Grupo de Economia da Energia

Belo Monte: the paradox of plenty

In electricity on 03/05/2010 at 01:27

By Edmar de Almeida 

The bid of Belo Monte hydroelectric power plant has raised a great debate in Brazilian society about the economic and environmental feasibility of the project. A large number of political and economic agents has been reporting the negative aspects in terms of environmental, economic and even electoral issues related to the project. Nearly always those who seek to point out the problems related to the project do not analyze the advantages and disadvantages of energy alternatives to Belo Monte. And they think that scarcity is not an issue to be considered. The false premise of the debate on Belo Monte in Brazil is that there are much better options in terms of economic and environmental instead of building the plant in the Xingu River.

Much of controversy about Belo Monte regards what we might call the paradox of plenty. Most of industrialized countries has no abundant energy potential. In these countries, the expansion planning for the electricity sector must manage the scarcity and choice security of supply, low tariffs or environmental sustainability. In China, for example, where coal is the only source available to ensure security of electricity supply, Belo Monte would not cause the same controversy indeed.

If, on the one hand, Brazil is favored, with an abundance of energy resources, on the other hand, it is unlikely that the debate ignores totally the comparison of such alternatives as occurring. The abundance of energy resources, to become competitive advantages for Brazil, requires a prudent discussion.  Brazil is the only industrialized country with a large potential for hydroelectric generation. This potential has been used until end in Europe and United States of America. By giving up to take the rest of its hydroelectric potential, Brazil will choose to use intensively other conventional energy sources such as oil, coal, natural gas and nuclear energy.

We have to mention that the debate on Belo Monte is not limited to the decision whether or not build this particular hydroelectric power plant. Discussing Belo Monte means discussing whether the country will take advantage or not of the hydroelectric potential in Amazônia. About 70% of the Brazilian hydroelectric potential is found in the Amazon region. Certainly, many of the reasons for not putting into practice Belo Monte would also apply to all hydroelectric projects in the region. Therefore, the discussion about Belo Monte is essential for the future of Brazilian hydroelectric development and national energy.

By comparing Belo Monte with other alternatives for expansion of electricity supply in the coming years it is clear that if Belo Monte not happen the cost of our energy generated and the level of emissions of greenhouse gases would have a high increasing. On the one hand, there are other hydroelectric projects ready to bid in order to replace the Belo Monte project. On the other hand, it is not economically feasible to replace the amount of energy to be supplied by other renewable sources (wind, biomass or small hydroelectric power plants).  That is, if Belo Monte project does not occur, Brazil will necessarily increase the hiring of energy generated by natural gas and/or coal power plants.

In recent public energy auctions organized by Aneel, the cost of energy generated by alternative sources to Belo Monte, whether thermal or renewable, on average, was twice the cost of Belo Monte. Thus, the debate about the feasibility of Belo Monte must consider the cost and environmental impacts of the alternatives.

Assuming that the Belo Monte project should be a priority to preserve the low tariffs and low emissions in the Brazilian energy sector, we can discuss responsibly the best options to implement the project. Much of controversy on the project regards definition of the maximum tariff and bidding process for selection of investors. In the new model of the Brazilian electric sector, the guarantee of low tariffs is through competition to obtain the right to invest in projects to expand supply. In this sense, the greater the number of participants greater the degree of competition and the lower the resulting tariff. However, we must recognize that this project has about US$ 20 billion investment, and the number of consortia able to participate in the bidding process tends to be reduced.

In the context of a small number of participants, setting the maximum tariff becomes crucial to ensure low tariffs.  Throughout the Belo Monte bidding process, only three consortia made proposal. So it is not supportable the idea that it would be better to set a higher maximum tariff to attract a large number of participants in order to let the market set the low tariff. Competition among such a small number of participants does not guarantee that the fair price could be achieved through auction. In summary, in this low level of competition, low tariffs are set by the price ceiling. However, setting the maximum tariff at a very low level can cause risks to the economic feasibility of the project. The public policy wisdom is to ensure low tariffs without including the economic feasibility of the project.

The feasibility of projects as Belo Monte depends on the State’s capacity to implement mechanisms for coordination and reduction of uncertainty, allowing the mobilization of necessary resources. By leading the investment decision process by Eletrobrás and BNDES, the State is assuming a central role and taking responsibility for the feasibility of the project. If, on the one hand, the strategic nature of the works justifies a greater role by State in this project, on the other hand, it is legitimate for society to follow carefully and discuss and judge the decisions made by public officials regarding the feasibility of the project.

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