Please email ft@debtwire.com or call us at Americas: +1 212-686-5374 Europe: +44 (0)20 7059 6113 Asia-Pacific: +852 2158 9731 for further information on Debtwire and how to receive more articles like the one below.
--------------------------------------------------------------------------------------------------------
Hours before Mines and Energy Minister Silas Rondeau resigned to defend himself from corruption allegations, power utilities and large industrial consumers gathered in the federal capital of Brasilia to discuss ways to avoid an energy crisis. More than a month after the 22 May conference, President Luiz Inacio Lula da Silva, serving a second term until 2010, had left the minister’s post vacant. Since then, there has been no sign, political or institutional, that the government is doing much to curb the rising threat of electricity shortages.
Aside from the peculiar lethargy of the Brazilian state in dealing with all sorts of economic development problems, another component of the energy crisis is already unfolding, or so says the private sector.
Rising electricity rates for the industrial consumer are depriving local companies from the competitive advantage of producing goods in Brazil, a country which derives more than 80% of its electricity from hydroelectric generation. According to FGV, a think tank, Brazil will lose 8.6% of GDP growth by 2015, the equivalent of BRL 214bn (USD 107bn) at 2005 prices, as a result of soaring electricity rates.
“We are in 2007 and an eventual [supply] problem is expected for 2010. It is not possible to build large [hydroelectric] projects in this period, but there are alternatives to avoid a more critical event like rationing, which leads to thinking that the problem may be more of price than of shortages,” an industry source said.
Brazil derives most of its electricity from renewable hydro sources, which is cleaner to produce and cheaper to buy when compared to alternatives. However, the approval of environmental licenses for new hydropower plants have seen extensive delays, boosting Brazil’s dependence on gas-fired thermo-electrical generation which experts say is unnecessary given Brazil’s vast and unexplored natural resources.
“In our view, [the government] will need to remove a plethora of legal, bureaucratic, and political constraints within the next six to 12 months or face inevitable power shortages by 2011-2012,” Bear Sterns said in a January report.
According to Abiape, the association of non-utility power generating companies comprised of aluminum concern Alcoa, miner Companhia Vale do Rio Doce, and steelmakers Gerdau and CSN, among others, the odds of rationing is 6.3% in 2010 but more than 10% in the following two years, the association said.
“There is no way to address the problem without building hydropower plants in the Amazon region,” says Mario Menel, president of Abiape, whose companies have invested BRL 3bn (USD 1.5bn) annually on generation projects to cater to their own needs. Vale do Rio Doce, for example, has stakes in seven power generators with 1,422MW of installed capacity in the state of Minas Gerais.
Brazil’s hydroelectric output is 75,000MW, a figure the government would like to increase by roughly 50% through 2010. Success will largely depend on construction of two power plants along the Madeira River and one along the Xingu River, both tributaries of the Amazon. The first two projects, hampered by the approval of environmental licenses that are months overdue, could add some 6,500 MW of capacity to the national grid.
Despite its reliance on water resources for most of its electrical needs, Brazil still has only tapped 28.2% of its national hydro generation potential, compared with 100% of France and 60-70% of Norway, says Silvia Calou of ABCE, an association comprising 14 power distributors, three generators and one transmission concern.
Of the five geographical Brazilian regions, the North, where the Amazon basin is located, is by far the least developed in terms of hydroelectric potential, with less than 9% explored. By contrast, the most developed is the South, but even there hydro-based generation is less than 50%, Calou says.
On top of delays to begin construction of new hydro power plants, the industrial sector has for years lobbied for a review of taxes and surcharges that come with their electricity bills. These represent 51% of the rate, according to Abrace, a group of domestic conglomerates spanning the pulp and paper, petrochemical and textile sectors.
Abrace companies demand 17% of the electricity produced in the country and 40% of locally generated thermal-based energy. Between 2001 and 2006, rates for the industrial sector shot up 150% compared with a 60% rise for Brazil’s IGP-M wholesale price index and a 45% increase for the IPCA retail price inflation index, Abrace says.
Not surprisingly, taxes represent 40% of the cost to build a new power plant and this too has been a deterrent for new investments. With a lighter tax load and standard international financing arrangements, the price of a MWh would be BRL 109 (USD 54.5) compared with BRL 127 (USD 63.5) at 2005 government auction prices, Abrace says. International funding standards would require 25 to 35 years to amortize project finance loans, 80% financing rather than the current 70% and a drop in annual borrowing costs from 12% to 7%.
According to the Mines and Energy Ministry, the country will have fulfilled its hydro generating potential when capacity reaches 258,500MW, a far-cry from the current 75,000 MW. Although the task seems enormous, Furnas and Cemig, federal and state-run utilities, respectively, along with construction companies Odebrecht, Galvao Queiroz and Camargo Correa, may rise to the challenge as their names are the first to be associated with the consortia interested in bidding for the Amazonian generation projects.
With investments of up to BRL 43bn (USD 21.5bn) predicted by the ministry’s viability studies to finance powerhouse, dams and transmission lines of the Madeira plants, all eyes are now turning to the Brazilian Development Bank (BNDES), the main long-term corporate lender in local currency. The bank recognizes the need to increase capacity and stated late last month that it may be a partner in the Madeira power plants instead of just the financial agent. The BNDES also said it may finance 85% of the projects.
--------------------------------------------------------------------------------------------------------
Debtwire is the most informed news service available on global distressed debt and leveraged finance and is used by hedge funds, proprietary trading desks, asset managers, restructuring financial and legal advisors. Debtwire provides clients with articles such as the one above in real-time via an online platform and personalized email and BlackBerry alerts. For further information on Debtwire please email ft@debtwire.com
or call us at Americas: +1 212-686-5374 Europe: +44 (0)20 7059 6113 Asia-Pacific: +852 2158 9731
