Brazil electric power: Riding the Green Wave

In 2015, renewable energy sources accounted for 70.4% of the installed capacity and for 75.9% of the power generation in the country.

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Sector Overview

Brazil is the world’s leader in renewable energy power generation. Notably, at the end of 2015, renewable energy sources accounted for 70.4% of the installed capacity and for 75.9% of the power
generation in the country. Although hydropower is undoubtedly the dominant element in the electric energy mix, with more than 71% of total power generation in 2015, wind power has been the fastest
growing energy source over the last years. Notably, between 2010 and 2015, the power generated from wind farms increased at a CAGR of 68.8%. About 56% of the power capacity of the country is located in
the economically developed South and Southeast regions. They were also the largest electricity consumers during the year, responsible for more than 68% of total power consumption in the country.

Entry Modes

Since the restructuring of the power sector in the 1990s, the main entry mode in the generation, transmission and distribution segments is through a competitive bidding process. The key regulatory bodies in charge of the process are ANEEL, responsible for transmission and distribution auctions, and CCEE, which is in charge of electric power auctions. The auctions that took place in 2015 and early 2016 faced small to moderate investor interest and low level of competition among bidders. The investor sentiment was hurt by the deepening recession in the country that affected power demand and the low profitability offered on concession contracts by the government. Another popular entry mode for foreign investors is through acquisition of already operational projects, with the most prominent example being Chinese state-run energy group State Grid Corporation.

Segment Opportunities

In line with the current negative economic conditions, a number of public and private companies are considering divestment programmes in an attempt to improve their financial situation. The largest opportunities for new investors will come from the leading company in the market, state-controlled Eletrobras, which announced plans in early 2016 to sell its distribution business. The power generation segment also remains attractive in view of its fragmented character. One of the largest players of the segment, Petrobras, the 7th largest company by installed capacity as of December 2015, informed in February 2016 that it was looking to divest its power generation assets. Power transmission is also offering investment opportunities, as the existing infrastructure is underdeveloped and poses challenges for the utilisation of the full installed capacity of the country.

Government Policy

Until recently, the electric power sector featured high government intervention, with power prices subject to centralised formation. Yet, the long drought period between 2014 and 2015 forced the government to implement a more market-oriented price policy for electricity and reduce subsidies for power distribution companies. In June 2016, interim president Michel Temer said the government was looking to further scale back government intervention in the development of the sector by reducing the participation of the National Development Bank (BNDES) in the financing of energy projects.