Q&A José da Costa Carvalho Neto - President of Eletrobras
Eletrobras is Latin America’s biggest power utility company, and the fourth largest clean energy in the world. With stakes in a number of Brazilian electric companies, it generates and transmits approximately 60% of Brazil’s electric supply. José da Costa explains the challenges his company faces in meeting the growing energy needs of the Brazilian people.
The Report Company: As the country continues to grow it will need even more clean energy. By 2020, the country's demand for energy is set to grow by 60 percent. What are the challenges for electricity generation in Latin America as a whole?
José Costa: In Brazil, we currently have a total installed energy capacity of up to 120,000MW. Ten years from now, we will need 50 percent more than that – or another 6,000MW each year until 2022 – which is an enormous challenge. However, the country is rich in clean energy, predominantly hydroelectric, but also wind, biomass and a little solar power. Our total potential hydroelectric production alone is 260,000MW, one of the greatest of any country in the world, of which over two-thirds is yet to be exploited. But the potential for wind energy is even greater, as much as 350,000MW per year.
Considering the broader picture of Latin America, Eletrobras has defined some strategic priorities for the energy generation and the transmission business, with a focus on the continent's electric-energetic integration, where huge opportunities are to be captured. We have established local offices in Montevideo, Lima and Panama and are currently developing common projects with Uruguay, Nicaragua, Peru and Argentina.
TRC: Where do Eletrobras’ investment priorities lie?
JC: Our main project is to strengthen the energy backbone of the country, the large hydroelectric power plants. It is essential that we are involved in the bigger, more high-risk projects because we have the expertise to carry them out. Some of these projects were first conceived 37 years ago. Since then, environmental impact studies have been carried out, leading to design optimisation. The initial reservoir at the Belo Monte hydropower plant, for instance, was twice the size of the one now in construction.
TRC: Why is there criticism of the Belo Monte project?
JC: The fact that it is in the Amazon strikes a nerve. However, the vast majority of the local population are in favour of Belo Monte, not least because it will provide energy where previously there was none. The nearest indigenous population is 60 kilometres away, too far for there to be any direct consequences.
Our total environmental investment there is approximately US$2 billion. The people living in the affected houses, in Altamira for example, will be transferred to comfortable homes with running water, electricity and much better sanitary conditions, that won’t collapse with heavy rain or flooding rivers as occurs today. Once these places have energy, we then need to introduce industry and schooling to make the development sustainable. There are a lot of benefits for the region.
TRC: How is Eletrobras going to finance all its planned projects?
JC: Brazil is going to invest around US$17 billion a year for the next ten years in energy generation, transmission and distribution. In 2012, Eletrobras will invest US$6.5 billion, and we are working with the local companies including Tractebel (the Suez Group), CEMIG and Vale. One of the international partners we are currently negotiating with at Tapajós is Electricité de France, but on low-scale projects we also make deals with smaller companies. On its own, the government cannot invest the 25 percent of its GDP necessary to sustain development at 5-6 percent, so we have sought to bring in the private sector.
TRC: Will there be problems attracting investors after President Rousseff announced a reduction in domestic and industrial electricity rates in September to make Brazil more competitive?
JC: I analyse the electricity sector according to five parameters: quality, reliability, universality, sustainability and affordability. We have the first two, and the system is totally integrated with losses of only around 4 percent, which is very good on a system of this size. In the last few years we added another 15 million people to the grid, leaving only around 1.5 million without power, which we aim to solve by 2014. It will be the first truly universal public service in Brazil. As for sustainability, we work almost entirely with the renewable resources of water, wind, biomass and the sun, so that leaves affordability.
The market economy of the United States keeps rates lower, and some countries’ rates are subsidised. Brazil is an unequal country, though, and 50 percent of the Amazon has been served by expensive diesel or oil-generated power. It wouldn’t be fair for these people to pay more, so the whole country shares the price through compensation taxes. Brazilians pay for their Amazonian countrymen to have similar rates to the more developed regions. Now that almost all of Brazil’s state capitals are connected, soon to be followed by the likes of Manaus, Boa Vista and Macapá, the consumption of diesel and oil will decrease greatly, and as the country becomes more equal, so the subsidies for the poorest families will be reduced, meaning such taxes will become increasingly avoidable.
Another aspect of this is the renewal of concessions. If the government grants a concession for a third party to start a power plant for a set period of time, the most important consideration for that company is to have paid off their investment by the end of the concession period. Rates are calculated from the amortisation of investments, the operation costs and maintenance, and for hydro plants the biggest factor is the first. Operation and maintenance costs are low and the fuel – water – is of course cheap, so once all the investments are paid off and the concession period has ended, there is no reason for its renewal not to be lowered to 60-70 percent of the original value, and that also opens the way for a reduction in rates.
There is a virtuous cycle at work here. The industry has indicated a relationship between every percentage point decrease in prices leading to a proportional increase in the GDP. Long-term, that means more investments, a larger market, greater growth and thus more energy available to be sold.
TRC: So these are the benefits of investments made years ago?
JC: Yes, benefits which the consumer is now profiting from. There are concessions that will expire in 2015 and 2017 and we are negotiating their renewal now, with more to follow in 2023. Brazil has a unique system, on a continental scale. France, for example, has the same energy demands as us but on a grid the size of Minas Gerais, so their transmission lines have a far greater load. In an economy of scale, therefore, the cost of each unit is going to be much smaller.
TRC: Everybody is talking about "smart grids." Is this going to help Brazil with the loss of energy in transmission and also reduce prices?
JC: Smart grids will help. We have more than a thousand agents working together, with plants in the Amazon sending energy to Rio Grande do Sul. We are proud of the technology involved and the development models that we have implemented but I have no doubt that in the next few years, as intelligent systems develop, costs will continue to decrease.
There are two types of energy loads. We need light on demand in a meeting room, but there are loads that are not time specific. If pumps need two hours to fill the water tank on the top floor of a building, it would be better if this were done at a different time. Intelligent air-conditioning can blow cold air around in the middle of the day that was created by a freezing process during off-peak times.
Clearly, almost every source of energy is derived from the sun. It evaporates the water that ultimately refills the hydroelectric reservoirs via rain. Its heating of the planet creates the winds and it fuels the photosynthesis that creates biomass. It is cheaper to produce energy directly from the source, so while the cost of wind energy in Brazil has decreased from US$150 per megawatt per hour to less than US$50 thanks to technology and scale, solar energy is the future.
TRC: So are there investments for the construction of solar equipment in Brazil?
JC: Producers are starting to become interested in it and Brazil has the raw materials.
Currently, when a solar panel is installed on a roof, the resulting price is about the same as for other sources. Generation does not need to be done at large and far away plants but closer to consumption, and consumers will also be generators. For that you need the ‘smart grid’ where consumers can also become vendors, and that is the future. That will revolutionise the industry.
TRC: Where does the future lie for Eletrobras?
JC: We need to do more with less. The expiry of concessions will hit our current revenues but we are adopting measures to reduce costs and increase new revenues and productivity. That requires research, development and technology, which is where the Centro de Pesquisas de Energia Elétrica (Cepel) in Rio, comes in. It is the biggest centre of its kind in South America and eminently capable of responding to our innovation needs.
Eletrobras must continue not only as the largest energy producer in Brazil, but also as a developer of strong international relationships. It took 50 years for Brazil to integrate its energy, but now the challenge is to do that for the whole of South America, from which everyone will benefit. Take, for example, the water cycle of the Brazilian drainage basins below the equator and those above it of Colombia, Venezuela and Guyana. When it rains here, it doesn't rain there. When it rains there, it doesn't rain here. Each region bases its operations on the rainfall lowest levels, but their combined lowest sum would of course be higher than the individual. There is an important relationship between countries in South America and the integration in energy and infrastructure will help bring about more profitable commercial integration too.