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WHY NATURAL GAS COGENERATION DOES NOT DEVELOP IN BRAZIL?
Lucélia Viviane Vaz Raad, IE – UFRJ, Phone: + 55 21 3873 5272, [email protected]
Overview
One of the main benefits of cogeneration, the combined production of electricity and heat from the same input, is the
increase of efficiency in fuel consumption. In addition, the electricity generation plant gets closer to the consumer
center, thus reducing both the needs for investment in transmission networks and the losses resulting from the
transmission process. Natural gas consumption increased sharply during the last decade in Brazil and currently
represents 10% of total energy consumption in industry. However, natural gas cogeneration is still incipient in Brazil.
The purpose of this paper is to analyze the underdevelopment of such market, by designing a stylized cash flow from
which we derive a curve of investment sensitivity for the price of natural gas when electricity price is kept constant
and a curve of investment sensitivity to the price of electricity when the price of natural gas is kept constant. By
means of a dynamic game, we will show the strategic interaction between the potential cogenerator and the electricity
supplier, what hinders a possible electricity surplus to be sold. Furthermore, we will assess the difficulties posed to
make energy available in the open market and in the energy auctions and, finally, we will show that the policy of
subsidies on the price of the natural gas does not encourage the entry of new cogenerators in the market.
Methods
Sao Paulo and Rio de Janeiro are the only Brazilian states with mature gas pipeline network. Our analysis focuses
Sao Paulo case where Brazilian industry is concentrated. In a co-generation cash flow, electricity generation
represents the revenue, while natural gas consumption is the cost. The National Bank for Social Development (Banco
Nacional de Desenvolvimento Social – BNDS) offers a financing of 85% of the total investment in projects for
power generation, with interest rates of 8% per year and repayment terms of 14 years. In this work we will be
evaluating the investment (cash flow) whose technology is a gas turbine of 10 MW which operates 640 hours per
mouth. The investment costs are R$ 3,000.00/ KW.
Supposing that the firm uses only 50% of the energy produced in the cogeneration plant, we will demonstrate, by
means of a dynamic game of complete information, that the sale of electricity to the concessionaire utility, to which
the prospective cogenerator is connected, will be blocked by the threat of retaliation by the concessionaire utility.
With the purpose of building the payoffs of both firms, we resorted to the designed cash flow from wich the
sensibility of the investment was obtained. Finally, by the Theory of Transaction Cost Economics we discuss how
regulatory commitment is important to enhance private investiment (Spiller, 1996) and summarize the difficulties
posed to make energy available in the open market and in the energy auctions.
Results
The investment sensitivity to the increase of natural gas prices when the price of electric energy is fixed: for each
increment of R$ 0.01 in gas price, the reduction in NPV is of R$114,000.00 up to the point when the complete
suppression of gas price subsidy generates a negative NPV.
The investment sensitivity to decrease in prices of electric energy when the price of natural gas is fixed: for each
decrement of R$ 1.00, the NPV decreases in R$ 367,000.00.
From a dynamic game we can see that the prospective cogenerator does not enter the market selling its electricity
surplus to the concessionaire utility because the threat of retaliation by this latter.
Conclusions
The difficulties to the entry of cogeneration plants in the Brazilian production of electric power may be explained by
a set of institutional arrangements that create uncertainty regarding the future flow incomes resulting from the
investment. The subsidy on gas price to firms that accomplish the investment in cogeneration is essential for assuring
returns of the project. However, this kind of policy is sensitive to opportunistic behaviors on the part of the
government. The government may change each four years and cogeneration may not be view as an important goal of
the new cabinet. The subsidy may be seen as a transference of income between groups – either concessionaires or
firms of the same sector (of the prospective cogenerator) which do not benefit from the subsidy on the price of
natural gas – what can make some groups discontent regarding the government, inducing an opportunistic behavior
on the part of this latter, especially during elections.
On the side of sales of possible electricity surpluses, the commercialization with the concessionaire is blocked once
there is a plausible threat of setting a purchasing price lower than that which makes the project feasible. The
concessionaire has incentives to contract electric energy at auctions in order to meet its whole future demand,
whereas the potential cogenerator represents surplus of electric energy in the hands of the concessionaire which,
when estimating its own future demand, took into account the amount consumed by the potential cogenerator.
The volatile prices of electric energy in the open market hinder the creation of parameters that could allow the
prospective cogenerator to make decisions aiming to offer electricity surplus in that market. Furthermore, it is
necessary to maintain a guaranteed amount of electric power, while the electricity resulting from cogeneration varies
according to production volume.
The cogenerator faces difficulties for bidding electricity surplus at auctions, once the electric power produced
through cogeneration depends upon the variation of industrial production, thus reducing the assured electric energy
that constitutes the base for contracts remuneration. Besides increasing the difficulty of coordination of System’s
National Operator, for being projects with a dynamics of energy generation that is completely different from that of
the other agents comprising the generation system.
In addition, thermoelectric plants count on contracts that warrant the gas supply at the moment of the dispatch by
System’s National Operator, whereas a potential cogenerator depends on the availability of gas in the market. If there
is not available gas in the market, the potential cogenerator will have to supply its plant with, for instance, fuel oil,
what represents a huge loss of efficiency in a plant adapted to natural gas. Uncertainties regarding the market supply
of natural gas along the last two years have also contributed to the lack of investments in cogeneration. However, in
face of the discovery of new fields which will add a significant supply to the Brazilian market, this problem will be
overcome, though it is not clear yet whether new cogeneration plants will begin operating, in view of the dependence
on subsidy for guaranteeing the return of investment and of the hindrances for offering electricity in the market.
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