May 8 (Bloomberg) -- Brazil, the second-biggest producer of hydroelectricity, is seeking to increase the use of fossil fuels after the worst drought in 50 years depleted reservoirs, underscoring a limit to renewable energy.
The country’s energy ministry revised rules for power auctions last week in an effort to accelerate development of natural gas and coal-fired thermal power plants. The policies may boost the sale of contracts for energy made from fossil fuels by 50 percent this year to 1,500 megawatts mostly at the expense of wind energy, according to Erik Rego, director of research company Excelencia Energetica Consultoria Empresarial Ltda.
Brazil gets 81 percent of its power from hydro plants mostly owned by the state and has the world’s cheapest wind energy. Efforts by President Dilma Rousseff and her predecessors to promote renewables have been so successful that regulators are now concerned the power grid has become too dependent on the weather, said Romeu Donizete Rufino, director of power regulator Aneel.
“Brazil is proud of having a renewable-energy focus,” Deputy Energy Minister Marcio Zimmermann said in an interview in Brasilia. “We always want to do hydro plants, but it isn’t always possible, so we have to use thermal plants to assure power supply.”
The increased focus on energy security comes amid the nation’s preparations to host some of the world’s most prestigious sporting spectacles, Rego said. Brazil is the site of the 2014 World Cup and the Olympic Games in 2016.
Under the new rules, wind farms won’t bid for the same contracts as gas and coal. The policies may reduce the amount of wind capacity sold this year by two thirds from 2011, to less than 1,000 megawatts, Rego said.
The new auction format will threaten turbine suppliers including General Electric Co., Vestas Wind Systems A/S and Gamesa Corp. Tecnologica SA that have invested in Brazilian factories, Rego said.
A GE press official in Sao Paulo who asked not to be named citing company policy, said wind energy is still competitive in Brazil. Gamesa, based in Zamudio, Spain, is fully committed to Brazil, according to a press official who asked not to be identified because of company policy. Aarhus, Denmark-based Vestas declined to comment.
The new policies will also let developers propose Brazil’s first new coal plants in auctions since they were barred from the government-organized events in 2009 over concerns of greenhouse-gas emissions.
Fernando Zancan, president of the Brazilian Coal Association, estimates that the government may auction as much as 3,000 megawatts of contracts to fossil fuel projects, benefiting local companies including MPX Energia SA that have permits to build projects.
Given Brazil’s recent gas discoveries, Zimmermann said it makes sense to build plants right next to the reserves that would connect to the power grid, without the need to build pipelines.
“We could have a big thermal revolution,” he said.
The threat of a lack of power became more clear during last year’s drought. The receding water level in reservoirs sparked concern that hydro plants wouldn’t be able meet the demand for power, prompting regulators to recall the 2001 and 2002 blackout crisis that helped drive the Brazilian Social Democracy Party from office, said Adriano Pires, head of the Brazilian Center for Infrastructure.
Those concerns are exacerbated by a new generation of environmentally friendly hydropower plants with smaller dams.
“Smaller reservoirs mean you can’t store as much energy so you need other back-up plants to generate power when demand is high,” Pires said. “Wind farms can’t fulfill this role.”
Some wind developers concede the point. “Brazil needs a stable grid and thermal power will need to play an important role,” said Luiz Gustavo Sant’Anna, director of Porto Alegre, Brazil-based Renobrax Energias Renovaveis Ltda., a wind-farm developer.
Turbines in Brazil are powered by the same strong, steady breezes that brought Portuguese and Spanish sailors to the continent in the 1500s and drive down the cost of electricity today. Developers including Renova Energia SA estimate that turbines there spin at full speed about half the time, compared with an average of 25 percent for wind farms in Europe,
Wind power has made it difficult for developers to sell energy from new gas and coal plants that need to compete on price. Under Brazil’s auction format, developers that offer the lowest rate win. Wind farms, competing against other types of power plants, won 55 percent of the contracts to sell power in 2011 and 2012.
The country isn’t turning away from renewable power because the low cost of wind helps Rousseff fulfill a pledge to reduce power prices by as much as 32 percent, said Elbia Melo, president of Brazil’s wind-power trade group Associacao Brasileira de Energia Eolica.
“Wind farms complement hydro in Brazil because dry periods are normally windy and the contrary is true,” so energy is produced the all year round, Melo said.
Zimmermann, the Brazilian deputy energy minister, said Brazil isn’t abandoning wind energy projects. He said the new auction rules separating different energy sources make sense given that wind farms can be built faster than thermal plants.
The shift to favor fossil fuels highlights the country’s position in international climate-change negotiations. Brazil, along with China, India and South Africa, four of the biggest developing nations, argue that it’s up to developed nations to cut carbon emissions first. China is the largest producer of hydro power.
At the last round of United Nations climate negotiations in Doha last year, Brazilian Environment Minister Izabella Teixeira said industrial nations are “shifting the burden” of fighting climate change to poorer countries by demanding they curb emissions.
Gas advocates welcome the new policies.
“More space is being created for thermal power in Brazil,” said Winston Fritsch, president of Petra Energia SA, which is developing Brazil’s biggest gas-fired power plant in Parnaiba with MPX Energia and OGX Maranhao. “Gas is the big solution for the country and this is what the government is signaling.”
Coal producers also are eager to get back into Brazil’s power auctions.
“There’s no reason why coal shouldn’t participate,” said Zancan of the Brazilian Coal Association.
Emissions from new coal-power plants “won’t threaten Brazil’s climate change obligations,” he said, and they offer reliability that wind and hydro can’t. “If there’s a drought and no wind you’ve got a problem.”
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