Sugar high: Will biomass stage supply auction comeback in Brazil?

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Wednesday, May 10, 2017

Zilmar de Souza, the bioelectricity manager of União da Indústria de Cana-de-Açúcar (Unica), an organization that represents more than 120 companies operating in the sugarcane, ethanol and biomass markets in Brazil, spoke to BNamericas about talks held with the energy ministry to bring back biomass-fueled power plants to Brazil's energy auctions. According to de Souza, "the regulated market is still the gateway to the power sector."

BNamericas: The expansion of Brazil's biomass-fueled generation capacity reached a peak in Brazil in 2010, but in recent years growth has decelerated. From the industry's point of view, what are the main reasons for this slowdown?

De Souza: This is true. The biomass industry added 1,750MW of generation capacity to the Brazilian energy matrix in 2010, which is more than 10% of a hydropower plant such as Itaipu. However, since then, Brazil has not had a good energy policy that can sustain growth of biomass in the matrix. There was a real slowdown in recent years and the industry is still concerned about the future results. According to Aneel [Brazil's energy regulator], biomass will add something near 372MW in generation capacity with new power plants in 2017, which is only 8% of the total volume forecast for the year. And according to a regulatory agency, biomass growth might decelerate further in 2018, to 105MW, representing only 1% of the total volume. Let us remember that, just a few years ago, biomass accounted for a third of growth experienced by the Brazilian energy matrix. The greatest difficulty lies in the industry, which has prepared itself to meet much larger annual demands than the ones we have seen.

Given the potential of renewable sources, we are hopeful that the expansion of biomass in Brazil's energy matrix can accelerate further. For example, in 2016, without increasing sugarcane milling – only by using the biomass of sugarcane bagasse already existing in the fields – power generation could have been 6 to 7 times as high as it was. With an energy policy that simulates the source properly, biomass's potential would be enormous.

BNamericas: How has the free energy market been important to growth in bioelectricity?

De Souza: In a study on biomass-fueled power plants, Unica indicated that 64% of power production was destined to the regulated market in 2016, by which distribution companies deliver electricity to the final consumers. The other 36% was sold on the free market. As we can see, the regulated market is still the gateway to the power sector – and not only for biomass plants but for all of them. The auctions are an anchor for the sources' growth because investors have the chance to make 20- or 25-year deals with guaranteed, inflation-adjusted income. It is also very important to strengthen the free market, especially in terms of the transparency mechanisms in price formation and also the available financing lines. It is difficult for development agencies and banks to fully fund projects created to only meet free market demand. Still, most importantly, Brazil needs to keep the regulated market open to attract new investment.

BNamericas: As the main association of the sugarcane industry, is Unica talking to the energy minister Fernando Coelho Filho about issues concerning the biomass sector?

De Souza: Yes, we are moving forward with this agenda. The Brazilian government wants to 'clean out' the power sector. Through an auction that will 'decontract' energy from past reserve tenders, which will be held at the end of August, the country's mining and energy ministry intends to assess what the actual demand for electricity is for 2021, 2022 and 2023. The government has given signals that it might promote a power auction in the second half of this year, after the real power offer available in the national electricity system is identified. This could be a new reserve auction or even a conventional tender for three-year projects [A-3].

BNamericas: If there is a new auction, will biomass power plants participate?

De Souza: The claim of the sugar-energy sector is that, if there is an auction, no matter what kind, biomass has to be there. Since 2011, biomass projects have not been invited to participate in reserve auctions, including the last two that were canceled. This is a terrible sign for investors. Biomass should be a larger part of the regulated electricity market, even to avoid inertia in this industry. If there is an energy auction, there is no reason to exclude renewable energy.