Grist to the mill14 August 2013
In recent years, major cost barriers and a dated energy auction format have priced biomass out of Brazil’s energy matrix. But with changes to public auctions this year and a handful of biomass projects drawing private investment, the role of biomass in Brazilian power may be on the rise, writes Bob Moser.
Brazil is the world's second biggest producer of hydroelectricity, getting 81% of its power from hydro plants, while also boasting the cheapest wind
energy in the world. But, scared by a drought in 2012 - its worst in 50 years - the country has revised rules for its power auctions this year to push
development of natural gas and coal-fired thermal plants. The new auction rules will segregate wind energy projects for the first time from thermal,
a category that includes natural gas, coal and biomass.
Brazil's public energy auctions had previously brought all power sources together to compete for bids, but wind, biomass, natural gas and other
sources were never truly on a level playing field. They all have different gestation stages for their technologies, pay different taxes and attract financing differently.
"Brazil's auction format needs to change so biomass doesn't have to compete head to head with wind power," says Guillaume Sagez, partner with Brazilian venture capital and private equity management company Performa Investimentos. He likes the potential of biomass cogeneration as a
future investment option, but won't put money into the sector until it's shielded from wind power's low prices.
Energy demand rising
Brazil's GDP grew 0.9% in 2012, but the country's expanding middle class, diverse economy and higher exports this year led Standard & Poor's (S&P) in April to project real GDP growth of 2.5% in 2013 and 3.25% in 2014.
Those are conservative growth estimates compared with the government's outlook, but even at this rate, S&P forecasts Brazilian electricity
demand to rise 4-5% over the next two years, an annual increase of 20,000- 25,000GWh, which would require investments to build 3,000-4,000MW of new-generation capacity, and related transmission and distribution capacity. In all, that's US$5-10 billion in annual investment needed in the country's power sector alone.
BNDES eager to lend
The Brazilian Development Bank (BNDES), which loaned R$156 billion (US$76.8 billion) in 2012 overall, financed R$700 million (US$345 million) in cogeneration investments for cane bagasse last year, down from R$900 million in 2011 and R$1.5 billion in 2010.
The money is available, says Artur Yabe Milanez, biofuels department manager at BNDES, but fewer biomass projects are pursuing it each year. It's because energy projects will only apply for a BNDES loan after they've won a long-term contract in Brazil's public auctions, and in recent years,
wind power has dominated that arena.
"We don't have a huge private market for electricity in Brazil - the public auction is the main driver of energy investment," says Milanez. "In 2012, only five or so [sugarcane] mills requested this type of investment. If the auction rules were to change, I think it could drive a new cycle of investment in biomass cogeneration."
It's not yet known how many biomass energy projects will enter the thermal-only public auction later this year, and if they'll compete well against natural gas and coal-fired projects. But for those that win, BNDES remains the favourite for finance.
"Many banks are complaining that BNDES has this market cornered," says Pedro Seraphim, partner and head of the energy practice group at law firm TozziniFreire Advogados. "BNDES rates are at or close to the cost of money for the bank, so there is no room for margin at private banks to compete with BNDES. There are questions about how long BNDES can assume this role, because it's costing the Brazilian treasury. Maybe this isn't an endless cycle of BNDES dominance."
Distributor as investor
São Paulo is studying new incentives for investment in cogeneration from sugarcane mills, the state's energy secretary said in April. The state
currently counts about 4,500MW of cogenerated energy from cane biomass, of which around 1,000MW is being sold as excess by mills to the grid.
Typically, sugarcane mills must cover the costs of connecting their generators to a local grid, updating old biomass boilers and ensuring their grid
connection can support large energy discharges. The investment can vary from R$1 million to R$4 million per megawatt of installed capacity.
A nascent but promising business model can emerge in Brazil, with electricity distributors making direct investments and taking management roles in cane mills. The first such investment occurred in March 2012, when CPFL Renováveis purchased 100% of the cogeneration activities of Ester Mill, based in the small town of Cosmópolis, São Paulo.
More than 100 of the roughly 200 mills in São Paulo lack the modern boilers necessary to turn their biomass into energy at a profitable rate. If all of São Paulo's mills were properly connected to the grid and operating with updated machinery, the state could generate four to five times the
biomass-based energy it's generating today.
Venture capital success
One biomass company building momentum for itself is São Paulo-based Energias Renováveis do Brasil (ERB), which is drawing hundreds of millions of reais in private equity financing from major banks to support its focus on eucalyptus as a dedicated feedstock.
BNDES has made financing available to ERB, but the company has opted to rely mainly on partners like Rioforte Investments (a holding company of Portugal's Espírito Santo Group) and Brazilian bank Caixa Econômica Federal, which together have invested R$120 million, and control 98% of ERB's capital.
"We believe that, for good projects, the money will come," says Emilio Rietmann, president of ERB. "First, you need an economically robust project."
The company is now concluding a fundraising round worth R$300 million, bringing onboard a few large shareholders to bankroll ERB's expansion plans this year. ERB embarked on a R$210 million project last year with The Dow Chemical Company, building a biomass energy plant near the Dow plants in Bahia state that produce paper, textiles, metals and pharmaceuticals.
The new Bahia plant, which should open in October, will burn up to 150t of eucalyptus a day to generate as much as 15kW a minute of vapour, helping Dow eventually reduce local fossil fuel consumption by 200,000m3 a day.
With a year-round dedicated feedstock, ERB can produce energy at US$6/mmBtu, which would be competitive today against natural gas and fuel oils, Rietmann says. "In that price condition, it makes sense for Brazilian authorities to stimulate and invest in dedicated biomass plants."
Eucalyptus breeds planted in Brazil have always been dictated by the pulp and paper industry, which focuses on fibre content. ERB is trying to develop and plant new varieties with more lignin and which mature in fewer years - ideal for energy production, according to Rietmann.
ERB is also partnering with state research agencies on sorghum's role as a complementary feedstock to sugarcane. The company retrieved its first data set on a sorghum harvest in April, and at US$5/mmBtu, its potential as a low-cost complement can establish biomass as a reliable feedstock with less concern about seasonal drop-off, Rietmann says.
"The major problem biomass projects have had here is that the majority are tied to the sugarcane industry, and that is difficult in the auction scenario because of seasonal production," adds Seraphim. "The simple cane mill investment is not attractive right now; people are cautious about the ethanol sector due to problems in recent years. We're starting to see biomass generation move toward projects controlling their own feedstock, and probably moving away from cane."