financing brazil biomass-based energy

7/28/2019 Financing Brazil biomass-based energy

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In recent years, major cost barriers and a dated energy auction format have pricedbiomass out of Brazils energy matrix. But with changes to public auctions this year anda handful of biomass projects drawing private investment, the role of biomass in Brazilianpower may be on the rise, writes Bob Moser.

Brazil is the worlds second-

biggest 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-

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.

Gristto the mill

Most biomass projectsin 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.

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.

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

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

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.

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.

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%

If all of So Paulos mills were properly connectedto the grid and operating with updated machinery,the state could generate four to five times thebiomass-based energy its generating today.

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


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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

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.

financing brazil biomass-based energy

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