I: MAKING THE CLEANEST ENERGY ECONOMY CLEANER
Brazil’s energy matrix is often touted as among the cleanest in the world: over 80% of Brazil’s power is produced from renewable resources. The predominant share of this 80%, however, stems from hydroelectric power, an energy source increasingly criticized in Brazilian civil society for its damaging ecological footprint and potential for community displacement. Behind this national controversy, Brazil has embarked on significant, albeit less publicized, efforts to spur other renewables such as wind and biofuels. This past winter, a team of Harvard Kennedy School/Harvard Business School joint-degree students studied Brazil’s policies and approaches to promoting a domestic wind and solar energy industry. Beyond understanding the key drivers for clean energy development in Brazil, the team paid close attention to the motivations influencing governmental energy policy. If environmentally sustainable development is the goal, policy makers and advocates alike must pay close attention to not only how government and business can cooperate to achieve this end, but also why it is in the parties interests to do so. Fortunately, in the space of clean energy, the public and private sectors have a broad range of shared interests, as industrial policy, economic growth, and job creation are common aims.
The burgeoning wind energy industry in Brazil is an exemplary case study of how business and government can work together to develop renewable energy. Within the next ten years, wind energy production is projected to grow by over 1,000% and account for over 10% of Brazil’s total energy generation. From an economic efficiency standpoint, a predominant share of wind energy is already cost-competitive with thermal and small hydro alternatives.
A confluence of factors contributed to this success story, some of which the Brazilian government can take little credit for. First, Brazil has some of the best natural wind resources in the world, especially in the Northeast region of Brazil. Second, following the global recession, component costs declined dramatically due to oversupply coming from China. Third, in many ways wind is an ideal complement to hydroelectricity, as wind capacity tends to peak countercyclically to hydroelectricity, allowing an increasing amount of hydro capacity to be stored in reservoirs. Lastly, private investors have been willing to assume significant risk when making large investments in the Brazilian wind energy sector, before the Brazilian government began to promote this industry through risk-mitigating incentives.
Still, much of the Brazilian wind energy success story must be credited to government planners, institutions, and policies. One factor encouraging wind energy development (renewable and distributed energy in general) is the centrally administered and highly connected electric grid. Brazil is one of few countries in the world that can efficiently transmit energy across the country, adjusting regionally as power generation fluctuates. The role of feed-in-tariffs, under the PROINFA program, also is an instrumental part of the Brazilian wind energy story. Starting in 2005, Brazil invested billions of Real to subsidize the higher cost of wind energy for consumers, making wind a viable alternative to traditional thermal and hydropower sources. While PROINFA has ended, other forms of subsidization still exist for Brazilian wind energy, including lower marginal tariff rates for generation, transmission, and distribution. In addition to making investments more economically productive for firms and investors, subsidization has provided an important signal to the marketplace that the Brazilian government is committed to growing the wind industry. Accompanying these economic incentives, the Brazilian energy planning organization (EPE), a quasi-governmental and highly influential institution tasked with making recommendations for Brazil’s strategic energy policy, included wind energy in its energy planning forecasts and reports. This served as another important signal to private investors that wind would become part of Brazil’s energy future.
In compliment to this industrial policy, Brazil utilized its development bank, BNDES, to provide low interest rate financing for wind energy projects. Though arguably slowing the development of long-term financial markets capable of capitalizing large-scale infrastructure investments, BNDES offers interest rates well below the market level, making investment in renewable energy more attractive. As a requisite for BNDES financing, wind projects must use at least 60% domestic components. This restriction is an important tool for ensuring the participation of domestic firms and the creation of local jobs. Lastly, Brazil created a special auction system to competitively award regional energy generation contracts. The state initially allocated a small percentage of future energy auctions and contracts specifically for wind, with wind producers bidding only against other wind producers. This intra-industry competition helped drive down wind energy prices. In the past two years, wind energy producers entered general auctions and competed successfully bidding against coal, gas and small hydro projects.
Critics view some of these government policies, especially the feed-in-tariff PROINFA program, as fiscally irresponsible and economically inefficient. Not surprisingly, the industry disagrees. Members of Brazil’s Wind Energy Association (ABEeólica) will be the first to tell you that the Brazilian wind energy industry would not be the flourishing sector that is today if it were not for governmental support and signaling. ABEeólica contends governmental promotion played in instrumental role in creating an environment conducive for supply chain and R&D investment, which operates more-or-less sustainably today.
Continue here to the next part of this blog series.
Eric and Todd are both MPP/MBA candidates in the Class of 2014, enrolled in the joint-degree program between the Harvard Kennedy School and Harvard Business School. Their joint-degree cohort traveled to Brazil in January to study the clean energy industry.