Grist to the mill

B
razil is the worlds secondbiggest 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-

Insight > Bioenergy

In recent years, major cost barriers and a dated energy auction format have priced biomass out of Brazils 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.
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.

Most biomass projects in Brazil are tied to the sugarcane industry.

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Brazils 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. 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. Its because energy projects will only 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 its costing the Brazilian treasury. Maybe this isnt an endless cycle of BNDES dominance.

If all of So Paulos mills were properly connected to the grid and operating with updated machinery, the state could generate four to five times the biomass-based energy its generating today.
Brazils auction format needs to change so biomass doesnt 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 wont put money into the sector until its shielded from wind powers low prices. apply for a BNDES loan after theyve won a long-term contract in Brazils public auctions, and in recent years, wind power has dominated that arena. We dont 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. Its not yet known how many biomass energy projects will enter the thermal-only public auction later this year, and if theyll compete well against natural gas and coal-fired projects. But for those that win, BNDES remains the favourite for finance.

Distributor as investor
So Paulo is studying new incentives for investment in cogeneration from sugarcane mills, the states 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 Renovveis purchased 100%

Energy demand rising

Brazils GDP grew 0.9% in 2012, but the countrys expanding middle class, diverse economy and higher exports this year led Standard & Poors (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 governments outlook, but even at this rate, S&P forecasts Brazilian electricity demand to rise 45% over the next two years, an annual increase of 20,000 25,000GWh, which would require investments to build 3,0004,000MW of new-generation capacity, and related transmission and distribution capacity. In all, thats US$510 billion in annual investment needed in the countrys 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

Biofuels in the transport sector are already a success for biomass in Brazil.

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Insight > Bioenergy

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 ERBs 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 sorghums 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. Were starting to see biomass generation move toward projects controlling their own feedstock, and probably moving away from cane.

There is an air of caution about the ethanol sector at the moment.

of the cogeneration activities of Ester Mill, based in the small town of Cosmpolis, So Paulo. More than 100 of the roughly 200 mills in So Paulo lack the modern boilers necessary to turn their biomass into energy at a profitable rate. If all of So Paulos mills were properly connected to the grid and operating with updated machinery, the state could generate four to five times the biomass-based energy its generating today.

Venture capital success

One biomass company building momentum for itself is So Paulo-based

Energias Renovveis 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 Portugals Esprito Santo Group) and Brazilian bank Caixa Econmica Federal, which together have invested R$120 million, and control 98% of ERBs capital. We believe that, for good projects, the money will come, says Emilio

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