazil and only 10 per cent of the entire crop area. There is, besides, plenty of room for further growth outside the Amazon region, which, incidentally, is unfit for sugar cane cultivation due to excessive humidity. Taking all the foregoing into consideration, the future of energy in Brazil does not differ in essence from what is expected to happen in more advanced economies, except for three issues: the still-dominant need of

Looking Forward 225 major economic development, a better redistribution of wealth, and the continuous improvement of the country’s already outstanding place in the world regarding its proportion of renewable energy. The third item involves the full exploration of Brazil’s hydro resources in the next two decades, and the continued expansion of its sugar cane agribusiness, to allow the time necessary for the maturity and economic entry of new technologies. The challenges are, however, radically different in the domain of forest management, where Brazil has to control the process of forest destruction still underway and the consequent emissions of greenhouse gases, in the expectation that the industrialized nations also substantially improve their performance in controlling emissions.

Appendix 1

Brazil in Maps

All maps are derived from originals supplied at the request of the author by Instituto Brasileiro de Geografia e Estatística (IBGE), except for Maps A1.6 (Basic Electric Grid) and A1.7 (Oil Fields), which were courtesy of, respectively, Operador Nacional de Sistemas (ONS) and Petróleo Brasileiro S.A. (PETROBRAS).

Figure A1.1 Regional sub-divisions of Brazil

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Table A1.1 Area of Brazil and of the great regions Region

Area (1,000 km2)

Percentage of Brazil

3,853 1,554 1,606 925 576 8,515

45 18 19 11 7 100

North Northeast Central-West Southeast South Total

Note: The often-mentioned Legal-Amazon region comprises the Northern Region plus the states of Maranhão (331) and Mato Grosso (903), corresponding to a total of 5,087,000 km2 and 60 per cent of Brazil Source: IBGE

Source: IBGE

Figure A1.2 Physical map of Brazil

Brazil in Maps 229 The territory is dominated by a large plateau 800–1,800 m high, over which there is a long series of mountain ranges, mostly parallel to the Atlantic Ocean, with altitudes from 1,800 m to a maximum of 2,800 m. There is also another plateau in the North, bordering with Guyana. The Northern Region is dominated by the Amazon Plain. The Amazon River is the only waterway that allows ocean-going ships. The São Francisco River falls 70 m before reaching the ocean. The Southeast and South rivers, mostly in the Paraná Basin, descend in successive falls to the River Plate in Argentina, favouring hydro plants and the outstanding Itaipu Binational station on the border with Paraguay. This map is a simplified version of the original IBGE map, to emphasize the relationship between the physical structure and water availability and the importance of hydroelectric power in the country. The greater part of the country lies between the equator and the tropics, except the

Source: IBGE

Figure A1.3 Humidity in Brazil

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Energy in Brazil

Figure A1.4 Population of Brazil

Southern Region, which is in the temperate zone. The Northeast is dry; the North and the South regions are humid. The central part of the country, where the most important rivers have their source, is subject to four to five dry months, causing the variation of water flow and the necessity of large regulatory reservoirs at the hydro plants. Table A1.2 Distribution of the population of Brazil Region

Population (million)

Percentage of Brazilian total

Density (inhabitants/km2)

12.9 47.7 11.6 72.4 25.1 169.7

7.6 28.1 6.8 42.7 14.8 100.0

3.3 30.7 7.2 78.3 43.6 19.9

North Northeast Central-West Southeast South Total Source: IBGE, ‘Census of 2000’

Brazil in Maps 231

Source: IBGE

Figure A1.5 Industry in Brazil Figure A1.5 shows a very strong concentration in the Southeast, mostly São Paulo, the next largest concentration being in the South. This concentration is much more pronounced than the distribution of population. Industries are almost absent in the Legal-Amazon region, except in the eastern part of the state of Pará.

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Source: ONS

Figure A1.6 Basic electric grid and main basins of Brazil Table A1.3 Installed capacity in hydroelectric plants Basins Paranaíba Grande Paraíba do Sul Paraná (without Itaipu) Paranapanema Itaipu Iguaçu Uruguai Jacuí São Francisco Paranaíba Tocantins

Installed capacity (MW) 5,840 7,398 550 9,257 2,430 13,445 6,674 2,590 963 10,393 225 10,174

Figure A1.7 Oilfields in the continental shelf

Note: Oilfields already well defined in the continental shelf between Vitória (ES) and Curitiba (PR), showing sea depths. The map includes results from PETROBRAS and of partnerships with PETROBRAS.

Brazil in Maps 233

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Energy in Brazil

Forest Non-Forest Transition Zone Anthropologically Modified

Note: Forests: dense, open, mixed, deciduous and semi-deciduous forests. Non-forest: campinarana, savannah and steppe Source: IBGE

Figure A1.8 Environmental diversity Figure A1.8 is a very simplified map, taken from the IBGE original. The purpose is to stress the main diversity between the main forest, the cerrado (savannah) and the area intensely modified by human occupation with economic activities (antropically modified). It also highlights the transition area between the cerrado and the Amazon Forest under stress and therefore the object of environmental concern. The map includes an arch which indicates the border of controversial occupation of land for farming and cattle grazing.

Appendix 2

List of Main Sources of Information in Brazil

Government agencies and private entities (Many of the sites offer an entry in English) ABRAF – Associação Brasileira de Produtores de Florestas Plantadas. Information on planted forest areas and production. www.abraf.com.br. Postal address: Setor de Autarquias Sul, quadra 1, bloco N, Edifício Terra Brasilis, sala 503 – Brasília – DF – 70070-010. ANEEL – Agência Nacional de Energia Elétrica. Information on generation, transmission and distribution of electric energy. www.aneel.gov.br. Postal address: SGAN 603, Módulo J – Brasília – DF – CEP 70830-030. ANFAVEA – Associação Nacional dos Fabricantes de Veículos Automotores. Information on production and sales of cars, trucks and tractors. www.anfavea.com.br. Postal address: Av. Indianópolis 496 – São Paulo – SP – CEP 04062-900. ANP – Agência Nacional do Petróleo. Information on exploration, production, foreign trade and final use. www.anp.gov.br. Postal address: Av. Rio Branco 65, Rio de Janeiro RJ. CEP 20090-004. BACEN – Banco Central do Brasil. Information on capital transactions, foreign trade, balance of payments and exchange rates. www.bacen.gov.br. Postal address: Setor Bancário Sul (SBS), Quadra 3, Bloco B. CEP 70074-900. BNDES – Banco Nacional de Desenvolvimento Econômico e Social. Wholly-owned government agency dedicated to long-term investment financing and temporarily responsible for the privatization process. Historical information. www.bndes.gov.br. Postal address: Av. República do Chile 100 – Rio de Janeiro – RJ – CEP 20031-917.

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Energy in Brazil

CCEE – Câmara de Comercialização de Energia Elétrica. A recent association of generating, transmission and distribution companies, sponsored by the government, with responsibility to conduct auctions and supervise energy contracts. www.ccee.org.br. Postal address: Alameda Santos 745, 9º andar, São Paulo – SP – CEP 01419-001. CGEE – Centro de Gestão e Estudos Estratégicos. A private organization under the auspices of the Ministry of Science and Technology (MCT). Coordinates strategic studies. www.cgee.org.br. Postal address: SCN Quadra 2, Bloco A. Edifício Corporate Center, 11º andar, sala 1.102, Brasília – DF – CEP 70712-900. ELETROBRÁS – Centrais Elétricas do Brasil S.A. A public company, controlled by the Brazilian government. Acts as a holding company of electricity generating companies. Also manages government development programmes. www.eletrobras.com.br. Postal address: Av. Presidente Vargas 409 13 andar, Rio de Janeiro – RJ – CEP 20071-003. ELETRONUCLEAR – Eletrobrás Termonuclear. A subsidiary of ELETROBRÁS. It owns and operates, under legal monopoly, the two nuclear power plants. www.eletronuclear.com.br. Postal address: Rua da Candelária 65 – Rio de Janeiro – RJ – CEP 20091-906. EPE – Empresa de Pesquisa Energética. Government-owned service company. It is responsible for long-term forecasts and projections of the energy market and for auctions of generating and transmission line projects. www.epe.gov.br. Postal address: Av. Rio Branco 1, 11º andar. Rio de Janeiro – RJ – CEP 20090-003. IBAMA – Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis. Government regulatory agency, attached to the Ministry of the Environment (MMA). It has a vast spectrum of functions related to environment and licensing of projects. www.ibama.gov.br. Postal address: SCEN Trecho 2 – Brasília – DF – CEP 70818-900. IBGE – Instituto Brasileiro de Geografia e Estatística. Main source of official Brazilian statistics. It has many branches. www.ibge.gov.br. Postal address: Central office: Av. Franklin Roosevelt 166 – Rio de Janeiro – RJ – CEP 20021-120. INB – Indústrias Nucleares Brasileiras. Government-owned company responsible for the nuclear fuel production cycle and technical services related to the use of radioactive material. www.inb.gov.br. Postal address: Rua Mena Barreto 161, Rio de Janeiro – RJ – CEP 22271-100.

List of Main Sources of Information in Brazil 237 INPE – Instituto Nacional de Pesquisas Espaciais. A government agency responsible for studies and technological development in the fields of space and atmosphere sciences. www.inpe.br/ingles. Postal address: Av. dos Astronautas 1.758 – Jd. Granja – São José dos Campos – SP – CEP 12227-010. IPEA – Instituto de Pesquisa Econômica Aplicada. A government agency responsible for studies in the social and macroeconomy fields. Important database. www.ipea.gov.br. Postal address: Av. Presidente Antonio Carlos 51 – Rio de Janeiro – RJ – CEP 20020-010. MAPA – Ministério da Agricultura, Pecuária e Abastecimento. www.agricultura.gov.br. Postal address: Esplanada dos Ministérios, Bloco D – Brasília – DF – CEP 70043-900. MCT – Ministério de Ciência e Tecnologia. www.mct.gov.br. Postal address: Esplanada dos Ministérios, Bloco E – Brasília – DF – CEP 70067-900. MMA – Ministério do Meio Ambiente. www.mma.gov.br. Postal address: Esplanada dos Ministérios, Bloco B – Brasília – DF – CEP 70068-901. MME – Ministério de Minas e Energia. www.mme.gov.br. Postal address: Esplanada dos Ministérios, Bloco U – Brasília – DF – CEP 70065-900. ONS – Operador Nacional do Sistema Elétrico. A mixed entity (government and private associates) that coordinates the operation of the integrated electricity grid. www.ons.org.br. Postal address: Rua da Quitanda 196, Rio de Janeiro – RJ – CEP 20091-005. PETROBRAS – Petróleo Brasileiro S.A. A public company controlled by the government. It acts in all phases of the oil industry. www.petrobras.com.br. Postal address: Av. República do Chile, Rio de Janeiro RJ – CEP 20031-912. Senado Federal. The major source of information on laws and government decrees. www.senado.gov.br/sf/legislacao. Postal address: Pça. dos Três Poderes – Brasília – DF – CEP 70165-900. SINDIPEÇAS – Sindicato Nacional de Componentes para Veículos. The syndicate of industries specialized in the production of parts for car makers. It offers a statistical database on the industry. www.sindipecas.org.br. Postal address: Av. Santo Amaro 1.386 – São Paulo – SP – CEP 04506-001. UNICA – União da Indústria da Cana-de-Açúcar. A trade association of the sugar cane agribusiness. It carries surveys and research programmes. It offers a statistical database. www.unica.com.br. Postal address: Av. Brigadeiro Faria Lima 2.179, 9º andar – São Paulo – SP – CEP 01452-000.

Appendix 3

Brazilian Exchange Rate 1995–2007

Table A3.1 Brazilian exchange rate – real (R$)/US$ 1995–2007 Period 1995 1995 1995 1995 1995 1995 1995 1995 1995 1995 1995 1995 1996 1996 1996 1996 1996 1996 1996 1996 1996 1996 1996 1996 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1998 1998

Rate

January..................................................0.84 February ..........................................0.8495 March ................................................0.894 April....................................................0.911 May ....................................................0.904 June ......................................................0.92 July ....................................................0.9268 August ..................................................0.94 September ......................................0.9508 October ..........................................0.9587 November ......................................0.9624 December ......................................0.9673 January ............................................0.9735 February ..........................................0.9801 March ..............................................0.9853 April..................................................0.9894 May ..................................................0.9945 June ..................................................1.0005 July ....................................................1.0061 August..............................................1.0126 September ......................................1.0185 October ..........................................1.0243 November ......................................1.0296 December ......................................1.0365 January ............................................1.0421 February ..........................................1.0485 March ..............................................1.0559 April..................................................1.0601 May ..................................................1.0675 June ..................................................1.0738 July ....................................................1.0799 August..............................................1.0871 September ......................................1.0928 October ..........................................1.0993 November ......................................1.1065 December ......................................1.1128 January ............................................1.1191 February ..........................................1.1263

Period 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1999 1999 1999 1999 1999 1999 1999 1999 1999 1999 1999 1999 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2001 2001 2001 2001

Rate

March ..............................................1.1329 April..................................................1.1404 May ..................................................1.1473 June ..................................................1.1538 July ....................................................1.1607 August..............................................1.1709 September ......................................1.1801 October ..........................................1.1876 November ......................................1.1929 December ......................................1.2046 January ............................................1.5011 February ..........................................1.9129 March ................................................1.896 April..................................................1.6933 May ..................................................1.6827 June ..................................................1.7646 July ....................................................1.7995 August ..................................................1.88 September ......................................1.8973 October ..........................................1.9687 November ......................................1.9291 December ........................................1.842 January ............................................1.8029 February ..........................................1.7745 March ..............................................1.7412 April..................................................1.7674 May ..................................................1.8271 June ..................................................1.8075 July ......................................................1.797 August..............................................1.8084 September ......................................1.8384 October ..........................................1.8788 November ......................................1.9472 December ......................................1.9625 January ............................................1.9537 February ..........................................2.0011 March ..............................................2.0882 April..................................................2.1917

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Energy in Brazil

Period 2001 2001 2001 2001 2001 2001 2001 2001 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2004 2004 2004 2004 2004 2004 2004 2004

Rate

May ..................................................2.2964 June ....................................................2.375 July ....................................................2.4652 August..............................................2.5098 September ......................................2.6709 October ..........................................2.7394 November ......................................2.5423 December ......................................2.3619 January ............................................2.3771 February ..........................................2.4188 March ..............................................2.3458 April..................................................2.3196 May ..................................................2.4796 June ..................................................2.7132 July ....................................................2.9338 August..............................................3.1093 September ......................................3.3412 October ..........................................3.8051 November ......................................3.5756 December ......................................3.6251 January ............................................3.4376 February ..............................................3.59 March ..............................................3.4461 April..................................................3.1179 May ..................................................2.9549 June ..................................................2.8824 July ......................................................2.879 August..............................................3.0017 September ........................................2.922 October ..........................................2.8607 November ........................................2.913 December ......................................2.9245 January................................................2.851 February ..........................................2.9295 March ..............................................2.9047 April..................................................2.9052 May ..................................................3.0996 June ..................................................3.1283 July ......................................................3.036 August..............................................3.0021

Period 2004 2004 2004 2004 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007

Rate

September ......................................2.8903 October ..........................................2.8521 November ......................................2.7852 December ......................................2.7174 January ............................................2.6922 February ............................................2.597 March ..............................................2.7039 April..................................................2.5784 May ....................................................2.452 June ..................................................2.4127 July ....................................................2.3727 August..............................................2.3598 September ......................................2.2936 October ..........................................2.2557 November ..........................................2.21 December ......................................2.2847 January ............................................2.2731 February ..........................................2.1611 March ..............................................2.1512 April..................................................2.1285 May ..................................................2.1773 June ..................................................2.2475 July ....................................................2.1885 August..............................................2.1551 September ......................................2.1679 October ..........................................2.1475 November ......................................2.1571 December ......................................2.1491 January ............................................2.1377 February ..........................................2.0955 March ..............................................2.0879 April..................................................2.0312 May ..................................................1.9808 June ..................................................1.9311 July ......................................................1.882 August..............................................1.9652 September ......................................1.8988 October ..........................................1.8002 November ......................................1.7691 December ......................................1.7852

Source: Ipeadata (2008) Macroeconomico, Séries Mais Usadas, ‘Taxa de Câmbio, Final de Período’

Index

alternative energy diversity of in developed world 159 hydropower plants 159 solar energy 159–160, 162–164 wind energy 159–162 reasons of investments in 160 Amazon region control of incursion into 152–154 deforested area of 154 repercussions of extended plantations in 149–151 various perceptions of 155–158 Amazon Vigilance System Project (SIVAM) 153 American and Foreign Power Company (AMFORP) 14, 15, 44 ANA see National Water Resources Agency (ANA) ANEEL see National Electric Power Agency (ANEEL) Angra I nuclear plant 110, 112 Angra II nuclear plant 62, 111–113 Angra III nuclear plant 26, 111–113, 121 annual required income (RAP) 60 ANP see National Petroleum Agency (ANP) auctions of energy for specific periods 71 for hydroelectric plants and transmission lines 59–60 of oil exploration areas 84–86 for purchase of bio-diesel 142 for sale of energy 72 automotive vehicles maximum emissions permitted for pollutant 192–193 technological progress in 193–194 automotive vehicle traction, alternative forms of 195–196 battery concepts, new 196–197 BEN see National Energy Balance (BEN)

BIG–GT system see integrated biomass gasifier–gas turbine (BIG–GT) system bio-diesel 138–139 production of 139 bio-diesel plants, authorized by ANP 143 biomass crop cultivation and 147 firewood and charcoal 133–135 as source of primary energy 123 use as fuel 131 biomass-fired thermoelectric plants 159, 164 Bolivia–Brazil gas pipeline project 92, 96–97, 100 Brazil bio-diesel programme 140–143 Brazil–Paraguay Itaipu treaty 73 coal policy 103 coal production in 4 constitution and macroeconomic deterioration in 18–20 dependence on foreign energy 41 foreign oil and oil products 80–81 imported oil 77 development of electric power in 4 economic development projects 11–13 retrospective of 29–31 world economic scenario and 34–35 economic forecasts for 212 economic growth and inflation 30 until 1980 31–32 election for President 20 electricity forecasts for 214, 216–217 electricity-generation capacity forecasts 214–215 electric power policy of 18 electric power sector in 50–51 debate on 63–65 establishing of competitive market for 55–56

242

Index

Brazil (contd) electric power sector in (contd) market price issue for 57–58 national system operator for 56–57 operational practices and accounting in 58 privatization of 53–55 reforms in 51–52 reorganization of 52–53 electric power system in 43 energy balance since 1970 36–38 energy consumption in 203–204, 213–214 energy infrastructure in 13 energy policy of 8–9 changes in 14 influence of atomic bomb on 10–11 environmental problems in 173 ethanol to petrol price ratio in 130 expansion of international trade 24 financial crisis of 1929 6–7 during First World War 6–7 foreign transactions 35 gas programme 93–94 geographical concentration of economy 26–27 Getulio Vargas Foundation (FGV) 29 growth of domestic oil production in 216 hydro and thermal generation capacity in 50 Independent Programme of Nuclear Technology 117 industrialization in 2, 6–7 influence of atomic bomb on energy policy of 10–11 initiatives for promoting efficiency in 187–188 institutional and economic reforms in 14–15 institutional framework 177–179 integrated electricity system 162 international economic relations 24 Itaipu 44, 46–47, 63, 73 land utilization in 146 liberal policy and nationalistic demonstrations 7 maps of 227 military governments 14–15, 17 National Development Plans 31, 111 National Energy Plan 212 National Forestry Programme (PNF) 136 National Nuclear Energy Commission (CNEN) 13

National Petroleum Agency (ANP) 82 National Petroleum Council (CNP) 9 National Pro-Alcohol Programme 9 National Water and Electric Power Council (CNAEE) 9 before nineteenth century cultivation of sugar cane and coffee 2 immigration of Europeans 2 influx of slaves 2 stages of political structure 1 during nineteenth century colonization 2 deforestation 3 geological surveys 3 public services 3 nuclear energy 10–11, 26, 107–108 oil and gas sector in, 82–83 oil monopoly 82 oil prospecting in 15–16 outlook for energy in 211–212 per-capita economic growth 30 photovoltaic cells installation in 163 political, economic and energy policies 8–9 political reforms in 10–11 political upheaval in 13–14 power plants construction schedule 215– 216 price of gas and exchange rate in 98–100 primary energy supply 40 Pro-Álcool programme 124–125 production forecasts for oil and natural gas for 217 Real Plan (Plano Real) 33 reforestation in 136–138 renewable energy in 38–40 reorganization of state 20–23 reserves of natural gas in 90 response to oil crises of 1974 and 1979 17–18 1930 Revolution 8–9 role of thermal plants in 49–50 solar panels potential in 167 sources of energy coal 3–4 hydroelectric power 4–5 nuclear energy 10–11 oil 6 primary 35–36 sugar cane yield 128 surveys for oil in 6 technological development in 196

Index Brazil (contd) Thermoelectric Priority Programme 61 total energy consumption in 40–41 total primary energy supply (TPES) CO2 emissions 38 GDP 37 by source 36 total primary non-renewable energy supply in 39 total primary renewable energy supply in 39 transition in 2002–03 23–26 troubled years from 1980 to 1994 32–33 urbanization in 202 value of imports and exports of crude oil 81 Water Code 3, 9, 12, 43, 44, 51, 180 wind potential 162 Brazil–Argentina Accounting and Control of Nuclear Materials Agency (ABACC) 121 Brazil–Bolivia natural gas agreement 91–93 Brazil–Germany Agreement, on nuclear technology 117, 118 Brazilian automobile industry motorcycle production 194 technological progress in 193–194 Brazilian energy balance 36–38, 92, 131, 134, 201 Brazilian Energy Matrix 38, 89, 127, 140, 169 Brazilian Fuel Cell Programme 169 Campos Basin foreign oil companies in activity in 88 oil exploration in 86–88 CANAMBRA 12, 43, 44, 47 capacity factor, of windmills in Brazil 162 in Denmark 161 in Germany 161 CAR see risk aversion curve (CAR) carbon dioxide credit-obtaining period 176 global atmospheric concentrations of 175 carbon dioxide emissions 173, 174, 203, 206 projection of 209–210 CCC see Fuel Consumption Account (CCC) CCEE see Chamber of Electrical Energy Commercialization (CCEE) cell development 168 Centre for Strategic Studies and Management (CGEE) 169

243

‘certificates of assured energy’ 96 charcoal 133–135 Clean Development Mechanism (CDM) 173–176 climate change on continental, regional and ocean-basins scale 175 integrated view of 174–175 IPCC projections on 209–210 and Kyoto Protocol 173–174 CNAEE see National Water and Electric Power Council (CNAEE) CNEN see National Nuclear Energy Commission (CNEN) CNP see National Petroleum Council (CNP) coal mining 4, 9 production in Brazil 3–4 White Mission Report on prospects of 6 coal coke 9 coal-driven plants 49, 71, 76 coal-fired thermoelectrical plants 103–104 coal policy, in Brazil 103 CO2 emissions, per unit of energy 38 Common Market of the South (MERCOSUR) 25 compressed natural gas (GNC) 90 Coordinating Group for the Planning of the Electric Power System (GCPS) 46 crops, used for energy production 146–149 crude oil exploration and production (E&P) 77 prospecting in Brazil 15–16 Decennial Electric Power Expansion Plan 113 deep-water prospecting 18 deep-water wells 87 deforestation 3, 154–155, 171 Deforestation in Real Time (DETER) 155 Denmark problems of integration of large wind farms in 161 use of wind energy in 161 Designated National Authority 175 DETER see Deforestation in Real Time (DETER) Diesel motors, technological progress in 194 Diesel oil consumption 195 quality of 193 drinking water, quality of 176

244

Index

Economic Ecological Zoning (ZEE) 152 electric/hybrid vehicle projects 196 electricity see electric power electric power forecasts for Brazil 214 generation in water cycle 177 household consumption of 190 pricing 72 promoting efficient use of 188 taxes 74–75 wind and solar energy installations for producing 160 electric power models, implementation of 61 electric power sector, in Brazil 50–51 debate on 63–65 establishing of competitive market for 55–56 evaluation of waste and losses in 189 implementation of electric power model with hydrological risks 61 generation model 69–73 transmission model 67–69 market price issue for 57–58 national system operator for 56–57 operational practices and accounting in 58 planning and optimization of interconnected operations for 67 privatization of 53–55 reorganization of 52–53 responsibility, safety and quality of supply 191 steps towards reforms in 51–52 auctions for hydroelectric plants and transmission lines 59–60 competitive market 55–56 market price issue 57–58 national system operator 56–57 operational practices and accounting 58 organizational changes in ELETROBRÁS 58–59 privatization 53–55 rationing of electric power system 62 reorganization 52–53 electric power system, in Brazil 43 collapse of 62 expansion of 75–76 market crisis and its financial consequences on 62–63 rationing of 62 electric power utilities 51

electric traction motors 196 ELETROBRÁS 13, 15, 44, 46, 47, 49, 50, 54, 57, 164–165 agreement on nuclear energy 109 organizational changes in 58–59 transformation and strengthening of 73–74 ELETRONORTE, and hydroelectric projects 183–184 ELETRONUCLEAR 73, 74, 114, 119 Emergency Consumption Reduction Plan 62 energy balance 92, 131, 134 outlook for 201 since 1970 in Brazil 36–38 world, forecasting for 204–206 energy conservation programmes 186 energy consumption in Brazil 40–41 in buildings 187 growth forecasts of worldwide 206–208 and income, relationship between 202 stabilization in industrialized nations 203 world total primary 207 energy efficiency conservation concepts and 185 initiatives for promoting 187–188 technical measures for 185 in transport system 192–193 Energy Forest Research programme 136 energy imports, by Brazil 41 energy projects, issues associated with 172 energy supply composition of 38 primary 40 environment in Articles 177–178 institutional framework, building 179–180 environmental concern international co-operation in 172 in licensing projects for hydroelectric plants 184–185 mobilization of public opinion 171 in poorer parts of world 171 environmental impact legal definition of 179 of projects and environmental compensation 180 environmental licensing definitions in CONAMA Resolution 183 hydroelectric power generating projects 182 for stages of undertaking 181

Index EPE studies inter-regional transmission trunks 215 oil and gas production 219 sustained energy planning 211–212 ethanol adaptation of vehicle engines to 125–127 as automotive fuel 123–124 consumption 133 controversies regarding energy efficiency and price of 129–130 price ratio with petrol 130 production of 127 FGV see Getulio Vargas Foundation (FGV) financial crisis of 1929 6–7 firewood 133–135 forest plantations, average productivity of 137 Forestry Code 8, 136 fuel cell and economic utilization of hydrogen 168–169 initiative to promote uses of 169 research and development 168 fuel consumption number of vehicles and 194–195 in transportation 192 Fuel Consumption Account (CCC) 47, 96 fuel cycle see nuclear fuel cycle fuel efficiency 194–195 fuel oil 18 fuel oil-driven plants 49 fuel-oil-fired thermoelectric plants 96 Fund for Clean Development 173 gas-driven plants 49, 71 gas-driven thermoelectric plants 25, 75 gas-fired thermoelectric plant 92, 96–97 gas pipeline 92, 93 gas programme, introduction of 93–94 gas turbine 197, 198 generation model, implementation of 69–73 Geological Service 180 Germany–Denmark integrated system 161 Getulio Vargas Foundation (FGV) 29 globalization, and energy balance 201 GNC see compressed natural gas (GNC) ‘gold clause’ 8 H-BIO 138, 139 heat-producing installations 197 heavy oil 81 see also crude oil

245

hybrid traction 195–196 hydroelectric plants 164 auctions, 59–60 environmental studies of 182–183 licensing 73, 182–185 hydroelectric power system advent in Brazil 4–5 construction of 43 mathematical models for 47–49 methods of optimization for 45–47 implementation with high hydrological risks 61 market for 55–56 role of thermal plants in 49–50 hydroelectric reservoirs 151–152 hydrogenation, of vegetable oils 138 see also H-BIO ‘Hydrogen Fuel Initiative’ 169 hydrogen programme, fuel cells 168–169 hydro resources 44 Hydro Resources Policy 181 hydrothermal system, methods of optimization of 45–47 IAEA see International Atomic Energy Agency (IAEA) IMF see International Monetary Fund (IMF) income and energy, relation between 203 Independent Programme of Nuclear Technology 117 industrialization, in Brazil 2, 6–7 INMETRO 166, 167, 188, 189 Institutional Revision of the Electric Power Sector (REVISE) 50 integrated biomass gasifier–gas turbine (BIG–GT) system 132 Intergovernmental Panel on Climate Change (IPCC) 174–175, 210–211 Inter-ministerial Commission of Global Climate Change 175–176 International Atomic Energy Agency (IAEA) 109, 117 International Monetary Fund (IMF) 22 International Water Resources Association (IWRA) 176 investments for improving energy efficiency 191 in indispensable technological development 160 in new and alternative energies 164 in wind energy 161 Itaipu Binational hydroelectric plant 16, 44

246

Index

Kyoto Protocol 173–174, 208 lieutenant-ism 7 ‘Maceió Letter’ 102 MAE see Wholesale Energy Market (MAE) Magna Carta 8, 19 MERCOSUR see CommonMarket of the South (MERCOSUR) methane, global atmospheric concentrations of 175 Mixed Brazil–United States Commission 11 motor alcohol 9 National Council on Environment (CONAMA) 179 National Development Plans 31, 111 National Electric Power System Operator (ONS) 56–57 National Energy Balance (BEN) 37–38 National Forestry Programme (PNF) 136 ‘National Integrated Policy for Legal Amazonia’ 153 National Inventory of Greenhouse Gas Emissions 174 National Metrological Institute (INMETRO) 166 National Nuclear Energy Commission (CNEN) 13 National Pact for Valorization of Amazon Region 158 National Petroleum Agency (ANP) 82 National Petroleum Council (CNP) 9 National Privatization Programme 53, 83 National Pro-Alcohol Programme 9, 124–125, 129 National Programme for Efficient Public Lighting (RELUZ) 190 National Programme of Incentives to Alternative Sources of Energy (PROINFA) 162 National Water and Electric Power Council (CNAEE) 9 natural gas 25, 71 advent in Brazil 89–90 balance 94 Brazil–Bolivia agreement 91–93 within energy matrix 94–96 methods for determining transportation costs 99–100 price and exchange rate 98–100 prices at city gates 101

proven reserves in Brazil 90 regulation of market for 101–102 sales by consumer 95 regional distribution 95 new energy see alternative energy ‘new energy’ auctions 70 nitrogen oxide, global atmospheric concentrations of 175 non-OECD group energy consumption forecasts for 208 total primary energy supply (TPES) 203 Nuclear Club 10, 111 nuclear energy 10–11, 26, 107–108 nuclear fuel cycle 114, 117–119 nuclear fuel reprocessing 119–121 nuclear minerals, prospecting 115–117 nuclear plants 108–110 Angra I 110, 112 Angra II 62, 111–113 Angra III 26, 111–113, 121 institutional dispositions for 113–114 professional and technological qualifications for operating 114–115 programme 110–111 nuclear technology 113 Brazil–Germany Agreement 117, 118 NUCLEBRÁS 110, 114, 115 OECD see Organization for Economic Cooperation & Development (OECD) OECD nations consumption per inhabitant in 202–203 energy consumption forecasts for 208 oil see crude oil oil and natural gas sector, in Brazil 82–83 oil exploration, in deep waters 86–89 oil monopoly 82 oil prospects 217 oil reserves 218 ‘old energy’ auctions 70 ONS see National Electric Power System Operator (ONS) Organization for Economic Cooperation & Development (OECD) 38 Parnaíba hydroelectric plant 5 pau-brasil 2 PETROBRAS 10–11, 16, 18, 25, 77, 80, 125 auction of oil exploration areas 84–86 authority to operate in other countries 91 bio-diesel programme 141

Index entry into electric power generation 97–98 investments and success in oil exploration 77–79 oil exploration in deep waters 86–89 plans flow of liquid fuels 218 oil and gas prospects 217–218 Tupi field 218 privatization program 83–84 reserves discovered by 89 petroleum surveys 9 photovoltaic cells components of 163 concept of 162–163 practical efficiency in capture of luminous energy 163 total installed capacity 163 photovoltaic solar energy 162 plutonium 119, 120 PNF see National Forestry Programme (PNF) population growth rate 201–202, 205 PPT see Prioritary Programme of Thermoelectricity (PPT) pressurized water (PWR) 109 Prioritary Programme of Thermoelectricity (PPT) 93 privatization, of electric power sector 53–55 Pro-alcohol programme see National ProAlcohol programme Pro-Álcool programme see National ProAlcohol programme PROCEL 187–188 energy saving stamp 189 PROESCO (funding programme) 191 PROINFA programme energy efficiency achieved by 189 National Programme for Efficient Public Lighting (RELUZ) 190 results from 190 stages 165 status of 165 tied to CDE 164 ‘Project Finance’ 51 public transportation and energy prices 186–187 PWR see pressurized water (PWR) radioactive minerals 107 RAP see annual required income (RAP) RAR see reasonably assured resources (RAR) Rate of Use of the Transmission System (TUST) 68

247

Real Plan (Plano Real) 22, 33, 34, 35, 154 reasonably assured resources (RAR) 117 reforestation, in Brazil 136–138 renewable energy 18 in Brazil and worldwide 38–40 sources of 138 REVISE see Institutional Revision of the Electric Power Sector (REVISE) risk aversion curve (CAR) 64 Santa Isabel project 60 Save project 193 separative work unit (SWU) 119 SIVAM see Amazon Vigilance System Project (SIVAM) Small Hydroplants Plants (PCH) 165 solar collectors 166–167 solar energy 159–160 photovoltaic 162 using by means of mirrors 163 for water heating 166–167 solar heating system 166–167 sources of information in Brazil 235 Special Environmental Secretariat (SEMA) 177 Study of Environmental Impact (EIA) 180 sugar cane agribusiness 127–129, 130, 132 alcohol 123 bagasse for production of ethanol-cellulose 132 use in thermoelectric plants 123 breakdown of energy content in 131 primary energy supply from 127 yield in Brazil 128 SWU see separative work unit (SWU) tax, on electric power 74–75 Tennessee Valley Authority (TVA) 11 thermal plants 45 role of 49–50 see also gas-driven thermoelectric plants; gasfired thermoelectric plant thermoelectric plants small 164 use of sugar cane bagasse in 123 Thermoelectric Priority Programme 61 thermonuclear plants 110, 111, 113 Tlatelolco, Treaty of 108 TNP see Treaty for the Non-Proliferation of Nuclear Weapons (TNP) tons of oil equivalent (TOE) 37

248

Index

total primary energy supply (TPES) 37 transmission lines, auctions 59–60 transmission model, implementation of 67–69 transport system, energy efficiency in 192–193 Treaty for the Non-Proliferation of Nuclear Weapons (TNP) 108, 119–121 Treaty of Tlatelolco see Tlatelolco, Treaty of TUST see Rate of Use of the Transmission System (TUST) TVA see Tennessee Valley Authority (TVA) United Nations Framework Convention on Climate Change 173 United Nations Special Fund 12 uranium enrichment 119–121 mining 116 reactor 109 uranium dioxide powder (UO2) 118 uranium hexafluoride 118 urbanization 205 in Brazil 202 Urucu–Coari–Manaus gas pipeline 91 Urucu gas, in Amazon region 90–91 vegetable oils 138 water activities related to, in United Nations 177

international meetings to discuss availability and quality of 176 and National Water Agency (ANA) 180–181 rules in sphere of 178 Water Code 3, 9, 12, 43, 44, 51, 180 water heating comparative expenditures for 167 solar energy for 166–167 White Mission Report, on prospects of coal 6 Wholesale Energy Market (MAE) 56 wind energy saving fuel by 162 use of 160 and windmills 161 wind farms, integration of 161–162 windmills blades 161 capacity factor 161 wind speed 161 World Energy Council 186 view of energy industry 208 World Energy Outlook 206 World Water Council 176 yellow cake 117 see also uranium ZEE see Economic Ecological Zoning (ZEE)