Brasil to Go from Hydro to Fossil Fuels

The Government is Seeking to Award Contracts in an Auction for Natural Gas- and Coal- Fueled Power Plants, Reversing a Drive that Previously Favored Renewable- Energy Projects

The government is seeking to award contracts in an auction tomorrow for natural gas- and coal-fueled power plants, reversing a drive that previously favored renewable-energy projects. It would lead to the first new thermal plants in three years, after the government scaled back such projects and awarded wind contracts starting in 2009 and solar energy earlier this year.

Thermal plants, which are faster and easier to build and open than wind or hydroelectric facilities, will be used as a stopgap to ensure energy supplies after the worst drought in eight decades dried up reservoirs at hydro-dams that produce 70 percent of Brazil's power. Without the extra energy supplies, Brazil may be forced to ration power as soon as next year if the drought continues, said BNP Paribas SA and consultant Thymos Energia.

"Coal and gas plants can meet an urgent need," Bernardo Bezerra, a manager at the Rio de Janeiro-based energy consultant PSR, said in an interview. "The big question mark is: Is it worth contracting an expensive source of energy for so many years, when you have cheaper and cleaner sources available like wind simply because of a short-term need?"

Energy ‘Security'

Brazil's energy research and planning agency, known as EPE, says it is.

"It's important for the security of the system that we have more thermal energy -- it was because of thermal that we avoided rationing last year," Jose Carlos de Miranda Farias, EPE director of electric energy research, said in a telephone interview from Brasilia. "We need to guarantee supplies to Brazilian consumers who refuse to deal with energy shortages of even half an hour."

Using fossil fuels at a time of need highlights tensions facing Brazilian policy makers as they join United Nations talks next week aimed at limiting global warming. While envoys from 190 nations are pushing for an agreement in 2015 to limit fossil-fuel emissions, Brazil may need to boost emissions to stabilize its power market and meet growing demand.

Brazil, the biggest polluter in Latin America, had a 6.7 percent jump in carbon emissions last year, according to data from BP Plc. That was the fastest increase worldwide after Qatar, Colombia and thePhilippines. A spokesman for Brazil's Ministry of Mines and Energy wasn't immediately available to comment.

For the world to meet its goals of limiting global warming, Brazil would have to cut carbon emissions an average of 0.9 percent a year until 2040, the International Energy Agency estimates. Current government policies put Brazil on course for annual increases of 1.8 percent over that period, the Paris-based institution estimates.

Idled Plants

Brazil restarted all of its idled thermal-power plants to make up an energy shortfall as hydroelectric output plummeted. Use of the costlier energy source boosted electricity spot prices to records.

Wind and solar developers including Renova Energia SA and Enel Brasil Participacoes Ltda were the only companies to win contracts in the last auction on Oct. 31.

Wind will still play a big role in tomorrow's A-5 auction - - the renewable source accounts for about 14 gigawatts of installed capacity on offer, or almost half of the projects that qualified to bid. In Brazil's energy auctions, the government sets a ceiling price and developers bid down the price at which they are willing to sell the power. The lowest bid wins the contract.

Big Shift

The big shift in this auction is that thermal plants come with the best terms. In an effort to lure more projects, the nation's energy regulator raised the cap on thermal-electricity rates to 209 reais ($83.51) a megawatt-hour from an initial proposal of 197 reais. The new price is more than twice that of the last gas project that was awarded in 2011.

And unlike the auction held last month, when the first federal contract was awarded for solar plants, the government is grouping all the projects together. That means gas and coal plants will compete head-to-head with clean-energy producers.

"The pressure is no longer on cleaning up the energy mix in Brazil -- we already have a clean mix," Rafael Brandao, co-owner of Rio Alto Energia, a renewable-energy developer, said in an interview in Sao Paulo. "This is a good excuse to dirty up that mix."

Source: Bloomberg

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