The Brazilian government has decided to press ahead with the development of the Madeira scheme in an effort to maintain the role of hydro in the national generation mix. Opposition to the project has been strong because of the likely impact on the area of the Amazon rainforest where it will be developed. Domestic discoveries of gas and rising imports have encouraged investment in gas-fired thermal power plants but the Madeira decision underlines the government’s confidence in the sector.

The auction for the construction of one of the main projects in the two-part Madeira scheme was finally completed in December 2007. Despite delays and large-scale street protests, the government decided to push on with the procurement and awarded the first contract, for the Santo Antônio project. The winner was Consorcio Madeira Energetica, a consortium that includes construction firms Norberto Odebrecht and Andrade Gutierrez, power utilities Furnas and Companhia Energetica de Minas Gerais (Cemig), and the banks Santander of Spain and Banif of Portugal.

Consorcio Madeira Energetica is a domestic JV that overcame foreign competition from Spain’s Endesa SA and Suez of France in the tender. In its bid, the consortium offered to sell electricity at R$78.87 (US$43.82) per MWh, about 35% less than the capped tender price, and pledged to bring the new capacity on stream by 2012. The 3,150MW Santo Antônio project, which will be built on the Madeira river in the Amazon region of west Brazil, is to cost R$9.5B (US$5.3B). According to the Ministry of Mines and Energy (MME), the operator will not be required to pay for any navigation-related costs.

Madeira Debate

Environmental protestors argue that a large area of ecologically important forest near the Bolivian border will be destroyed and one of the world’s most diverse fish populations, including rare catfish, could be devastated as a result of the project. Opponents also argue that it will spread malaria and claim that 10,000 people would lose their homes due to reservoir impoundment. Some also insist that the venture will be particularly prone to suffering reduced generating capacity during times of drought. Opposition to the project has even attracted substantial support from within Parliament as the Madeira scheme – which also includes the 3,300MW?Jilau project, to be auctioned separately this year – has divided political opinion.

Roberto Smeraldi, of Friends of the Earth Amazonia, commented: “The project aims to transform the entire western Amazon, but the government is treating it as if it had only a local impact.”

Domingos Parintintin, a representative of the 400-strong Parintintin ethnic group, which lives in the Madeira basin, added: “The dams won’t cause problems only for us, but for all Brazilians who live off the fish from this river.”

The national environmental agency, Ibama, took two years to sanction the scheme and even then attached a host of conditions, including continual monitoring of mercury levels, to mitigate the impact of the dam construction.

Brazil’s federal government authorities had previously blocked the EIA because it examined only the two dam projects and not the associated transmission infrastructure. Federal prosecutors also complained that local people had not been adequately included in the consultation process. However, the ministry of mines and energy regards the project as of strategic importance and accepted changes to the EIA.

Although Ibama cleared the two projects in the Madeira scheme with conditional environmental licences to proceed, in 2007, the auction planned for August last year was delayed to October and then further postponed to December.

Hundreds of protestors from groups including the Movement of Dam Affected People and organisations representing those who would lose their land gathered outside the offices of the Agência Nacional de Energia Elétrica (Aneel), the Brazilian electricity regulatory agency, in Brasilia on the day of the tender announcement. Riot police were employed to break up the protests and some protestors were arrested.

The government concedes that there will be some environmental degradation but argues that extra electricity is needed to ensure power supplies and to support its electrification programme. President Luiz Inacio Lula da Silva has promised that there will be no repeat of the power rationing caused by the drought of 2001. The government also insists that the Madeira scheme are the best places for power development, as the planned dams will not create the relatively large reservoirs that have caused environmental problems elsewhere in the country.

There has also been some opposition from Bolivia, as the Madeira watershed includes some Bolivian territory and impoundment would have cross-border consequences. The Bolivian government complained in July 2007, after the Ibama appeals, that it had not been given the chance to contribute to the project’s environmental impact assessment (EIA).

A tender for the construction of the other main element in the Madeira scheme, the Jirau dam, is expected to be launched in May. Jirau, which will be slightly larger than Santo Antônio, is expected to start coming on stream in 2013, and all turbines in both plants are due to be in place by 2016.

Developing generation mix

The Madeira scheme as a whole is the first large-scale hydro venture in Brazil for 14 years. Hydroelectric schemes account for about three-quarters of national generating capacity of 90GW in Brazil and it is the third largest producer of hydroelectricity in the world, after China and Canada. In recent years, however, most additional generating capacity has been provided by gas-fired power plants. Most hydro schemes are far from the main centres of consumption and a large proportion of electricity production is lost in transmission. The Madeira dams will be particularly distant from the industrialised south-east and so will also suffer high losses. As a result, the government has encouraged the construction of thermal power plants in coastal areas that can easily be supplied by domestic and imported gas feedstock.

Domestic proven gas reserves increased from 5.4 trillion cubic feet in 1997 to 11.5 trillion cubic feet by 2006, while production has risen from 194.9 billion cubic feet a year to 348.9 billion cubic feet a year over the same period. However, the real boost to power sector consumption has come from imports of gas from Argentina and Bolivia, so that domestic fields now account for about half of all Brazilian consumption. Though gas reserves in Argentina are being depleted, the development of a north-south pipeline would enable Brazil to receive gas from Venezuela.

Developments in liquefied natural gas (LNG) are also adding to Brazil’s energy mix. Import terminals are to be built near Fortaleza in the north-east of Brazil by the end of this year and near Rio de Janeiro, in the south east, in 2009. Bolivia’s government led by Evo Morales had attempted to bring the gas sector under state control but last October agreed a new deal with Brazil that allows Brazilian energy corp Petrobras to remain the biggest foreign investor while giving the landlocked nation a larger share of gas revenues. Brazil currently buys about 70% of Bolivia’s gas production.

The other sources of competition for hydro are likely to make only modest contributions to generating capacity. New nuclear reactors will take many years to be built, even though last year state-owned Electronuclear was given the go ahead by the government to resume construction of Angra 3, two decades after development was halted by a combination of lack of finance and security fears. The nuclear sector has generating capacity of 1,896MW since the Angra 2 reactor was completed in 2000.

Lula da Silva commented: “If money was lacking, it won’t be lacking now. I’ve made a commitment to provide the necessary funds so we can complete that project. We will complete Angra 3, and if necessary, we’ll go on to build more [reactors] because it is clean energy and now proven to be safe.”

Angra 3 will have a capacity of 1,000MW and is expected to be completed in 2013 while Electronuclear plans this year to select the site for its fourth reactor and even with Angra 3 working again, it seems unlikely that the sector will produce more than 5% of Brazilian electricity for a long time to come.

Hydro – Beyond Madeira

As a result of sustained economic growth, national power consumption is expected to continue rising by about 5% a year over the next decade, so new hydro schemes are required. Gas consumption will rise substantially but the government has insisted the hydro must grow in parallel with thermal power generating capacity to maintain energy security. MME’s national energy plan, which was published in 2005, calls for 30GW of new hydro capacity to be developed over 15 years. One of the most recent projects to come on stream is the 880MW Campos Novos scheme on the Canoas river, which was completed in February 2007. It is operated by CPFL Energia, which is now also developing the 855MW Foz do Chapeco venture on the Uruguai river.

Construction work on Foz do Chapeco began at the end of 2006 and its four units are expected to become operational over 2010-11. After a project assessment, Brazilian development bank Banco Nacional de Desenvolvimento Econômico e Social (BNDES) agreed in July 2007 to provide funding of US$590M for the project. BNDES’ support will also allow a consortium of other banks, including Banco do Brasil and Santander, to provide a further US$270M in loans.

About 60% of all output will be sold on the open market, with the balance supplied to project partners, including Furnas and Pentagono. alstom Hydro has been awarded a US$213M contract to supply four 217MW units, control systems and commissioning services to the plant.

On the River Tocantins, an even larger hydro project is under development. In 2002, Consorcio Estreito Energia (Ceste) JV secured a concession for the 1,087MW Estreito scheme, which was scheduled for completion in 2010. Members of the JV?include Suez Energy South America Particpacoes, Alcoa Alluminio, Camargo Correa Energia and Companhia Vale do Rio Doce (CVRD). A joint venture of Impregilo of Italy and OAS won a US$326M construction contract last October.

As with Madeira, federal prosecutors held up development because of concerns over the impact on local ethnic groups. However, a review of the dam and power generation work concluded that the needs of local people would be taken into account, that sufficient mitigation measures had been agreed and that the environmental damage would not be too severe.

However, Suez has now indicated that it would like to expand the generating capacity of the Estreito plant by 435MW as part of its more general investment in the Brazilian hydro sector. Suez has previously suggested that one of its subsidiaries, Tractebel Energia, could take over ownership of Estreito.

Among the firm’s others plans in the country are the construction of the 241MW Sao Salvador scheme, also on Tocantins, at a cost of US$410M, and expanding the Salto Osorio plant. In March 2007, BNDES signed a deal with Suez to provide US$275M to finance about 65% of the Sao Salvador scheme’s development costs which is due for completion in 2011.

In December 2007, Suez bought the 176MW Ponte de Pedra hydro scheme on the Correntes river for US$329M?from a JV of Swedish firm Skanska and Impregilo. The project was completed in September 2005 and is connected to the Brazilian power grid by a 230kV transmission line. It has a contract to supply electricity to state utility Cemig under a concession that stretches to 2034, with a possible extension up to 2054.

Brazilian firm Neoenergia has already started construction of the 261MW Dardanelos hydro venture in Mato Grosso state. Neoenergia leads the project consortium, alongside two Eletrobras subsidiaries, Companhia Hidro Eletric do Sao Francisco and Eletronorte.

Neoenergia appears to greatly stepping up its interests in power generation, having purchased a 60% share in the 93.6MW Corumba II plant in Goias State in 2006 and investing in the 140MW Baguari hydro scheme in Minas Gerais State with partners Cemig and Furnas. Corumba II is due for completion shortly and Baguari in a year.

The level of investment in the sector also demonstrates the level of business confidence in new Brazilian hydro schemes. While BNDES’ support for Foz do Chapeco is substantial, the project represents just a fraction of the development bank’s overall commitment to the hydro sector.

According to Nélson Siffert, the director of the bank’s power department, BNDES has approved R$7.79B (US$4.35B) in hydro sector loans this year as part of the government’s Programade Aceleraçãodo Crescimento (PAC), or accelerated growth programme to 13 separate schemes with combined generating capacity of 3,590MW.

Siffert said that the total excludes Santo Antônio , which is PAC’s second largest hydro project, only Jirau being larger. Financing approval for Santo Antônio is anticipated this year.

Some BNDES funding is provided in the form of direct loans but the bank also arranges syndicated loans with other financial institutions.

Hydro Acquisitions

Investors have also been active in acquisitions in the hydro sector in South America. In January, Brookfield Asset Management (BAM) opted to take over Itiquira Energetica SA, which operates 156MW of capacity on the Itiquira river in Mato Grosso, where BAM is already active.

The acquisition follows the move by BAM last July to purchase 11 small hydro schemes in Minas Gerais with generating capacity of 45MW. The company’s managing partner, Richard Legault, said: “These assets complement our existing portfolio of operating assets and provide a valuable pipeline of green field hydroelectric projects that will enable us to expand our geographic footprint in the growing Brazil market.”

Other investors are also interested in Brazilian small and mini hydro. Union Fenosa plans to invest US$120M in acquiring 80MW of mini hydro capacity across the country, while BNDES is actively supporting small- to medium-sized projects.

In August 2007, the bank approved US$81M funding for the 10MW Salto Buriti and 30MW Salto Curua schemes, which are to be developed on the Curua river by the Bertin Group, plus a 200 kilometre transmission line to connect the area with the rest of the country.

Hydro Popularity

The popularity of electricity from hydro schemes was underlined by the Camara de Comercializacao de Energia Eletrica (CCEE) tender for power production in October 2007. The Brazilian power sector is only partly deregulated and so two different markets are in operation: a free market power pool and a more regulated system under which prices are fixed in advance.

Electricity prices in the auction to supply electricity in 2012 were expected to reach R$126/MWh for hydroelectricity and R$140/MWh for power from thermal plants. However, the average price paid by distribution companies was slightly higher for hydro at R$129/MWh but that for thermal power was lower, R$128/MWh, indicating competition to buy hydro output was fiercer than anticipated.

The president of CCEE, Antonio Carlos Fraga Machado, said: “The auction was successful because it made room for very cheap and interesting prices for the development of this market. Thermo power is becoming cheaper and cheaper at every auction we hold.”

Nelson Hubner, the Acting Minister for mines and energy, added: “The auction had 52 bidding rounds, which has certainly helped decrease the power price at the end of the process.”

Capacity sold in the tender included 259MW from the Foz do Chapeco hydro scheme and 256MW from the 1,087MW Estreito venture.

A combination of recent investment decisions and government support for the Madeira scheme indicate that the Brazilian hydro sector is set for a period of sustained expansion.

The construction of LNG terminals and the conclusion of piped gas import deals will enable the development of new thermal power plants but hydro will remain the bedrock of the Brazilian generation mix. Partial sector liberalisation seems to have persuaded both foreign and domestic companies that there are profits to be made in hydro and it is likely that further projects will be given the goahead over the coming year.


Madeira scheme