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Approaches to Overcome the Differences between the Remuneration of the MWh Generated by the Sugar-Alcohol Sector and the Guarantee of Reduced Tariffs
Nivalde J. de Castro
Guilherme de A. Dantas
André Luis da S. Leite
Reforms aiming at a higher liberalization that were carried out in the electrical sector in several countries, though presenting significant differences, had as a consequence, among others, the establishment (or strengthening, as in the USA) of a regulation agency. One on the most important and complexes tasks of a regulation agency, in the case of the not yet regulated electrical sectors, is the determination of a tariff that must, at the same time, stimulate new investments and be socially equitable. The international background attests that the diversification of the energy matrix significantly contributes to the achievement of these goals.
The compatibility between remuneration of energy generation from sugar-alcohol plants to stimulate the sector and the guarantee of reduced tariffs require the implementation of actions to solve the conflict between the goals mentioned above. The approaches that can be used to harmonize the profitability of the undertaking and a low impact on final consumer tariff are many and vary from simple actions to the more sophisticated ones and that can be used individually or combined. This article intends to discuss how special arrangements such as carbon credit trading, fiscal incentives, co-management models as well other mechanisms can be relevant to promote the bioelectricity generation from the sector.
Financial aspects are essential for the economic viability of an undertaking. Though the BNDES presents specific financing lines for bioelectricity plants, these lines can be improved in order to stimulate investments in plants that utilize more efficient technologies.
Still considering financial aspects, carbon credits may add a considerable amount of investments. Nevertheless, a specific policy for these credits is necessary for their mere trading by the plant owners may not arouse the commercial interest due to trading costs and to the inherent uncertainty of the carbon market from 2013 onwards. A bioelectricity promotion policy that includes carbon credits may be implemented by the elaboration of Project Finance or by the trade side through the offer of a premium price from the demand agents in exchange for carbon credits.
On the other hand, a well-planned policy aiming at reducing taxes on capital goods necessary in a co-generation plant may have a significant impact on the reduction of investment costs. Environmental, economic and social external aspects of bioelectricity would justify this de-taxation.
The approaches previously mentioned attenuate the difficulties between the MWh value paid to the producer, enough to increase the investments in bioelectricity, and the guarantee of socially adequate tariffs. However, the central issue that is the biggest obstacle to the definitive insertion of bioelectricity from sugarcane in the Brazilian Electricity Matrix: electric energy commercialization is not the core-business of the sugar-alcohol producer. So, it is necessary to adopt a structurally different model. A co-management model including the producer and the electricity sector agent may become a vital factor in the definitive inclusion of bioelectricity in the electric energy supply in Brazil.
Financial Conditions Stipulated by the Chosen Technology
The adequate establishment of the financing structure, including the participation of capital from third parties, grace period and amortization is fundamental for the success of an investment. The financing conditions offered by the banking sector tend to be more favorable in case of major undertakings and more conservative projects, that is, lower risk investment projects. Thus, projects with a higher degree of technology and innovations tend to have more difficulties to obtain financing with attractive conditions and need a larger amount of their own resources.
The technologies available for use in co-generation plants present well-known techniques but different economical viability. However, the most efficient technologies present higher cost that tends to be reduced in the long term due to technological diffusion and the decreasing peculiarity of the learning curve. Therefore, there is an incentive for the adoption of more conventional technologies that assure a higher return rate associated with a lower risk. The insertion of more efficient technologies can occur faster if incentives are provided, for instance by subsidized financing.
The BNDES offers a financing line for bioelectricity projects with costs equivalent to the long-term interest rate, plus 1% as administration fee, plus the eventual remuneration of the financial broker, depending on the plant size and on the accredited financial institution, regardless of the fact that the project uses or not a 60 bar boiler. The only difference is that if the boiler’s pressure is equal or higher than 60 bar, BNDES may finance up to 90% of the project whereas if the pressure is lower than 60 bar, the maximum financed by BNDES is 80%. This differentiation policy according to the kind of technology should be more radical in order to promote the more efficient technologies. Such a differentiation is even more necessary in a situation in which the technology of biomass gasification is technically viable although not viable in economic terms; technological development, may, however, reduce its costs in a short time and a subsidized loan may turn it economically viable.
BNDES could reduce its remuneration to 0,75% in case of boilers with 60 bar or more and to 0,5% for those projects utilizing biomass gasification. According to SOUZA (2003), financing classes provided by the government offering special conditions for those technologies showing higher energy efficiency could be subsidized through the resources of a compulsory energy efficiency fund kept by the distribution, transmission and generation agents. The utilization of such a fund for financing sugar-alcohol co-generation plants with modern technologies would be justified by the high energy efficiency of bioelectricity generation.
The Role of Carbon Credits for Bioelectricity Insertion
According to DANTAS (2008), the carbon credits may work as a bonus to be added to the bioelectricity remuneration for its positive environmental externalities. The way carbon credits will be effectively converted into revenue for the plant operator is a controversial question. The simplest structure would be the one in which bioelectricity generation would permit the entrepreneur to commercialize the electricity and the carbon credits as two different products offered in distinct markets. Nevertheless, the inherent uncertainties regarding the future of carbon market and the trading costs makes it necessary the analysis of more complex mechanisms for making viable carbon credits utilization in bioelectricity.
The need of mitigating climate changes permits to foresee the carbon market as one that will be expanding along the next years; however, a series of geopolitical decisions will establish the configuration of this market. Brazilian participation in such market is restricted to the “Clean Development Mechanism” (CDM) that presently represents about 25% of the carbon market. According to CARBONO BRASIL (2008), the global carbon credits trade will grow about 56% in 2008, totaling 4.2 billion tons equivalent of CO2 and a financial amount of about 90 billions dollars considering the current credit prices. The CDM will trade 1.2 billion tons of CO2 and a financial amount over 20 billion dollars in 2008.
A simple calculation enables the evaluation of the financial flow the sugarcane sector can obtain from carbon credits. For each GWh generated the sector avoids the emission of 267.7 tons of CO 2e, at the cost of 22.5 dollars per ton of carbon at an exchange rate of R$ 1.70/dolar. So, the carbon credits represent an amount higher than R$ 10.00 per MWh generated.
From what was presented in the two previous paragraphs, it would be natural to consider that the sugar-alcohol producer would be interested in having carbon credits and trade it in favorable conditions. Nevertheless, there are many doubts regarding the configuration of the carbon market after 2012 and the interest of the plant operators in having the bioelectricity profitability associated with the sale of carbon credits is quite questionable. The perspectives for the carbon market in the post-Kyoto period are promising due to the ambitious goals set for emissions reduction in the European Union and the establishment of reduction goals for the USA and eventually for developing countries such as China and India. However, the CDM participation after 2012 is still uncertain.
Thus, even though in the most likely scenario the financial volume traded in the CDM ambit will be much higher than the current one, the economic viability of bioelectricity cannot depend on the CDM perspectives after 2012 and mechanisms must be created to protect the plant operators from uncertainties regarding the future of carbon credits market. Among these mechanisms one can mention the elaboration of the Project Finance with carbon credits and the compulsory purchase of carbon credits together with bioelectricity by the distributors, which are two examples of how to protect the producer from future uncertainties in the carbon market.
Project Finance is a financing method in that risk analysis; expected cash flow and the guarantees regarding the financing are related to the project and not to the company, as it would be in a conventional financing scheme. Therefore, the cash flow guarantee of the project itself makes the financing in the form of Project Finance less expensive than conventional financing.
Since the revenue from the sale of electric energy surplus and from carbon credits are the guarantees given to the financing agent, the shape of financing for co-generation plants in the sugarcane sector in the form of Project Finance would give more favorable financing conditions due to the lower risks for the financial institution.
Another viable mechanism for carbon credits utilization would be to require from the distribution pool, when they buy bioelectricity, the acquisition of carbon credits equivalent to such generation, based on the model of “green certificates” implemented in some European countries. Nevertheless, due to the need of protecting the plant operator from the CDM future uncertainties, the distribution agents should pay a pre-established price for the carbon credits and trade them later on and facing the market risks. The proposed model is a combination of a compulsory carbon credits purchase and a premium-price since the concessionaires will pay to the electricity producer an amount relative to the bioelectricity bought added to a pre-established amount from the carbon credits purchase.
It is necessary to establish the differences of the proposed model relative to that of PROINFA, since the latter was based on contracting renewable energy through the establishment of a premium-price and the carbon credits were a secondary issue due to the low liquidity of the market at the PROINFA time. Eletrobrás owned these credits rights, however, juridical issues on the legal property of the credits arose. On the other hand, the model mentioned in the previous paragraph deals with the carbon credits as goods quite distinct from electrical energy that the distribution pool must buy for a pre-established price when buying bioelectricity. This purchasing at a pre-established price would protect the plant operator and at the same time the concessionaires would not be burdened by buying a kind of energy that has a cost higher than the conventional sources because they would be acquiring goods that have an organized market. So, they can get profits from the sales of these goods, even if the sales are submitted to the market risks in the same way other goods would be.
Reducing Capital Goods Taxation
One of the great obstacles to the consolidation of a sustainable growth cycle in the Brazilian Economy is a complex and heavy fiscal structure. A fiscal reform to simplify the Brazilian taxes structure, eliminating cumulative taxation, reducing the tax burden and, as a consequence, giving incentive to private business investments and promoting those sectors that are less competitive, though strategic, is essential for the sustained expansion of the Brazilian economy.
As mentioned previously, alternative energy sources present in their initial stage generation costs higher than the conventional ones. So, the government intervention is justified if the insertion of such alternative energy sources in the energy matrix brings economic, energy and environmental benefits to the country. Co-generation from sugarcane does not emit CO2, it is generated near the Brazilian consumption centers and it is complementary to hydropower generation, just to mention some advantages.
One of the approaches for the governmental promotion of bioelectricity insertion is granting fiscal benefits to the capital goods needed to build the co-generation plant. According to CASTRO and DANTAS (2008), the installation costs of a co-generation plant using the extra-condensation technology is approximately R$ 3.000,00 per installed kW. Tax reduction could significantly decrease investment costs and cause a positive impact on the low tariff guarantee since the remuneration that makes the bioelectricity economically viable would be significantly reduced.
According to KITAYAMA (2008), there is no fiscal incentive for the capital goods necessary for a co-generation plant utilizing more efficient technologies. The author says that however there are tax exemptions (PIS – Social Integration Program and COFINS – Contribution for Social Security Financing) in the “Special Incentive Regulations for the Infra-Structure Development” when the project satisfies the PAC regulations and it is under discussion an application for ICMS (Tax on Circulation of Goods and Services) reduction that would not be related to the adopted technology.
Therefore, one can notice that there is space for the creation of fiscal incentives to reduce the investment costs in co-generation plants using sugarcane by-products, most of all in ICMS reduction, promoting the growth of electricity generation. The incentive would be even more efficient in the maximization of the electricity generation if it occurs in a discriminative form, according to the technology used, and so favoring the use of efficient technologies.
The proposals previously discussed try to reduce investment costs or assure the revenue of the electricity producer but without solving the structural problem, that is, the elimination of the difference between the average return rate of the electric sector and the expected revenue of the sugar-alcohol sector agents. The transfer of bioelectricity generation undertaking to an electric sector agent is the ideal way to guarantee the competitiveness of bioelectricity without involving the undertaker’s investment attractiveness since the electric sector investors require a return rate lower than that required by the sugar-alcohol sector agents.
The co-management model would consist of leasing the energy part of the plant to an electric sector agent that would guarantee the supply of the plant’s energy consumption regarding alcohol and sugar production and would pay a pre-established amount to the plant operator or would be a junior partner of the plant.
It should be highlighted that contrary to the mechanisms previously described, where the government has an active role, the co-management model is to be applied to the private sector. The government participation would be limited to call for a public hearing to discuss the interest of the agents in the matter and, eventually, devising the adequate model. If a reasonable number of plant operators are attracted to the proposal, an auction could be implemented so that the electric sector generation agents could offer permitted annual revenues (RAP) starting from a minimal value established by the plant owners.
Even though theoretically the partnership between plant operators and electric sector agents is the most efficient way to promote bioelectricity at reasonable prices it is difficulty to implement it. An entrepreneur of any economic sector would analyze with great concern the co-management proposal for producing goods that are secondary in his productive structure and it would not be different in the sugarcane-alcohol case.
According to SOUZA and AZEVEDO (2006), the plant operators use a vertical integration strategy in order to guarantee the competitiveness of alcohol and sugar and make preventive investments in electricity generation so that they can satisfy the future alcohol and sugar demand at competitive prices. So, it is clear that the revenue offered to the plant operator has to be attractive so that he can give up the control of electricity generation which is a key factor in his core-business.
Getting fixed revenue that will make the plant operator adhere to the co-management model and that is compatible with the average return rate of the electric sector and with moderate tariffs is an equation difficult to solve. However, the partnership model between plant operators and electric sector agents should be analyzed with close attention as it is an issue that has acquired importance, regardless of the model chosen by the partners. As an illustration, the Energias Brasil group through Enernova, its renewable energies company, will invest in bioelectricity as a junior partner in plants to be built in Brazil (OGLOBO, 2008).
There are no technical restrictions to bioelectricity generation in large quantities. The existing restriction is economic due to the fact that payment requirements from the sugar-alcohol sector are incompatible with the moderate tariffs issues, one of the government goals. Thus it is necessary to search for mechanisms that enable the solution of such a conflict of interests with the consequent inclusion of large amounts of bioelectricity in the Brazilian electricity system.
The simpler and more agile tools to be used are those that can be set by the government mainly aiming at investment costs reduction. The financing concessions with special conditions regarding more efficient energy technologies, as well as fiscal benefits also fixed according to the kind of technology used are ways to reduce investment costs and, consequently, promote the generation of large electricity surplus to be used in the public electric system.
On the other hand, the adequate internalization of the positive environmental externalities through carbon credits may significantly reduce the necessary remuneration to implement the bioelectricity generation. As it was highlighted, the plant operator doesn’t want to be exposed to the uncertainties connected with the carbon market after 2012. So, the utilization of mechanisms that protect the sugar-alcohol producer from this uncertainty are needed, such as the Project Finance, with carbon credits and the requirement that the dealers pool would buy this carbon credits associated with bioelectricity generation.
Amongst the approaches proposed, the co-management is the only one that deals with the structure blockage to bioelectricity trading as it aims to significantly reduce the return rate required by the entrepreneur by transferring the management of electricity generation to an electricity sector company. However, this model presents restrictions from the plant operators that have as a priority the maintenance of their vertical integration approach.
The set of approaches discussed in this paper shows that there are ways to overcome the economic restrictions to the definitive insertion of bioelectricity from sugarcane in the Brazilian electricity matrix. The more adequate mechanism or the set of mechanisms is an issue to be discussed and the debate among all the agents involved is fundamental regarding the choice of the model that will maximize the bioelectricity trading.
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DANTAS, Guilherme de A.. O Impacto dos Créditos de Carbono an Rentabilidade da Co-Geração Sucroalcooleira Brasileira. Dissertação de Mestrado. ISEG/Universidade Técnica de Lisboa, 2008.
KITAYAMA, O. Política Tributária para Bens de Capital. Entrevista concedida a Guilherme de Azevedo Dantas em 06/03/2008.
OGLOBO. Plano da Energias do Brasil para biomassa inclui fatia em usinas. Disponível em < http://oglobo.globo.com/economia/mat/2008/02/26/plano_da_energias_do_brasil_para_biomassa_inclui_fatia_em_usinas-425964440.asp>. Acesso em 11/03/2008.
SOUZA, Z. Geração de Energia Elétrica Excedente no Setor Sucroalcooleiro. Tese de Doutorado. Departamento de Engenharia de Produção/Universidade Federal de São Carlos. São Carlos, 2003.
SOUZA, Z; AZEVEDO, P. Energia Elétrica Excedente no Setor Sucroalcooleiro: um estudo a partir de usinas paulistas. Revista de Economia e Sociologia Rural. Brasília-DF, 2006.
 Professor at UFRJ and coordinator of GESEL - Grupo de Estudos do Setor Elétrico do Instituto de Economia (Electric Sector Studies Group of the Economy Institute).
 MSc of Economy and Energy and Environment Policy by the Lisbon Technical University and Researcher of GESEL/UFRJ.
 Professor at UNISUL, Pos-Doctorate at the Instituto de Economia (Economy Institute of UFRJ and Associate Researcher of GESEL/UFRJ.
 See DANTAS (2008).
 Technology able to produce up to 300 kWh per sugarcane ton, as compared to technologies generating about 100 kWh per sugarcane ton.
 See COSTA (2006).
 Growth Acceleration Program established by the Federal Government in January 2007, aiming at the promotion of investment in basic structural areas.
Graphic Edition/Edição Gráfica:
Thursday, 11 August 2011.