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Viewpoints from the Board Room: Eletrobras of Brazil

Jose da Costa Carvalho Neto has been tapped by Brazil's President Dilma Vana Rousseff to run Eletrobras, one of the top 10 biggest publicly traded electric companies in the world. His task is to make Eletrobras the largest clean energy company system in the world by 2020.

By Marla J. Barnes and Michael Grossman

Brazilian energy conglomerate Eletrobras was created in 1962 to foster studies, construction projects, and operation of generating plants, transmission lines and substations designed to provide electric power to the country. Institutional reforms and privatizations in the 1990s caused the company profile to change, and Eletrobras started to operate the distribution of electric power in several states in Brazil. The company now controls the Electric Power Research Center (Eletrobras Cepel), as well as 13 Eletrobras companies with a total installed generating capacity of 41,600 MW.

 
Jose da Costa Carvalho Neto

PennWell recently sat down with Jose da Costa Carvalho Neto, president of Eletrobras, in his office in Rio de Janeiro, Brazil, to learn more about this company and its ambitions for the future. The following is a transcript of that discussion.

Q: Please describe your company and its role in the Brazilian electrical energy sector.

Carvalho Neto: Eletrobras is a state-owned company — 67% of the company is owned by the Brazilian government or by BNDES (the Brazilian development bank), while another 33% is publicly traded on the stock market. The company owns and operates a large portfolio of generation, transmission, and distribution assets — 41,600 MW of electrical capacity, 53,923 km of transmission lines and 3.4 million customers to whom we distribute electricity. In Brazil, this represents a market share of about 36.8% in generation and 53% in transmission (see table on page 38).

Eletrobras is among the top 10 biggest publicly traded electric companies in the world. In addition, Eletrobras is an expert in clean energy (i.e., hydro, biomass and nuclear).

All in all, we have a very important presence in the country of Brazil.

Q: The electrical energy sector in Brazil is growing at an amazing pace. What amount of investment in this sector does Eletrobras have planned for the future?

Carvalho Neto: Over the next 10 years, Brazil needs about 65,000 MW of new electrical capacity. That's an average, per year, of 6,500 MW. To meet this estimated growth, the country — over the next 10 years — will invest a total of BRL310 billion (US$154.8 billion) in the electrical energy sector: BRL190 billion ($94.9 billion) in generation; BRL40 billion ($20 billion) in transmission; and BRL80 billion ($40 billion) in distribution.

In 2011, Eletrobras's total investment in the electrical energy sector was BRL10 billion ($5 billion). In 2012, it will be BRL13 billion ($6.5 billion).

To find the capital for this kind of investment, Eletrobras is studying several possibilities. We will likely need new investments and a new type of IPO (initial public offering). One concern is the possibility that the Brazilian regulatory agency responsible for setting the rates for concessions paid to private developers of new generation will choose to renew existing concessions, but for a lower rate. For Eletrobras, this could mean decreasing revenues.

Q: In the next 10 to 20 years, what do you expect your generation portfolio to look like?

Carvalho Neto: In Brazil, we have an estimated 260,000 MW of power capacity potential. From this total, we have 80,000 MW of capacity already in operation. So the remaining potential is 180,000 MW. Some part of this potential will not be feasible for development because of environmental challenges and economic constraints. So, we estimate the actual feasible amount of potential capacity available for development at 120,000 MW.

 
The 14,000 MW Itaipu hydroelectric facility, on the Parana River on the border between Brazil and Paraguay, supplies 16.99% of the energy consumed in Brazil and 72.92% of the Paraguayan demand.

As mentioned earlier, from an electrical demand standpoint, the country needs more or less 60,000 to 65,000 MW every 10 years.

Our first priority to meet this demand is to complete development of the hydroelectric power potential of the country, which is planned to be accomplished over the next 20 years mostly from new developments in the Amazon region. After that, for the next 20 years, I think it will be a competition between nuclear and natural gas with the use of wind, biomass and solar as a complement to these two (no more than 25% of the total).

Q: One big challenge Eletrobras is facing is effective operation of the six distribution companies it owns. This is an interesting moment for these companies because of the opportunity to implement smart grid technologies. How is Eletrobras thinking about these companies and what will happen with them?

Carvalho Neto: That is really a good question. As you know, our DNA is generation and transmission. But we now have these six distribution companies. They didn't perform well, so the Brazilian government has given them to Eletrobras to operate them. These companies have big problems. First, their losses of energy are almost 35%. What does this mean? If we generate 100,000 MW, we just sell 65,000 MW. We lose 35,000 MW. Most of this loss is non-technical. In Portuguese, we say "commercial" loss. Losses include theft of electricity by bypassing the grid, customers not paying their electricity bills, electricity tariffs (rates) that are set too low to cover the cost of operations, and penalties incurred by the distribution companies because of reliability problems.

These losses add up to financial losses for Eletrobras. In 2010, we had a loss of BRL1.5 billion ($763 million). Overall, the company had a profit of BRL2.5 billion ($1.27 billion). If we didn't have the distribution companies, our profit would have been BRL4 billion ($2 billion).

Obviously, improvement is necessary. To accomplish this, we are undertaking several initiatives. For example, we have a loan from the World Bank of US$500 million, and we will add another US$200 million. With this US$700 million, we will install electronic metering systems in the homes of customers, connected to a central metering operation in the capital city of Brasilia. When loss occurs, this system will be able to detect exactly where the loss is coming from.

We also will make improvements to our distribution network. For example, nowadays, we have a lot of bare conductors, making theft quite easy. We have plans to insulate these wires. And, we will make use of detection technology to better pinpoint and eliminate non-technical losses.

Q: How does the fact that Brazil is hosting the World Cup in 2014 and the Olympics in 2016 affect the operations of Eletrobras?

Carvalho Neto: In terms of power demand, we do not anticipate a problem. After all, the country stops when Brazil is playing soccer. The only electricity being used during a match is that to power everybody's TVs!

Really, we don't expect the World Cup or the Olympics to significantly increase power demand or consumption. Consumption may increase, but we will have no trouble meeting this demand.

The country's biggest task is to reliably transmit and distribute electricity to the cities where the World Cup and Olympics events will be held. The Ministry of Mines and Energy is coordinating a team, with participation by all of the electrical sector companies, to plan and implement a redundancy system.

Q: Let's focus for a moment on Eletrobras's presence outside Brazil. Tell us about your current and planned presence in other counties?

Carvalho Neto: Eletrobras believes it is very important to participate in the electrical energy sector in other countries. We are really interested in working abroad — in both owning/operating generation, transmission, and distribution assets but also in offering our company's knowledge, experience, and expertise in the form of consulting services.

Two power events in Brazil

PennWell is organizing two events in Brazil in September 2012: HydroVision Brasil and DistribuTECH Brasil. Together, these two events — co-located in Rio de Janeiro Sept. 25-27 — provide a unique and unprecedented platform for the coverage of a broad range of power generation and supply topics and technologies impacting the Latin American region.

LIGHT, the utility company serving the electricity needs of Rio and the surrounding vicinity, has confirmed its support as a Host Utility of the two events.

As part of the two events, more than 215 speakers from 22 countries will share knowledge, expertise and experiences with conference delegates. More than 80 companies from a dozen countries throughout the world have already committed to be part of the exhibition.

Find details about the events on the Internet: www.hydrovisionbrazil.com and www.distributechbrasil.com.

We have a portfolio of projects in South America, Central America and Africa. We are looking for opportunities in North America, Asia and Europe. Eletrobras recently was one of the top two contenders in a bid to purchase a 21.35% share of Portuguese utility Energias de Portugal S.A. (EDP).

While the shares were eventually sold to China Three Gorges — the corporation responsible for China's 22,400 MW Three Gorges hydroelectric project — Eletrobras was highly competitive in the bid. In the end, the government of Brazil could not reach agreement with EDP on how many shares of the utility could be purchased at a later date. But, this performance shows Eletrobras can compete on the world stage.

I recently participated in a meeting at the United Nations with other heads of electrical sector companies from throughout the world. UN Secretary-General Ban Ki-moon called for the following:

— A program to provide access to electricity to the 1.5 billion people who currently do not have access;

— Increase the amount of renewable energy that is contributing to the total amount of energy used (to 30%); and

— Decrease, by 30%, the amount of energy needed to maintain each dollar of a country's gross national product.

In all three of these areas, Brazil performs well. With regard to electricity access to all people, Brazil's Energy for All program started in the early 2000s with a goal of providing access to the electrical grid system to all people in Brazil. When the program started, 50 million customers were not connected to the grid. Today, it's more like 3 million — 98.5% of homes are now connected. So the UN secretary wants to take the Brazilian Energy for All program and implement it worldwide.

In Brazil, 50% of the energy comes from renewables. For electrical energy, it's more than 90% (because of hydroelectric generation). So our country already meets and exceeds the UN's 30% goal.

With regard to energy efficiency, Brazil's Procel – National Electrical Energy Conservation Program has a goal to promote electricity rationalization to fight waste and reduce costs and sector investments, increasing electricity efficiency. In 2011, this program contributed toward the saving of about 6,696 GWh of electricity. Through this program, Eletrobras offers to manufacturers of domestic products that use electricity (for example, refrigerators and air conditioners) an official seal of quality and energy efficiency. Consumers use this seal to compare the energy efficiency of different brands of products. This program is forcing manufacturers to build and consumers to buy and use energy efficient products.

We believe we are very well-positioned to lead the way in the world in accomplishing these three objectives. Our goal is to become the largest clean energy company system in the world by 2020, with profitability comparable to the best companies in the electric sector.

Marla Barnes is chief editor and publisher of the hydro group for PennWell. Michael Grossman is vice president and group publisher for PennWell publications Electric Light & Power, POWERGRID International and Utility Products.

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