Energy: Government will change rules for auctions of new power projects

Government will change rules for auctions of new power projects

By Rodrigo Polito Rio de Janeiro
The federal government is considering adopting a series of changes in rules for auctions of new power this year. It aims to increase the security of supplies and reduce delays in the construction of generation facilities, after the frustration with Bertin, group which had won several auctions but never took off the drawing board more than 5,000 megawatts of thermal plants it had negotiated. But the new measures may have a side effect: increasing future electricity prices, reversing the falling trajectory of the past few years, when it reached the level of R$100 per megawatt-hour.
Brasília is working with the possibility of holding three auctions of new power (meaning from yet-to-be-constructed plants) in 2013, with one “A-3” (electricity to be supplied within three years, or in 2016), one “A-5” (for delivery in 2018) and one auction of reserve exclusive for wind farms. And it is exactly for the wind farms that the most significant changes are planned. The idea is to increase the rigor of the criterion to calculate physical guarantee (volume of tradable power) from wind farms. In practice, a project with the same nominal capacity will have a smaller amount of electricity to sell.
Another proposed change is restricting the participation in auction only to farms that have the possibility of connecting to the existing electric system. Although this would eliminate the risk of delay in supplying power for lack of transmission lines, the measure will reduce the offer of wind farms in auctions, which may result in higher prices.
“There will be a tendency to increase the top price for wind power because of the change in physical guarantee and due to the fact that we have a little less competition,” said Maurício Tolmasquim, president of the Energy Research Company (EPE), planning arm of the Ministry of Mines and Energy.
To have an idea of the impact that changing the physical guarantee calculation will have, experts explain that, considering the top price for the latest power auction, of R$112/MWh, this value would be modified to something around R$130/MWh.
Today, the calculation of physical guarantee is made under the “P50” criterion, which, taking into account a historical series, accepts a probability of 50% of the farm generating at least the declared volume of firm power (physical guarantee). The government now plans to use the “P90” criterion, which increases this probability to 90%. In practical terms, this means that the investor will be forced to opt for one of two alternatives: reducing the declared firm power or investing in expanding the installed capacity.
However, the proposal hasn’t pleased wind-farm investors. “It’s a measure too strong and unnecessary. We will pay for the insurance a higher value than the indemnity,” says Elbia Melo, president of the Brazilian Wind Power Association (Abeeólica). She says that to sell the same amount of electricity, capital expenditure in these projects will have to rise by 15%. The trade group even proposed to the government to alter the criterion to 75%.
Experts say the government’s motivation is to avoid overestimations of capacity of wind power and reducing the risk in implementing projects. Nivalde Castro, coordinator of the Study Group of the Power Industry at the Federal University of Rio de Janeiro, says the measure is in line with financing conditions for the industry. The Brazilian Development Bank (BNDES) uses “P90” to define financing to wind projects.
Two other industry sources, however, argue that the initiative aims to increase the price of wind power and pave the way to the use of coal and biomass thermal plants.
The government intends to reserve one part of the demand in new-power auctions for exclusive contracts for thermal power plants. “Looking to the medium and long terms, we need to keep and potentially increase a little the share of thermal plants,” Mr. Tolmasquim said.
He said he’s working to convince Petrobras to take part in the auctions. “I’m talking to Petrobras. I’m stimulating them to participate. I expect strong competition between natural gas, coal and biomass,” he said.
Experts say a larger share of thermal power in total generation will increase electricity prices. “It’s certainly not possible to think in a trajectory of falling prices,” said Claudio Sales, president of Instituto Acende Brasil.

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