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Renewable Energies in Brazil – An Entry Guide for Foreign Energy Trading Companies


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This business case is written for the purpose of informing CEOs of foreign Energy Trading Companies about the Brazilian Renewable Energy Market and possible investment opportunities, as well as a suitable entry strategy. In particular, the business case will focus on three renewable energies that will play an important role in Brazil`s future energy mix: Hydropower, wind energy, and biomass. All three energies have great growth potential, are supported by the government, and have an abundance of resources to dwell upon. Moreover, in an era where global warming is a pending issue, global energy supply increasingly relies on the use of alternative energies. Brazil, being home to vast reserves of water, agricultural land, and coastal regions, can be one of the first developing countries to follow the lead of developed nations in terms of total energy output from alternative energy sources. Favorable macro-economic conditions (which will also be analyzed in this business case), coupled with a going-green attitude of the government, makes renewable energies an interesting investment opportunity for foreign Energy Trading Companies. Not only has the government recently opened the energy market for FDI, but it also provides attractive financial support to Energy-rookies who are about to enter the market. By taking part in yearly energy auctions, or by forming a partnership with a domestic company, foreign Energy Trading Companies can be sure to indulge and prosper upon one of the most thriving and promising markets of this century.

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Renewable Energies in Brazil – An Entry Guide for Foreign Energy Trading Companies

  1. 1. ITESM CAMPUS MÉXICO Final Business CaseRenewable Energies in Brazil – An Entry Guide for Foreign Energy Trading Companies Final Version© Maximilian Franke (A01294626) Doing Business in the Americas Dr. Isabel Studer México City, December 1st 2011
  2. 2. Table of ContentsExecutive Summary .................................................................................................................................... 31. Introduction ........................................................................................................................................... 42. Analysis ................................................................................................................................................. 6 2.1 Structure of the Analysis ................................................................................................................... 6 2.2 Country Analysis ............................................................................................................................. 7 2.2.1 DESTEP ................................................................................................................................... 7 2.2.2 Ease of Doing Business .......................................................................................................... 13 2.3 Market Analysis ............................................................................................................................. 17 2.3.1 Renewable Energy Market ..................................................................................................... 17 Hydroelectric Energy .................................................................................................. 18 Wind Energy ................................................................................................................. 20 Biomass ........................................................................................................................ 22 2.3.2 Energy Policy ......................................................................................................................... 24 2.3.3 Legislative Framework ........................................................................................................... 273. Conclusion ............................................................................................................................................ 294. Recommendation ................................................................................................................................. 335. Bibliography ......................................................................................................................................... 346. Appendices ........................................................................................................................................... 377. Further Reading .................................................................................................................................... 45 2
  3. 3. Executive Summary This business case is written for the purpose of informing CEOs of foreign Energy TradingCompanies about the Brazilian Renewable Energy Market and possible investment opportunities, as wellas a suitable entry strategy. In particular, the business case will focus on three renewable energies that willplay an important role in Brazil`s future energy mix: Hydropower, wind energy, and biomass. All threeenergies have great growth potential, are supported by the government, and have an abundance ofresources to dwell upon. Moreover, in an era where global warming is a pending issue, global energysupply increasingly relies on the use of alternative energies. Brazil, being home to vast reserves of water,agricultural land, and coastal regions, can be one of the first developing countries to follow the lead ofdeveloped nations in terms of total energy output from alternative energy sources. Favorable macro-economic conditions (which will also be analyzed in this business case), coupled with a going-greenattitude of the government, makes renewable energies an interesting investment opportunity for foreignEnergy Trading Companies. Not only has the government recently opened the energy market for FDI, butit also provides attractive financial support to Energy-rookies who are about to enter the market. By takingpart in yearly energy auctions, or by forming a partnership with a domestic company, foreign EnergyTrading Companies can be sure to indulge and prosper upon one of the most thriving and promisingmarkets of this century. 3
  4. 4. 1. Introduction In 2007, James Martin, founder of the 21st Century Institute and Institute for Science andCivilization, penned the “17 Great Challenges of the Twenty-first Century” as part of his notorious work“The Meaning of the 21st Century: A Vital Blueprint for Ensuring our Future”. His appeal to humanity notonly addresses social and technological challenges that have to be dealt with in this still juvenile century,but also environmental issues. Saving the Earth – the first and foremost challenge on the list – states that“the planet`s climate will change and we have to learn to live with changes 1”. James Martin was keen torealize that, above all other challenges, the saving of the planet should be our utmost priority as it providesboth the home and shelter we depend on. Nowadays people, and especially companies, see themselves confronted with the rising issue ofglobal warming that goes hand in hand with the conspicuous increase in greenhouse gas emissions. Thismalicious “trend” is omnipresent, and brings about the need for environmental responsibility. Being thenumber one producer of greenhouse gases, the production industry has to start rethinking its energyportfolio, as conventional energies such as oil, coal, or gas (so called fossil fuels) are not only subject toscarcity, but also jeopardize the environment significantly. The alternative to fossil fuels is renewableenergy. This rather “modern” type of energy is renewable, because it is generated from the very essencethat James Martin sought to protect: the earth and its nature. Renewable energy is both infinite andecologically beneficial, and therefore should be the guarantor of energy in the future. “Thinking green”,the designated catch-phrase of many environmentalists and a long thought empty cliché, is more and morebecoming a reality in the heads of many people. Unfortunately, the willingness of companies to go green is merely a futile undertaking if thepolitics of a country do not provide the incentives for green energy. The most prominent and prevailingexamples are the United States and China. Whereas many European countries (for example Germany)have already made a significant progress towards renewable energy, the world`s two biggest nations interms of economic output have not yet undertaken a clear commitment to a greener future. Be that as itmay, developed countries are leading the way concerning renewable energies, and appear to be a goodrole model for nations to follow. Interestingly, developing countries are increasingly taking part in thepioneering task of developed countries despite their huge demand for and dependence on naturalresources. Brazil for example, has long been dependent on oil, also given the fact that it is one of theworld`s biggest oil producers. In 1970, following a series of severe oil shocks, Brazil began to diversify itshitherto unilaterally-developed energy portfolio in order to reduce its dependence on oil and other fossilfuels. Nowadays, according to the Energy Research Corporation (EPE), 85.4% of Brazil`s domestically-produced energy comes from renewable energies – mostly ethanol and hydroelectric power 2. Favorablegovernment incentives alongside with the global movement towards a greener future have made Brazil aninteresting market for renewable energies.1 Martin, James. “The Meaning of the 21st Century: A Vital Blueprint for Ensuring our Future.” 21st century Instituteand Institute for Science and Civilization. January 2007. <>2 Hübner, Nelson. “Brazil`s Wind Power Auction Spurs More Clean Energy Development”. ANEEL. 29 December2009. <> 4
  5. 5. This case study has been written with the purpose of analyzing the Brazilian market of renewableenergies, and gauging it upon possible investment opportunities. The case study is tailored to the requestof any foreign Energy Trading Company, which seeks to expand its business into the Brazilian energymarket. Throughout the subsequent pages, I will not only take a look at the market and all itscharacteristics, but also analyze the government`s energy policy and the corresponding legislativeframework. I will then conclude the business case with a recommendation on possible entry strategies andinvestment opportunities. In essence, this paper serves as a preliminary entry-guide for CEOs of foreignEnergy Trading Companies that seek to dwell upon formidable investment opportunities of an increasingmarket in an aspiring country. 5
  6. 6. 2. Analysis 2.1 Structure of the Analysis The subsequent analysis forms the main body of this business case, and will justify the conclusionand recommendation stated at the end. Given the fact that this business case pertains to a certain market,the following analysis will take the form of a market research study. The purpose, as mentioned in theintroduction, lies in helping the client (foreign Energy Trading Companies) gain a better understanding ofthe Brazilian renewable energy market, and to offer him, based on the analysis, a suitable entry strategyand possible investment opportunities for this particular market sphere (recommendations). Through this,the client will be able to better tailor his expansion strategy to a possible entry into the Brazilianrenewable energy market. Preceding the recommendations, the conclusion will summarize the findings ofthe country and market analysis, and visualize them with the help of an opportunities/threats (OT)analysis. To facilitate the analysis, I have formulated a main question serving as the guiding viewpoint ofthis market study. The main question states the reason for conducting this business case, and also depictsthe all-embracing query of the client:“What are the benefits/threats of expanding my business into the Brazilian Renewable energy market?” In order to answer the main question, a number of sub-questions need to be answered. Those sub-questions serve as the milestones of the analysis: a) How do macro-economic factors influence the renewable energy business in Brazil? b) What is the ease of doing business in Brazil? c) Which renewable energies are profitable in the long term? d) How does the government`s energy policy on renewable energies affect the client? e) How does the legislative framework for renewable energies affect the client? In the conclusion at the end I will then answer all sub-questions by summarizing the analysis, andgiven answer to the main question. 6
  7. 7. 2.2 Country Analysis Prior to analyzing the market for renewable energies, it is crucial to examine the country in whichthe market of interest is located. Many times, the attractiveness of a specific market is defined or limitedby the characteristics of the home country. Those characteristics, which play an important role indetermining the ease of doing business in a country, can be dissected into 6 macro factors, commonlyknown as DESTEP. Serving as a powerful analytic tool, the DESTEP is used to examine macroeconomicfactors that cannot be controlled by the company. By analyzing each factor, the management can be sureto obtain a better understanding of external influences that have an effect on the market of interest. In the following section, I will apply the DESTEP analysis to Brazil with respect to the renewableenergy market. It shall be mentioned, that the most important factors – namely political and legal aspects –will be further elaborated on in the market analysis (2.3.2 and 2.3.3), as they have a particular impact onthe market of interest. After the DESTEP, I will then determine the Ease of Doing Business in Brazil,which provides objective measures of business regulation in that country. Those two measurements – theDESTEP and the Ease of Doing Business – conclude the country analysis and set the focus on thesubsequent market analysis. 2.2.1 DESTEP Macro factors, such as the economy, have a not to be underestimated impact on business activitiesin a country. Therefore, it is of utmost prudence to gauge those factors upon their importance towardsbusiness activities prior to entering a market. The DESTEP analysis will do just that, and it is divided intodemographic, economic, social, technological, ecological, and political factors. As it has been mentionedearlier, political and legal aspects will be dealt with in-depth later in the analysis. In order to keep theanalysis within the scope of this business case, I will only emphasize the most predominant trend(s) ofeach factor.Demographic Factors Recent demographic trends have made Brazil an interesting country for Foreign Direct Investment(FDI). The probably most intriguing trend is the rapid expansion of its middle class. Whereas in the mid-90s the disparity between the rich and the poor was at its height, in 2002, following a period of sustainedeconomic growth, the emergence of a new lower middle class, with growing disposable incomes andeasier access to credit, reshaped Brazil`s thitherto unequal class society. Although income disparitiescontinue to be an issue, future scenarios predict that Brazil and its young population (mean age 29.3 in2010) will be one of the most attractive consumer markets in the world 3. A rising and young middle class with growing disposable income not only has a positive effect onthe consumer market, but also benefits other sectors, such as the energy sector. This is because anincreasing disposable income goes hand in hand with a nation`s increasing prosperity and living standard.Hence, the demand for essential goods like running water and electricity also increases. This is good newsfor Energy Trading Companies, as their target group is increasing as well.3 Euromonitor International. “Brazil`s new middle class has a growing appetite for consumption.” EuromonitorInternational. Euromonitor, 2007. Web. 12. November 2011. <> 7
  8. 8. Economic Factors It goes without saying that Brazil is among the fastest growing economies in the world. Everyonewho is familiar with term BRIC (a term coined by Goldman Sachs in 2003 standing for Brazil, Russia,India, and China) should at least have acknowledged the emanating power of those 4 fast developingeconomies. What sets Brazil apart from the other South American economies, is its striking ability torecuperate from economic calamity. In 2009, when most of the world was fighting off the aftershock ofthe financial crisis, Brazil experienced just 2 quarters of recession. In 2010 it was more than back on track,boasting with an unprecedented real GDP growth rate at around 7.5% (see appendix1). What is it thatfuels Brazil`s astonishing economic growth and renders it relatively immune against economic misery?One the one hand, it is due to its well-developed agricultural, mining, manufacturing, and service sectors,which provide the country with a sound basis for economic growth. On the other hand, Brazil is graduallybuilding up foreign reserves (in Dollar and Gold), and therefore strengthening macro-economic stability4. Rapid economic growth and macro-economic stability are two attributes of fast developing andascending economies. In essence, they portray the increasing prosperity of a country. Coupled with equalincome distribution – a factor that is improving year by year – and an expanding middle class (asexplained under Demographic Factors), it has a positive effect on the client`s target group. The annualconsumption of electricity supports this trend (see appendix2). As the graph shows, annual consumptionhas been increasing constantly, and except for the years 2007 and 2008, where the financial crisis struckthe country, energy consumption continues to grow. In fact, growing electricity consumption emulates thetrend of Brazil`s expanding middle-class and rising living standards.Social Factors Despite the accelerated pace with which Brazil`s economy seems to overwhelm its SouthAmerican counterparts, 20% of its society does not have access to sanitary facilities, and more than 25%of it is living below the poverty line4. In addition, 6.7% of the world`s 6 th largest labor force isunemployed (according to the World Factbook). Social unrest, especially in rural areas, stand for the otherside of the coin in midst of Brazil`s economic wonder. Be that as it may, rising living standards and atightening gap between the poor and the rich (see appendix3) may alleviate the social pressure that iscurrently being exerted on the government. Economic growth and social inequality form a perfect breeding ground for (international)companies. Not only can they prosper on a solid economy, but also reduce unemployment and thuscontribute to the country`s prosperity. The only requisite is that the government allows foreign firms togain a foothold in the market. This procedure is frequently referred to as Foreign Direct Investment (FDI),which measures the net inflows of investment to acquire a lasting management interest in an enterpriseoperating in an economy other than that of the investor5. Since the beginning of the century, the Braziliangovernment has made a considerable effort to foster and promote the inflow of FDI into the Brazilian4 The World Factbook. “Country: Brazil.” The World Factbook. Central Intelligence Unit. 2010. Web. 13. November2011. <>5 The World Bank. “Data: Brazil.” The World Bank. IBRD&IDA. 2010. Web. 13. November 2011. <> 8
  9. 9. market (see appendix4). An open and uninhibited flow of FDI should be an encouragement for foreignfirms to think about entering the Brazilian market. What foreign Energy Trading Companies should also take into account upon expanding theirenergy portfolio into Brazilian market is that although the majority of Brazil`s population is in favor ofrenewable energies, there has been a growing social stance against one specific renewable energy: hydro-electric power. In 1970, when Brazil began with the construction of the Itaipu Dam, almost 10,000families living beside the Paraná River had to be displaced. The thitherto world`s largest waterfall byvolume, the Guaíra Falls were drowned completely by the newly formed Itaipu reservoir 6. Back then, thegovernment was able to put down any (mostly indigenous) resistance against the project. Meanwhile,another hydro-electric dam complex is under construction: the Belo Monte Dam. Considered to be theworld`s third largest hydro-electric dam (only second to the Itaipu- and Three Georges Dam), a Brazilianhydro-electric project once again spurs social resistance both nationally and internationally. The BeloMonte Reservoir is estimated to flood approximately 400 km² of forest, severely jeopardize biodiversity,and cause the emission of methanogens (a greenhouse gas) that is produced by the lush jungle covered inwater each year as the reservoir fills7. Energy companies, who have specialized in the generation of hydro-electric power, are sure to encounter social stance when introducing new hydro-electric projects in Brazil.Technological Factors In terms of infrastructure, Brazil can boast of 4,072 airports (of which 726 are paved), 28,538 kmof railway, about 96,500 km of paved roadway, and 50,000 km of waterway4. Considering the fact thatalmost 57.2% of the country is covered in rainforest, and therefore only accessible via boat or airplane, themagnitude and quality of Brazil`s infrastructure is outstanding. Apart from a decent infrastructure, thecommunication sector is keeping pace with the fast developing online- and mobile trend. In 2009,telephone main lines in use were measured at 41.5 million, and the number of internet hosts amounted upto almost 20 million. Both measurements are among the top 5 ranking worldwide (according to the WorldFactbook). However, the client might be more interested in the condition and quality of the infrastructuredirectly related to renewable energies. In terms of wind energy, there are 36 wind parks and wind farmsmostly located along Brazil´s 4,600 mile coast line. Biomass constitutes another important element inBrazil`s energy portfolio. Today, more than 1 million people work in the production of biomass, and theenergy represents 27% of Brazil`s energetic matrix 8. In fact, since the oil shocks in the 1970s, theBrazilian government has done much to promote the use of renewable energies. Nearly 40 years after theshift towards green energy, Brazil`s infrastructure for renewable energy is in formidable shape and cansurely be counted to the world`s most developed in terms of investment9.6 Wikipedia contributors. "Itaipu Dam." Wikipedia, The Free Encyclopedia. Wikipedia, The Free Encyclopedia, 7 Nov.2011. Web. 15 Nov. 2011.7 Wikipedia contributors. "Belo Monte Dam." Wikipedia, The Free Encyclopedia. Wikipedia, The Free Encyclopedia,7 Nov. 2011. Web. 15 Nov. 2011.8 Wikipedia contributors. "Renewable energy in Brazil." Wikipedia, The Free Encyclopedia. Wikipedia, The FreeEncyclopedia, 20 Jul. 2011. Web. 15 Nov. 2011.9 Global Intelligence Report. “China and Brazil leading Energy Infrastructure Investment in Latin America.” GlobalIntelligence Report. Southern Pulse. 2010. Web. 14. November 2011. <> 9
  10. 10. A sophisticated infrastructure is of utmost importance for companies. Not only does it facilitatetransportation, but also foster marketing and information efforts (e.g. developed online infrastructure). It iseven more advantageous for a company, if the infrastructure of a specific market is outstandinglydeveloped. This is the case with Brazil, where 40 years of continuous development and aggregatingexpertise have transformed a country from an oil-dominated economy into one of the world`s mostadvanced renewable energy producer. Brazil truly is the perfect breeding ground for Energy TradingCompanies.Ecological Factors The ecological variable of the DESTEP is probably the most crucial one for Energy TradingCompanies. In a time where global warming is a pending issue, topics like climate, energy, andsustainability are more frequently seen on discussion boards and political agendas. In fact, energy, thevery essence with which energy companies are dealing with, is supposed to be environmentally-friendlyand also sustainable. Nowadays, companies are expected to not only excel in social responsibility but alsoenvironmental stewardship. The government, who to some extend is responsible for the domesticmanufacturing sector, is trying to guarantee a clean environment by issuing environmental regulation. In2008, the Brazilian government launched its National Plan on Climate Change, which among otherobjectives seeks to “maintain a high proportion of renewable energy in the national electric powernetwork10”. Emulating the environmental policies of European governments in recent years, it seems likethe Brazilian government is building its energy portfolio around renewable energies as well. A government that is in favor of clean energies clearly portrays an advantage for Energy TradingCompanies. Given the legislative power of the political institution, the government is able to alter both thepolitical and entrepreneurial playing field in its favor. In essence this means that in the near future, EnergyTrading Companies are more likely to prosper on favorable legislative conditions concerning renewableenergies. The overall ecological mindset which has acquired Brazil in recent years, namely reducinggreenhouse gas emissions and placing emphasis on renewable energies, have turned the country into aformidable market for clean energy-oriented companies.Political Factors Concerning political factors, I have already touched upon environmental legislation in theprevious paragraph (Ecological Factors), which will be further elaborated on under the section LegislativeFramework (2.3.3). However, companies that are new to a particular market should not only focus onlegislation concerning their products or services, but also consider legislation that might have an impacton more subtle areas within the companies, such as labor law or corporate law. Furthermore, the companyshould always be keen to keep an eye out for potential subsidies or other government funds. Labor law forms an essential part in the planning process of companies when they embark upon anew expansion strategy. Especially Energy Trading Companies, who are labor-intensive due to the use ofextensive fixed assets (solar parks, windmills, electricity networks, etc.), are keen to not infringe uponlabor rights, as labor strikes and governmental penalties would be the logical consequence. Labor law in10 Lehman Baracui, Pedro. “Brazil: Recent developments in Environmental Law.” Mondaq. February 2009.<> 10
  11. 11. Brazil turns out to be “favorable to all Brazilian workers – both blue and white collar”11. In general, thequick facts about Brazilian employment law are as follows:  Enforcement of an employment contract is not mandatory, but should be regarded as good practice  Duration of the employment agreement is infinite, but can be executed (in writing) for a definite term if it does not exceed 2 years or just incorporates a trial period (cannot exceed 90 days)  Discrimination (of any kind) is prohibited by the Brazilian Federal Constitution  Maximum working hours are limited to 44 hours/week, 8 hours/day. The legal limit is 10 hours/day  Minimal additional overtime pay is 50% of the regular hourly rate  11 hours of rest between 2 working days  Minimum wage requirements exist and are fixed every year  Employers can terminate contracts with or without cause, provided that all termination and severance amounts are paid  Employer cannot terminate the contract if the employee is under a provisional job tenure (e.g. women after pregnancy)12 Taking into consideration the brief overview of employment law in Brazil above, it turns out thatthe labor code not only is beneficial to employees (minimum wage, fixed working hours), but alsoprovides certain benefits to employers. For example, the enforcement of labor contracts is not mandatorilylimited to a fixed time period, and can be terminated without cause at any time. This leaves the employerwith more flexibility when dealing with his human resource plan. Be that as it may, the employer shouldbe careful to not take advantage of the relatively loosely defined “termination of the contract” paragraphin the Brazilian Labor Code, as strong, social bonds among workers within the organization can bedamaged and subsequently lead to dissatisfaction, turnover, or strikes. This is because the Brazilianculture is intrinsic, meaning that people tend to care about each other more than any other aspect of theirlives. Decapitating employees without reason may not only backfire on the company’s reputation but alsocause unrest within the organization. Corporate law defines the business etiquette of a company within the domestic businessenvironment. In general, it denotes the interaction of the company with its stakeholders, also includingindirect stakeholders such as the community and the environment. Corporate Law is particularly importantfor companies that seek to penetrate a market with the help of partnerships, as it regulates the varioustypes of business entities. In the subsequent paragraph, I will take a closer, though brief look at the 3 mostcommon partnerships foreign companies form with their Brazilian counterparts: 1. Limited Liability Company - Ltda. (Sociedade Limitada) The limited liability company is simply to form and operate. It normally requires neither aminimum capital requirement nor does it constitute a capital reserve. There is no need to publish annualfinancial statements, and it can be converted easily into a Corporation. The company can be founded by11 Viegas, Juliana, Benito Machin, Gloria. “Summary of Employment Law in Brazil and Mexico.” Fredikson. Spring1997. <>12 Villa da Costa, Mariana. “International employment law Quick Facts: Brazil.” International HR Forum. January,2010. <> 11
  12. 12. two partners but neither of them needs to be a Brazilian. A partner can either be an individual person or alegal organization. If the Ltda. is managed by the foreign managers, he needs to have a Brazilian workpermit13. 2. Corporation - S.A. (Sociedade anónima) Forming a corporation is by far more complex than forming a limited liability company. The subject to a detailed regulatory framework for corporate activities. It is obliged to publish annualfinancial statements, and a reserve of 10% of the total capital in use needs to be kept at a bank account. Itneeds a board of directors and an audit committee. The Corporation needs at least 2 shareholders, and 10%of the shares need to be paid in cash. Furthermore, the Corporation needs to be registered at the BrazilianStock Exchange13. 3. Joint Ventures - JV Joint Ventures are a common way to form a partnership in Brazil. Many times, companiescompete for contracts with the government or in regulated sectors, such as the telecom y energy. Both theLtda. and S.A. models are suitable for the forming a Joint Venture. In fact, the models HAVE to serve as ablueprint for forming a Joint Venture as there does not exist a specific Joint Venture Law in Brazil. Hence,foreign investors would have to adapt their plans to local regulations13. Any of the three partnerships serve as possible entry modes for the client. Later in therecommendation (4), I will pick one of the above-mentioned partnerships and explain why I think it is themost suitable entry mode for the client, and also point out the advantages and disadvantages. Concluding the political analysis of Brazil, I will skim the political environment for possiblesubsidies or other government funds that support Energy Trading Companies. Being part of thegovernment’s energy policy, the subject will be further dealt with in-depth under section (2.3.2). Companies, who are seeking subsidies for their (renewable) energies have a hard stand in Brazil.Whereas the construction of Brazil`s two largest hydro-electric projects (the Itaipu- and Belo Monte Dam)have received extensive financial support from the government, competing renewable energies such aswind power must stand on their own merits. Concerning wind energy, the Brazilian government “does notintent to pay a premium for wind […] there are no overt incentives in terms of energy price subsidies suchas feed in tariffs14.” Despite the absence of subsidies in the wind sector, investors have the opportunity tobenefit from a host of other incentives: first and foremost, the rigorous commitment of the governmenttowards clean energy provides investors with benefits in the long term, stipulated by power purchaseagreements of up to 20 years. Furthermore, the government covers the installation costs of transmissionnetworks, which alleviates fixed asset costs on behalf of the company. In addition, favorable purchaseloan terms are available from government-owned banks, providing investors with fast access to money14.At last, Brazil`s overall ambition to foster the use of renewable energies is personified in the so-calledpublic wind auctions – a first time event that took place in December 2009. Public wind auctions giveforeign investors the opportunity to gain a foothold in the Brazilian renewable energy sector by13 Fujikawa Nes, Egil. “Should you form a S.A. o Ltda. Company in Brazil?” The Brazil Business. October, 2010.<>14 Cleantech. “Building Brazil`s Wind Business.” Cleantech Magazine. Cleantech, 2010. Web. May/June 2010.<> 12
  13. 13. contracting projects. In case of wind energy, those projects take the form of wind parks. In December2009, 71 projects were contracted to provide 1,800 megawatts of generation capacity, and the governmentaims to increase capacity to 10,000 megawatts over the next decade14. Even without governmentalsubsidies, wind energy has a huge potential and sustainable stand in Brazil. Having analyzed all relevant factors of the DESTEP, the client should have acquired a basicunderstanding of the macro-economic environment and the impact it can have on his business (later in theconclusion, the DESTEP will be included in the overall OT-analysis). Finalizing the country analysis, Iwill gauge the Ease of Doing Business in Brazil, which apart from the all-embracing DESTEP analysis,will provide the client with a more specific and detailed knowledge about the macro environment. 2.2.2 Ease of Doing Business This year`s ranking of – a distinguished research site of the IFC and the WorldBank – about doing business in Brazil may confuse the reader, especially after the DESTEP analysisturned out to be rather favorable for foreign Energy Trading Companies. And indeed, although macro-environmental factors seem to encourage Energy Firms to start their business in Brazil, doingbuisness.orgonly estimates the country at the 126th rank (out of 183 countries). In order to explain why start-upbusinesses or subsidiaries of foreign firms apparently have a hard time gaining a foothold in the Brazilianmarket, I will briefly analyze the ease of doing business in Brazil according to a set of pre-determinedvariables. Each variable is influenced by certain key indicators, which will also be analyzed in thesubsequent section if necessary. In order to establish a standard of comparison, the variable will becompared against the OECD ranking 15: 1. Starting a Business The variable “Starting a Business” incorporates bureaucratic and legal hurdles an entrepreneurmust consider when he wants to register a new firm. The procedures and time to register a firm are by farhigher as compared to OECD-countries (13 procedures and 119 days against 5 procedures and 13 days forthe OECD). On the other hand, the costs of registration (as a % of capita) are with 5.4% almost equal withthose of the OECD (4.7%). Furthermore, new firms in Brazil do not have to deposit a paid-in minimumcapital prior and until 3 months after having registered the firm. OECD countries however, have to deposit14.1% of income per capita in order to be permitted to start a firm. In short, starting a business in Brazilcan be a complicated undertaking but is considered to be less costly (final ranking: 120). Note: As it has been mentioned earlier in the DESTEP, the government is currently facilitating themarket entry for foreign Energy Trading Companies through issuing “public wind auctions”. Hence,starting a business, or expanding the business to Brazil, is currently an opportunity for Energy TradingCompanies. 2. Dealing with Construction Permits The variable “Dealing with Construction Permits” incorporates procedures, time, and costs ofbuilding one warehouse, and acquiring the necessary licenses and permits. As with the previous variable15 The following data was taken from The author does not claim any property rights on theinformation whatsoever. Any additional and more detailed information, if needed, can be taken from the latterwebpage. 13
  14. 14. “Starting a business”, procedures and time required to deal with the construction permits is higher than inthe OECD (17 procedures and 469 days versus 14 procedures and 152 days in OECD countries).Similarly, the costs of 40.2 (% of income per capita) are less than in the OECD (45.7%) and even muchlower than in their Latin-American counterparts (average 160.3%). In short, dealing with constructionpermits is more complicated in Brazil than in OECD countries, but again less costly (final ranking: 127). Note: As it has been mentioned earlier in the DESTEP, the government is covering the installationcosts of transmission networks, thus reducing the total cost of fixed assets for Energy Trading Companies. 3. Registering Property The variable “Registering Property” incorporates the ease with which businesses can protect theirright to property. Procedures and time are estimated at 13 and 39 respectively, and are higher than in theirOECD counterparts (5 procedures and 31 days). The costs are estimated at 2.3 (% of income per capita),which again is even lower than in OECD countries (4.4%). The final ranking for registering property is114. 4. Getting Credit The variable “Getting credit” calculates on scale from 1-10 the strength of legal rights (with 10being the highest degree of borrower and lender protection), and on a scale from 1-6 the depth of creditinformation (with 6 being the highest information transparency for credits). In terms of legal rights, Brazilis scoring substantially lower than in OECD countries (3 versus 7 points), meaning that collateral andbankruptcy laws are less likely to protect borrowers and lenders than in the OECD. As of creditinformation, the public credit registry is doing a fine job publishing and explaining credit information.Rules and practices that might inhibit the publishing of credit information are almost not present. In short,firms cannot expect to receive protection from the government in case they would have to default on debtsor loan repayments. On the other hand, available information about credit terms is transparent andflexible, reducing the chance that firms have to default on their debts or file bankruptcy. Anotherimportant fact to mention is that getting loans in Brazil is generally perceived to be difficult, as thecommercial bank prime lending rate has been fluctuating between 30 and 50 percent in recent years(39.9% in 2010)16. Thus, companies are forced to obtain start-up capital or financial support from sourcesother than commercial banks, making it more arduous for them to operate in the fast-moving businessenvironment that Brazil is. The final ranking for getting credit is 51. Note: As it has been mentioned earlier in the DESTEP, favorable purchase loan terms are availablefrom government-owned banks. This means that Energy Trading Companies are currently not (as much)affected by the high commercial bank prime lending rate, than other companies. 5. Protecting Investors The variable “Protecting Investors” describes the extent to which investors are protected in Brazil.In essence, it describes 3 dimensions of investor protection, each of which is measured by a scale from 1-10 (10 being the most favorable condition for the investor): In terms of transparency of transactions,Brazil is equal with its OECD counterparts, scoring a 6. Concerning director liability, which measures the16 The World Factbook. “Country: Brazil.” The World Factbook. Central Intelligence Unit. 2010. Web. 27. November2011. <> 14
  15. 15. extent to which a CEO is liable for self-dealing, Brazil scores a 7 (OECD: 5). This means that directors aremore likely to account for any mischief, take responsibility, and reckon with (financial) consequences incase the company must file for bankruptcy, or is subject to any other type of calamity. In terms ofshareholder suits, which measures the shareholder´s ability to file a lawsuit against officers or directors formisconduct, Brazil scores a 3 (OECD: 7), making it more difficult for shareholders to challengetransactions. In short, the final index for investor protection scores a little lower than the one in OECDcountries (5.3 versus 6 out of 10), conveying that directors or CEOs have less problems dealing withinvestor issues. Essentially, this is good for companies. 6. Paying Taxes The variable “Paying Taxes” portrays the tax load a medium-sized company has to pay within ayear, and also measures the administrative burden that occurs when paying the taxes. Concerning totaltaxes to be paid, Brazil ranks in the lower third of the population of 183 countries. This is because for the2 mayor taxes, namely profit tax and labor tax, firms that reside in Brazil have to substantially pay moretaxes than in OECD countries (22.4% and 40.9% versus 15.4% and 24% in the OECD). The totaloutstanding tax rate accounts for 67.1% as compared to 42.7% (OECD). And also in terms of theadministrative burden, Brazil does not come off that well: 9 payments and 2,600 (!) hours per year standin opposition to 13 payments and only 186 hours per year in OECD countries. In essence, Brazilian firmshave to pay more taxes than in the OECD (and even in their Latin-American counterparts [average47.7%]), and also the administrative burden appears to be heavier than elsewhere. Consequently, the finalranking for paying taxes is 150. Note: Energy Trading Companies DO NOT receive tax cuts in forms of subsidies or other taxbenefits. 7. Trading Across Borders The variable “Trading across Borders” is of particular importance for companies that think toexpand their business abroad, especially if the company chooses an export mode for their market entry,where production takes place at the home basis and the point of sales is taken care of in the foreignmarket. For Energy Trading Companies, the variable is only important in the short-term, when specialequipment needs to be shipped-over from the home country in order to start constructing the power grid orother fixed assets. In general, this is an advantage of Energy Trading Firms, as trading across borders isquite costly in contrast to worldwide standards: Cost to export ($US per container) accounts for 2,215(OECD: 1,032), and cost of import ($US per container) is 2,275 (OED: 1,085). In addition, moredocuments are required to wind up the trading process. As a result, the final ranking for trading acrossborders is 121. 8. Enforcing Contracts. The variable “Enforcing Contracts” refers to the ease or difficulty of enforcing commercialcontracts. It is determined by measuring the cost, time, and procedures in a payment dispute starting withthe plaintiff´s lawsuit and ending with the actual payment. In essence, the duration of a dispute take moretime and procedures than in OECD countries (731 days and 45 procedures versus 518 days and 31procedures in the OECD). Litigation is more complicated in Brazil, but on the other hand less costly. Thefinal ranking for enforcing contracts is 118. 15
  16. 16. Note: As it has been mentioned earlier in the DESTEP, employers located in Brazil are allowed toterminate any employment contracts without naming a cause, but are forced to litigate in case noagreement has been reached between the parties concerning severance payments. Like I also mentionedbefore, companies should be keen to not fire employees without cause, as it not only disrupts social bondswithin the organization, but also entails relatively costly and time-consuming lawsuits. 9. Resolving Insolvency At last, I will take a look at the variable “Resolving Insolvency”, which incorporates the time andcost of resolving a bankruptcy. In comparison to the OECD countries, solving insolvency takes more time,and is more expensive in Brazil. This is due to “weaknesses in existing bankruptcy law and administrativebottlenecks in the administrative process”. The time of resolving a bankruptcy is stated at 4 years, ascompared to 1.7 years in the OECD. The costs account for 12% of the estate, as compared to 9% in theOECD. The worst indicator, however, is the recovery rate, which determines how many cents on thedollar recovers the claimant from his insolvent firm: in the OECD, 68.2 cents per dollar are recovered,whereas in Brazil only 17.9 (!) cents are recovered. In other words, Energy Trading Companies who fail inBrazil are not only forced to withdraw from the market, but also risk a not to be underestimated loss on thecorporate financial statement. Hence, the decision to expand the business to Brazil should be carefullypondered. Having analyzed the Ease of Doing Business in Brazil, the client should have acquired a basicunderstanding of macro-economic factors that have a more precise impact on the company`s micro-environment. While reading the analysis, it can clearly be seen that the still under-developed andsometimes chaotic bureaucracy in Brazil prohibits the smooth progress of administrative procedures,making it more time-consuming and complex for companies to operate. Yet, doing business in Brazil is byfar not as expensive as in OECD countries. Be that as it may, the overall rank of doing business in Brazilis only 126, placing the country in the lower third of the population. Companies have the opportunity tocircumvent the above-mentioned obstacles by forming partnerships with already existent, local companies.This option will be further discussed in the conclusion and the subsequent recommendations. Now that I have finished the country analysis, and taken a careful look at both the DESTEP andEase of Doing Business in Brazil, it is time to go more into detail. The following market analysis willexamine the Renewable Energy Market of Brazil, and also be the last step in the overall market study. 16
  17. 17. 2.3 Market Analysis The country analysis should have already convinced the client that Brazil, at the moment, is a saveheaven for energy investments. Not only has the country transformed from an oil-depended economy intoa renewable energy colossus within just 30 years, but foreign energy conglomerates are also given thechance to prosper on favorable market conditions that have been provided for by a going green-orientedgovernment. The most conspicuous evidence of Brazil`s recent pivot towards renewable energies, is theextensive construction and development of its wind energy sector. Through this, the government is furtherdiversifying its energy portfolio, and gradually forming an alternative to the season-depended andcontroversial hydro-electric energy, which has been subject to social as well as environmental concernsfor so long. In the following section, I will analyze those renewable energies that are likely to have asustainable impact on the Brazilian energy market in the long term, and also enumerate their pros and conswith respect to the expectations of foreign Energy Trading Companies. Later in the section, as acontinuation of the DESTEP, I will further enlarge upon the government`s energy policy and benefits, andalso take a more detailed look at the legislative framework for (renewable) energies. The overall objectiveof the market analysis is to find the most thriving renewable energies that are beneficial and sustainable inthe long run, and also find legislative niches and governmental benefits on which foreign Energy TradingCompanies can prosper and expand on. 2.3.1 Renewable Energy Market Brazil is home to one of the largest renewable energy programs in the world, and is embracing itsgood reputation by further larding its energy mix with renewable energies. According to the EnergyResearch Company (EPE), almost 90% of Brazil`s energy mix comes from renewable energies 17. Thedependence on conventional energy sources like oil and coal has drastically been reduced in recent years(see appendix5). From the graph it can be seen that Brazil is mostly relying on hydro-electric power.Including energy imports, of which the majority are of hydro-electric nature, almost 85% of the country`senergy mix comes from hydropower. However, electricity generated from the pure force of water is notthe only alternative energy that Brazil can boast of nowadays. Biomass and especially wind energy seemto emulate the rapid ascension of their hydro-electric archetype. Abide from wind energy, Brazil iscurrently not tipping into any other second- or third-generation technologies, as developing costs are toohigh, and technological standards are simply not as advanced as in developed countries. That is whytechnologies such as solar heating, photovoltaic, and modern forms of bioenergy are rarely to be found inBrazil, and rather pertain to the private sector. However, given that Brazil is a fast-developing economy,second- and third-generations technologies may soon become a market niche for companies as Brazil isgradually acquiring that status of a developed country. Until that date, the incentives are focused on thefollowing 3 types of renewable energies: hydro-electric power, wind power, and biomass.17 Gonçalves, Danilo. “Brazil: Research and Advances in Renewable Energy Sources.” The Energy Collective.October, 2010. <> 17
  18. 18. Hydro-Electric Energy Hydro-electric power is the world`s largest installed renewable source of electricity, supplyingabout 17% of worldwide electricity in 200518. This number is estimated to grow further, as more and morecountries take advantage of extracting energy from the river`s fast-flowing currents. China, Canada, andBrazil are leading the way with respect to total energy produced from hydro-electric power. All threecountries are home to vast reserves of standing or flowing water, which makes it possible for them toextract energy from rivers or lakes. Whereas Canada is generating most of its hydro-electric power fromthe numerous lakes that bedeck the countryside, China and Brazil are dependent on their mayorwaterways. In China it is the Yangtze River and the world largest power dam Three-Georges, whichgenerate the majority of hydro-electric energy in the country. Brazil`s Itaipu Dam, which began operationsin 1984, is with 14,000 MW only second to the Three-Georges in terms of installed capacity. After yearsof public controversy, Brazil began construction on its second hydro-electric project; the Belo MonteDam, which with its estimated installed capacity of 11,233 MW would make it the third largest hydro-electric dam in the world. However, on September 28, a federal court prohibited the continuation of theconstruction process due to severe environmental concerns. The consortium is expected to refute thedecision19. Currently, Brazil operates 887 hydropower plants (80,704 MW), with 75 under construction(9,665 MW), and 232 granted (16,912 MW). In total, operating hydropower plants make up 76.9% of totalinstalled capacity in Brazil (2010). The total hydropower recourses (maximum hydro-electric capacity ofBrazil) are estimated at around 261.4 GW. Until 2019, the government is planning to expand capacityfrom 80.7 GW (80,704 MW) to 116.7 GW20. The country´s hydro recourses group themselves around theAmazon River, which is with 3,900 10³ km² the biggest source of hydro-electric power in Brazil (seeappendix6). Clearly it can be seen that Brazil will be utilizing its hydropower recourses in this decade, and isplanning to extend its capacity from currently 80.7 GW to 116.7 GW in 2019. Even from 2019 onwards,the country still embodies a potential capacity of 144.7 GW until the estimated maximum of 261.4 GWhas been reached. For foreign Energy Trading Companies this means interesting investment opportunitiesin the hydro-electric sector. The advantages of investing in this sector are apparent:  Granted construction and development of hydro-electric capacity from 80.7 GW to 116.7 GW in 2019  Overall hydro-electric potential estimated at 261.4 GW  Know-how and expertise for over 30 years18 Mark Z. Jacobson (2009). Review of Solutions to Global Warming, Air Pollution, and Energy Security. P.5<>19 "Brazil court orders halt to work on $11 bln mega-dam". AFP. September 28, 2011. Web. Retrieved November 29,2011.<>20 Carvalho, Erton. “Hydropower in Brazil.” Brazilian Committee on Dams, January 18, 2011, Rio de Janeiro. Rio deJaneiro: WEX, January 18, 2011. Print 18
  19. 19.  Brazil is home to the world`s largest reserves of renewable fresh water 21  8 existent water basins with an area of 8,512 10³ km² and 182,170 m³/s long term mean flow  Hydro-electric power makes up 70.21% of total installed capacity, and therefore is Brazil`s most important energy source  Developed transmission network and power grids In essence, foreign Energy Trading Firms can be sure to count on sustainable benefits from theBrazilian hydro-electric sector. Although the sector appears to be saturated due to the high and increasingnumber of installed hydropower plants, there still is room for potential investment given the enormoussize of the country and its water reserves. In addition, Brazil can boast of over 30 years of continuousexpertise and development of its hydro-electric infrastructure, and the government`s immense faith inhydropower will assure a secure and stable investment environment at least until 2019. Despite the advantages, Energy Trading Firms should pay attention to the following disadvantagesthat come along with hydro electricity:  Social concerns  Environmental concerns  Weather Social and environmental concerns are in fact the biggest disadvantages of the usage of hydro-electric energy. I will take the current construction of the Belo Monte Dam as an example. For manypeople, Brazil`s second hydro-electric dam with a capacity of over 10,000 MW is considered to be anambitious, but also infamous project. This is because the project entails certain social and environmentalproblems. Appendix7 shows the construction area of the Belo Monte Project. The graphic clearly showsthat the Xingu River is forcefully redirected, and channeled through an area that until then has been purerainforest. It is important to notice that the construction of the Belo Monte Dam is affecting theenvironment in two mayor ways: First of all, the main dam causes the water flow to be redirected into therainforest, where it forms a huge water reservoir. Secondly, the water level behind the main dam will bedrastically reduced. This has both social and environmental consequences. In terms of socialconsequences, indigenous populations (in this case the Paquicamba), who depend on a steady water level,are deprived of their only source of food. A residing water level causes the fish to move downstream,where the water level is steady again. Also, the dam is keeping fish from moving further downstream sothat local tribes have absolutely no chance of a fresh supply of fish. Furthermore, the water reservoirwould entail the resettlement of a substantial number of people. Environmental groups say that theconstruction of the Dam would affect the survival of indigenous groups, and the lives of up to 40,000people would be threatened as 500 km² of land would be flooded 22. In terms of environmentalconsequences, the dam would disrupt the aquatic ecosystem and lead to large scale destruction. Matingseason and mating areas of fish or other aquatic animals could be disrupted, jeopardizing fish populationand even driving them near extinction. However, not only aquatic creatures are endangered, but also landanimals. The water reservoir and the channels leading to it, require the clearing of large areas of rainforest,21 Hoare, Natalie. “Water World.” Business Library. CBS. 2008. Web. 29. November 2011. <>22 “Judge again halts Belo Monte dam auction in Brazil". AFP. April 20, 2010. Web. Retrieved November 29, 2011..<> 19
  20. 20. putting at danger both plant life and animals that depend on the trees. At last, although hydropower damsdo not require and fuel, and therefore produce no greenhouse gases directly, it has a number of injuriousaffects on the environment. Most notably, by flooding large areas of rainforest, and over a period ofmonths, a decomposing process sets in, emitting not to be underestimated amounts of methane gas, whichin many aspects is even more harmful to the atmosphere than carbon dioxide. In addition to social andenvironmental disadvantages, hydropower, just as any other renewable energy, is dependent on the freakof nature. In the years 2001 and 2002, Brazil, for the first time, experienced the great deficiency of hydro-electric energy. A combination of lack of rainfalls, painstaking droughts, lagging investment, and anincreased consumption of electricity resulted in a series of so-called blackouts, which led to energyshortages all over the country. It came to the attention of the government that hydropower, despite its hugegeneration capacity, is only as powerful as the monthly rainfalls, which were missing in the rainingseasons of 2001 and 2002. As it can be seen, hydro-electric power does not only have attractive advantages but also certaindrawbacks. Given the huge energy capacity of hydro-electricity, this sector is probably the most attractiveand profitable one for Energy Trading Companies. However, environmental and social concernsfrequently lead to damaged reputation and expensive lawsuits. On top of everything, hydropower is verydependent on monthly rainfalls. With more than 70% of Brazil´s energy production relying onhydropower, the fast-growing country cannot afford another period of power shortages. In order tocounterbalance the risks of power shortages, the government, in 2002, called into existence the Programfor Incentive of Alternative Electric Energy Sources (PROINFA), to foster the use of other renewableenergies such as wind energy and biomass. Wind Energy Just like hydropower in the 1980s, wind energy is experiencing an unprecedented boom that beganwith the beginning of the new century. Supported by government incentives and public wind auctions, thecapacity of wind energy has more than tripled since 2006 (see appendix8). Nowadays, wind farms portraya reliable alternative to hydropower, and further help diversifying Brazil`s energy matrix, thus reducingthe risks of energy shortages in case of droughts. In 2010, total installed capacity was measured at around931 MW, constituting a 53% growth from 2009 (606 MW)23. At the end of 2009, wind energy accountedfor only less than 1% of the Brazilian energy mix (see appendix5), which by today should have crossedthe 1% mark. The main reason why wind energy is experiencing unprecedented growth rates year afteryear, is not so much due to favorable government incentives, but rather due to Brazil`s impressive windpotential. In 2008 and 2009, measurements were carried out in several states at 80-100 meters height,indicating that the country`s real wind potential lies at around 350 GW23, which is substantially more thanthe estimated potential of hydro-electric sources (261.4 GW). The source of Brazil`s wind energy comesfrom its large, unpopulated land areas, and its 9,650 km coastline. Excellent wind conditions prevail in theNorth / North-East of Brazil (see appendix9). In addition, hydropower and wind energy are perfectpartners, as wind energy can compensate power shortages in dry seasons (normally during fall / winter)23 . The incredible growth of wind parks in recent years has been fueled by incentives of thePROINFA, which, as earlier mentioned, came to life in 2002 as a response to the 2001 / 2002 blackouts.23 Global Wind Energy Council. “Brazil.” Global Wind Energy Council. Brazilian Wind Energy Association. 2010. Web.November 29, 2011. <> 20
  21. 21. The program was recently extended to the end of 2011, setting the target to 1,400 MW, which is mostlikely met by the end of December this year. Clearly it can be seen that wind energy in Brazil is an interesting investment opportunity forforeign Energy Trading Firms. This can be said not only with respect to the huge wind potential (350GW), but also because the Brazilian energy regulator ANEEL is regularly hosting so-called wind auctions.Those wind auctions are held with the intention to lure foreign companies into the country, which have thebetter expertise and technical know-how to bring forward Brazil`s energy program. What seems to bebeneficial for Brazil also pays off for the companies that enter the Brazilian market. Those companies, ofwhich most are Energy Trading Companies or producers of energy technology like General Electric fromthe United States or Siemens from Germany23, benefit from both attractive investment opportunities and afacilitated market entry. The wind auctions held in 2009 and 2010 alone contracted 112 projects with atotal capacity of 3,319 MW23. The advantages for foreign Energy Trading Firms are apparent:  Tremendous wind resources (350 GW)  Unpopulated land areas and a 9,650 km coastline with more than 8.5 m/s of wind speed  Necessity to have an alternative energy to hydro-electric power  Increasing demand during dry seasons  Wind auctions to facilitate market entry  Attractive incentives from PROINFA and ANEEL Unlike hydropower, wind energy does not have clear disadvantages. Nonetheless, Energy TradingFirms should consider the following drawbacks:  Noise pollution  Unpredictability  Costs Noise pollution is probably the most preeminent drawback of wind energy. However, since mostof Brazil`s wind farms are located along the coast line, outside of cities, and in unpopulated inland areas,this disadvantage shall not discourage the construction of windmills. It is true that wind is anunpredictable force of nature, but just like droughts are likely to be predicted in fall periods, it appears thatwind experiences its most active season during the fall and winter months. I will take the north-easternregion of Brazil as an example. North-eastern Brazil is one of the most promising regions for wind poweruse, where high wind speeds are measured just when the flow of the local Sao Francisco River is at itslowest (see appendix10)24. The graph is showing the converse alignment of the wind speed at the coastand the water flux of the Sao Francisco River. The wind speed that never drops below 4 m/s reaches itspeak in the fall season and maintains wind speeds of up to 6-7 m/s during the winter season, while theriver, who accounts for the power supply of most of the region, is at its lowest. This phenomenon occursevery year, which makes the wind calculations more predictable in North-eastern Brazil. Concerningcosts, wind energy is considerably more expensive in both its construction and long run costs than hydro-electric energy in terms of cost per kWh (see appendix11). Although it might not appear on the firstthought, wind parks, especially off-shore wind parks, require a higher investment than hydro-electric dams24 Krauter, Stefan. “Wind Power Conversion in Brazil.” International Journal of Distributed Energy Resources. 1.3(2005). P. 223. Technology&Science. Web. November 29, 2011 21
  22. 22. (except for big projects such as the Three-Georges). Wind parks many times have to be constructed oninaccessible cost land, or mountains, to be profitable. Furthermore, long term costs are quite substantial ascontinuous maintenance is necessary due to lightening strikes, mechanical fatigue failure, hub stress, andheavy weather damages25. Wind energy certainly does not have the environmental and social drawbacks, which have madehydro-electric projects infamous among Brazil`s population. In addition, the government has currently putits emphasis on wind energy in order to reduce the dependence on hydropower. Be that as it may, the costsper kilowatt hour (kWh) are higher than any other type of renewable energy (a part from solar power),which requires on part of the companies a substantial capital investment. On the other hand, wind auctionshave greatly facilitated the market entry for foreign Energy Trading Firms, thus spurring FDI in Brazil. Biomass The market for biomass in Brazil has tradition and a significant potential. It has potential becauseof a) the size and availability of land, b) the adequacy of its weather, c) the availability and low cost of itsworking force, and d) the domain of biomass production and biomass conversion technologies in theagricultural and industrial sector 26. In 2010, Brazil produced approximately 157,992,556 tons of forestresidues, which is enough to meet all domestic energy demand 26. In addition to forest residues, agriculturalwaste, waste from extraction plants, and waste from fruits together account for 603,393,952 tons of wasteresidues (see appendix12). Biomass has many advantages for a green future, provided that it is usedcorrectly. This means, that no primary forest should be used in biomass production, but rather matureforest at the end of its growing life. As well, producers have the obligation to reforest the trees they havecleared for biomass production. If producer adhere to those norms, biomass can be a continuous basisserving as a potential substitute for future fossil fuel use. Biomass clearly turns out to be an energy with potential, as recourses are potentially the world`slargest and most sustainable energy source26. The fact that the plant life cycle is infinite also makesbiomass an infinite energy resource. Biomass comprises 220 oven dry tones (odt) or about 4500 exajoules(EJ) of annual primary production in Brazil, which leaves the annual bioenergy potential at about 2900 EJ(approx. 1700 EJ from forests, 850 EJ from grasslands, and 350 EJ from agricultural areas)26. In otherwords, power plants fueled with biomass generate hundreds of Megawatts of energy every year. By theend of 2009, energy generated from biomass comprised 5.4 % of Brazil`s energy matrix (see appendix5),which contributed about 3,000 MW the country`s power grid. By taking a look at the energy outlook forbiomass, one can see that the energy capacity of bioelectricity is expected to reach 13,000 MW by the endof 2020 (see appendix13)27. Interestingly, the same inverse relationship between hydropower and windenergy can be observed between hydropower and biomass (see appendix14). Just like wind, biomass is aperfect alternative to the hydropower, compensating for dry periods in the fall and winter months. Theadvantages for Energy Trading Companies are apparent:25 “Directory: Cents per Kilowatt-Hour.” Peswiki. Pure Energy Systems. January 5, 2007. Web. November 29, 2011 <>26 Marcelo de Oliveira, Celso. “The Future for Bioenergy and Biomass Brazil.” Brazilian Association IndustryBiomass and Renewable Energy. 2010. ABIB. Web. November 30, 2011.27 José de Souza, Zilmar. “Electricity from sugarcane.” UNICA. October, 2011. Sugercane Industry Association.November 30th, 2011. <> 22
  23. 23.  Availability  Cheap labor force  Numerous sources  Numerous outputs  Usability (underutilized agricultural land)  Increasing demand during dry seasons  Low costs Compared to hydro-power and wind energy, biomass holds the most advantages for EnergyTrading Firms. The agro-industry in Brazil occupies 28,840,726 ha of corn, sugarcane, rice, cassava,wheat, citrus, coconut, and grass, which together generate of 157,992,556 tons. Thus, an abundance ofresources make it possible for biomass producer to generate electricity. The production of biomass also isthe most laborious form of renewable energies in the long run. Many workers are needed to collectagricultural waste, chop down trees, and transport the remaining residues to the production site. Theproduction process itself is neither labor-intensive nor complicated, as little personnel are required to turnbiomass into bio products or bio fuels. In fact, biomass not only has many sources (agricultural, papermill, lumber mill, municipal waste), but also numerous outputs, such as bio fuels (ethanol and biodiesel)and bio products (wood pallets), which increases the product portfolio of companies. Biomass is alsohighly utilizable, meaning that production is even possible on underutilized agricultural land. Just likewind energy, biomass is likely to profit from the increasing necessity to have an alternative energy tohydropower. This is why PROINFA also schedules energy auctions, where energy contracts are sold toforeign Energy Trading Companies. At last, production costs for biomass are significantly lower than forhydropower and wind energy. Biomass, on the other side, has two mayor disadvantages:  Low energy capacity  Cost competition Biomass does by far not generate as much capacity as wind- or hydro electricity. This has as aconsequence, that winning margins of Energy Trading Companies are not as big as those of companies,who have specialized in the hydro- and wind business. An additional challenge is the cost competitionbetween renewable energies, which is further spurred by energy auctions. Competition between differentsources of energy is designed to obtain the lowest tariffs possible for the final consumer, but it takes placein a public bidding procedure in which participants are vying to meet the same demand 27. With alreadysmall margins, biomass producer have a clear disadvantage over other energy producer if competitioncontinues to push prices down. Bioenergy is a sustainable investment opportunity for foreign Energy Trading Companies.However, small selling price margins in combination with substantial labor- and reforestations costs leavecompanies with fewer winnings than in other energy sectors. 23
  24. 24. 2.3.2 Energy Policy Renewable energies in Brazil are directly affected by the government`s energy policy, which istrying to regulate the distribution of energy contracts, the production, and cost structure of renewableenergies. In the following paragraph I will briefly analyze the government-owned Electricity RegulatoryAgency (ANEEL), the energy programs that were launched on behalf of the Agency, and the impactsthose programs have on foreign Energy Trading Firms who are planning to enter the Brazilian EnergyMarket. ANEEL`s mission is to “provide favorable conditions for the electric power market to develop abalance between agents and the benefit of the society 28.” The agency is the regulatory arm of thegovernment, and manages the electricity distribution and supply for Energy Firms. ANEEL is part ofBrazil`s Ministry of Mines and Energy, and therefore only constitutes a sub-agency of the energy ministry.The agency was founded in 1996, and after the liberalization of the Brazilian energy sector in 1997, whereoil monopolies were ended and subsidies reduced, a new regulatory framework was applied in 2004, inwhich ANEEL was to play a major role. With the surge of renewable energies, new incentive programswere launched with the objective to make the Brazilian (renewable) energy market more attractive forlocal and foreign investment. The following section will analyze the most important programs, plans, andauctions (projects) that the government launched in the last decade or is about to launch. Also, the currentprize structure per mWh for each renewable energy source will be analyzed:The National Energy Plan The all-embracing blue print for Brazil`s energy policy in the upcoming two decades is theNational Energy Plan, which was launched in November 2006 by the Energy Research Corporation(EPE). The Corporation estimates that by 2030, population will have increased by 53 million, theeconomy will have an annual growth rate of 4.1%, and energy demand will grow at an annual average rateof 3.5%29. In order to meet the increase in demand, the plan suggests the following changes in the energymix:  Doubling capacity form large hydro-electric projects, adding about 3,100 MW per year until 2015, 3400 MW until 2016-2020, 4,300 MW per year until 2021-2025, and 3,800 MW in the final 5 years of the plan  Increasing production from small hydro-electric projects to 7,800 MW until 2030  Increasing waste-to-energy projects (pure energy from biomass) to 1,300 MW in 2030  Expanding the use of bio fuels (up to 28 million liters / day) and sugarcane products (bioethanol and bagasse) until 2030  Steady growth in wind-energy to about 4,700 MW until 2030 2928 ANEEL. 2011. November 30, 2011. <>29 Keith, R. “A sustainable Energy Plan for Brazil?” The Temas Blog. Temas. November 28, 2006. Web. November 30,2011. <> 24
  25. 25. Note: It shall be noted that by today (2011), waste-to-energy generation (in the form of biomass) hasalready surpassed the plan`s objective of 1,300 MW (see appendix13), and wind energy with almost 900MW of total installed capacity in 2010, is on a good way. The National Energy Plan has set high objectives, which are to be met by domestic as well asforeign companies, in order to counterbalance increasing energy demand in the future. Some of theobjectives pose substantial challenges for Energy Companies, especially in the hydro-electric sector,whereas other have already been met (biomass) or are on a good way (wind energy). Be that as it may, forforeign Energy Trading Companies this is good news, as Brazil takes a positive stance to renewableenergies in the future. In addition, the Ministry of Mines and Energy has estimated that between 2008 and2017, public and private investment of around R$ 352 billion will be put into the expansion of thecountry`s national energy output 30. Most of public funds will come from the Growth AccelerationProgram (PAC), of which R$ 83 billion is planned for hydro-electric projects, and R$ 23 billion for theproduction of bio fuels.Alternative Energy Source Incentive Program (PROINFA) PROINFA was created in 2002 by the Ministry of Mines and Energy, with the objective todevelop alternative and renewable energy sources for electrical energy production. The program, asmentioned earlier, was recently extended until the end of 2011. Initially, the program`s aim was to deploy3,300 MW of installed capacity through the use of wind-, hydro-electric-, and biomass energy. In total, theprogram foresees the deployment of 144 plants, totaling 3,299.4 MW of installed capacity, 1,191.24 MWcoming from small hydropower plants, 1,422.92 MW from 54 wind farms, and 685.24 MW from powerplants fueled with biomass30. Although the program is to end at the beginning of 2012, PROINFA has paved the way for renewableenergies. According to the Ministry of Mines and Energy, the energy has a guaranteed market for the next20 years.Energy Auctions Energy auctions are the threshold for foreign Energy Trading Companies into the BrazilianEnergy Market. In January 2003, one year after the energy crisis, the government decided that they neededto bolster the country against possible energy shocks in the future. The solution at hand was to quicklydiversify the country`s energy matrix to a) render it less vulnerable to energy shocks, and b) make it moreeffective with the help of different types of renewable energies, not just hydropower. In the end, thegovernment opted for an energy model that was both driven by rigorous competition and attractive forlong term private investment. One important element of the new energy model was the establishment ofenergy auctions. The idea behind energy auctions was to first make the market more competitive so thatthe price per mWh could be made more affordable for lower income sections of the population. Secondly,by privatizing the Brazilian energy market, investment in form of FDI would flood the market, bringingalong expertise, know-how, and technology, which would make Brazil an attractive and developed energymarket in the long run. According to this system, energy auctions are held 3-5 years in advance of delivery30 “The Energy Matrix.” Brasil, n.d. Web. November 30, 2011 <> 25
  26. 26. dates, and plants are only built if designated companies have won the bids in energy auctions and areguaranteed long term contracts31. In September 2010, the government held a wind, hydro-electric, and biomass auction that isexpected to prompt US$ 5.52 billion in investments in renewable energies in Brazil 32. All investments areexpected to come from private enterprises. The auction in 2010 contracted 89 wind farms, small hydro-electric power plants, and biomass plants, and will add 2,892.2 MW to the national energy matrix. OnDecember 20, 2011, the government will hold its next energy auction (A-5), with 20 years energy supplycontracts on the table33. It is an essential requisite for foreign Energy Trading Companies to join the energy auctions, asthey are the easiest way to gain a foothold in the Brazilian Energy Market. Companies like GeneralElectric and Siemens have already made the jump, and are now contributing technologies and services to athriving market. However, companies who are willing to enter the Brazilian Energy Market should not shyaway from fierce price competition. Energy auctions, which on the one hand offer companies an easy anduncomplicated market entry, demand on the other hand willingness to participate fierce price biddings,which tend to relentlessly push the price per mWh down to the limit where most companies cannot keepup with.Tariffs Concerning the current price per mWh, to which Energy Companies have to sell their electricity tothe end-consumer, the most recent energy auction on August 18, 2011, rendered the followinginformation: Type of Energy Price per megawatt hour (in R$) Wind Energy 99.85 Hydropower 102 Biomass 58.84Note: The price per mWh for biomass is from 2008. The fierceness of the price competition can best be pictured by comparing the price for windenergy of this year’s energy auction to the average price of wind power of last year’s energy auction. Theaverage price for wind energy in 2010 accounted for R$ 130.86 34, which compared to this year, is a pricereduction of 31.4% (!). Those drastic price reductions are made possible by the competition of largeEnergy Trading Companies, who have the capital strength to be able to afford low per mWh prices. Smalland medium-sized companies are often left with no slice of the cake.31 Wikipedia contributors. "Electricity sector in Brazil." Wikipedia, The Free Encyclopedia. Wikipedia, The FreeEncyclopedia, 23 Nov. 2011. Web. 1 Dec. 2011.32 Pasolini, Antonio. “Brazil to Invest $5.5 Billion in Renewable Energy Sources by 2013.” September 14, 2010. Web. November 30, 2011. <>33 “Date Set for next Brazilian Wind Energy Auction.” BWEC. Web. August 29, 2011. <>34 “Average Wind Price below R$100 in Brazilian Energy Auction.” BWEC. Web. August 18,2011<> 26
  27. 27. 2.3.3 Legislative Framework The legislative framework for (renewable) energies determines the rules, norms, and standards towhich (foreign) companies have to adhere to in order to legally participate in the market. For manycompanies, the legislative framework is the last hurdle into the market, and therefore needs to beexamined carefully. The legislative framework for foreign Energy Trading Companies is important in two ways: Firstof all, it is important to know for the company what requirements and conditions have to be consideredwhen establishing a subsidiary or a business in Brazil (corporate law). Secondly, what impact does localenvironmental law have on the business? It goes without saying that the latter two areas of law do notcover the entire legal perspective of a company, but they are the most important ones. Furthermore, insection 2.2.1 under “political factors”, employment law and corporate law have already been brieflytouched and therefore taken care of. The following section will completely be dedicated to environmentallaw in Brazil:Environmental Law Renewable energies have a significant advantage over conventional energies (fossil fuels). Due tothe fact that clean energies do not emit greenhouse gases, emission legislation does not directly apply forthem. Nonetheless, renewable energies have to abide to a certain legal environmental framework.Legal Framework for Forestry and Agriculture Biomass producer procure their energy from agricultural and forestal waste. Brazilian agriculturepresently covers one-third of the land area, and has expanded substantially due to the demand for foodproducts and biofuel feedstock35. Although agricultural activities are most of the time limited to alreadyexisting crop lands and pastures, some crops (e.g. soybean) have recently expanded and are jeopardizingthe natural grassland ecosystem or forestal areas. In order to prevent the loss of biodiversity, ecosystemdiversion, and resource degradation, the government has established a legal environmental frameworkfor agriculture, which has two mayor aspects: Forest law and Preservation Areas. Forest law divides ruralprivate land into productive land and land dedicated to preservation, which is further divided into Areas ofPermanent Preservation (APP)35. In those areas it is not allowed to use any type of production. APP aremostly located in the North / North-East of Brazil (see appendix15).The forest law covers all naturalvegetation, including the rainforest, savannas, wetlands, thorny woods, and the Atlantic forest. Biomassproducer who are looking for possible energy sources in those areas, and also Hydro-electric Companieswho search for potential dam sites, should revise Brazilian forest law. Three mayor laws govern forestry in Brazil: i) the Forestry Code, Law N* 4.771, which is theprincipal legal document for forestry, ii) the National Environmental Policy Law N* 6.938 and 1981,which established the basic government actions to maintaining ecological balance, and iii) theEnvironmental Crime Law of 1998, which regulates criminal and administrative penalties for activities35 Sparovek, Gerd. “Brazilian Agriculture and Environmental Legislation: Status and Future Challenges.”Environmental Science&Technology. ACS Publications. July 16, 2010. Web. December 1, 2011.<> 27
  28. 28. harmful to the environment36. The latter law imposes sanctions on forestry violations, and sets finesranging from R$ 50 to R$ 50 million. Furthermore, foresters who seek to use the forest for biomassproduction or hydro projects need to acquire a logging permit in order to clear trees. It is important tomention, that the area of forest to be cleared shall not exceed the regeneration capacity of the same area.Energy Companies, who seek to clear forest for the use of energy sources (biomass) or the construction ofpower plants (hydro and wind), must acquire the permit for “clear cutting36”. Even after decades of deforestation in Brazil, the legal framework for reforestation still encountersloopholes and misses the necessary firmness to make companies replant the trees they chop down.Fortunately, many companies, nowadays, realize their environmental responsibility, and take part inreforestation projects such as Planeterra. Concluding it can be said, that Brazilian environmental law generally refers to Forestry andAgricultural Law. This makes sense, because Brazil is home to the biggest area of rainforest in the world.Especially hydro-electric and biomass projects, and to some smaller extent wind farms close to theAtlantic rainforest, jeopardize the natural flora y fauna and therefore the world´s largest source of forestaloxygen. The Brazilian government has made a substantial effort to confine and regulate the deforestationof the rainforest. Forestry laws and crime laws prohibit and fine infringers for activities harmful to theenvironment. Nonetheless, the reforestation legislation still is subject to loopholes and fails to establish aclear legislative framework for reforestation. Nonetheless, public as well as political protest have forged anew sense of environmental responsibility in the mind of companies. Foreign Energy Trading Companiesare keen to not infringe on environmental law, as substantial fines, loss of or restriction of fiscal benefits,loss or suspension of lines of credit, or suspension from activities would be the consequence36. The chapter about the legislative framework for (renewable) energy is altogether concluding themarket study about renewable energies in Brazil. The client should have obtained a general understandingabout the country`s macro-economic factors, the ease of doing business, and the markets of renewableenergies as well as the government´s energy policy and legislative framework to which the market issubject to. In the following section, the market study will be rounded-up and evaluated with the help of theOT-analysis. Later, in the recommendation, a possible entry mode and investment opportunities (asderived from the OT-analysis) will be discussed.36 Hirakuri, Sofia. “Can Law safe the Forest?” Desa Putera, Indonesia: CIFOR, 2003. Center for International ForestryResearch 28
  29. 29. 3. Conclusion As it has been mentioned under section (2.1), the conclusion will give answer to the main question byanswering all sub-questions, which served as milestones in the market study. In combination with the OT-analysis, the benefits and threats of entering the Brazilian Energy Market for foreign Energy TradingCompanies can be evaluated.Sub-Question 1: How do macro-economic factors influence the renewable energy business in Brazil? The macro-economic environment of Brazil portrays a favorable constellation for foreign EnergyTrading Companies. The rapid expansion of Brazil`s middle class with growing disposable incomeincreases the demand for essential goods like running water and also electricity. In terms of economicfactors, rapid economic growth and macro-economic stability are two attributes of the Brazilian economy.Coupled with equal income distribution – a factor that is improving year by year – and an expandingmiddle class, it has a positive effect on the client`s target group. Concerning social factors, rapid economicgrowth and social inequalities forge a wide income gap, which, though decreasing at a constant rate, formsa perfect breeding ground for (international companies), because it gives them the opportunities to reduceunemployment and thus contribute to the country`s prosperity. What foreign Energy Trading Companiesshould also take into account is that although the majority of Brazil`s population is in favor of renewableenergies, there has been a social stance against hydro-electric energy. In terms of technological factors,Brazil`s counts with a superb infrastructure, which not only facilitates transportation, but also fostermarketing and information efforts (e.g. developed online infrastructure). The ecological variable of Brazilis probably the most important one for Energy Trading Companies. In general, the Brazilian governmentis highly concerned with environmental responsibility on behalf of private companies. In its National Planon Climate Change, the main objective is to “maintain a high proportion of renewable energies in thenational electric power network.” At last, political factors analyze corporate law, employment law, andgovernment funds. In terms of corporate law, foreign Energy Trading Firms have the opportunity to formi) Limited Liability Company (Ltda.), ii) Corporation (S.A), and iii) Joint Venture (JV). Employment lawis quite favorable for companies, as the enforcement of labor contacts is not mandatorily limited to a fixedtime period, and can be terminated without cause at any time. However, companies should be keen to nottake advantage of the paragraph as strong, social bonds among workers could be disrupted and lead tostrikes or employee turnover. 29
  30. 30. Sub-Question 2: What is the ease of doing business in Brazil? The Ease of doing business in Brazil is summarized in the following table: Variable 5 4 3 2 1 1. Starting a Business X 2. Dealing with Construction Permits X 3. Registering Property X 4. Getting Credit X 5. Protecting Investors X 6. Paying Taxes X 7. Trading Across Borders X 8. Enforcing Contracts X 9. Resolving Insolvency X[5 = Very Favorable, 4 = Favorable, 3 = Neutral, 2 = Unfavorable, 1 = Very Unfavorable] In essence, the underdeveloped and in many ways complicated Brazilian bureaucracy makes doingbusiness in Brazil a difficult undertaking. Procedures to set up a business are time-consuming andcomplex, however less costly. In fact, the bad ranking of Brazil concerning the ease of doing business(according to, favors the formation of a partnership, because already establishedlocal players do not need to quarrel with the ranking.Sub-Question 3: Which renewable energies are profitable in the long term? In the market study, 3 renewable energies, which according to Brazil`s current energy matrix havethe biggest share of installed capacity, were examined: Hydropower, wind energy, and biomass. All ofthem are profitable energies in the long run, because the government includes all three energies in theNational Energy Plan until 2030, which is urging the expansion of renewable energies. Nonetheless,especially hydropower has certain social and environmental drawbacks, is costly, and depends on monthlyrainfalls. In fact, the government is increasingly supporting the construction of wind and biomass projects.Wind and biomass have a huge potential due to formidable wind conditions in the North-East of Braziland agricultural and forestal reserves in the inland. According to ANEEL, wind and biomass are bothpotential alternatives to hydropower and therefore will receive substantial support in the future.Considering the analysis, wind energy and biomass have the most potential and thus are the mostprofitable energies for Energy Trading Companies in the long term.Sub-Question 4: How does the government`s energy policy on renewable energies affect the client? Brazil`s energy policy can be divided into short term and long term programs. The NationalEnergy Plan can be considered the all-embracing blueprint for Brazil`s energy policy in the upcoming twodecades. EPE foresees a drastic increase in energy demand until 2030, and therefore urges the expansionand construction of renewable energies. The Ministry of Mines and Energy estimates that between 2008and 2017 public and private investment of around R$ 352 billion will be pumped into the realization of theplan. In terms of short term programs, the government frequently holds Energy Auctions in order to sellenergy projects to foreign Energy Trading Companies. For them, the energy auctions portray a perfectthreshold into the market. Be that as it may, the energy auctions are subject to fierce price competition,pushing the price per mWh to the absolute limit where most companies cannot keep up with. In essence,the government`s energy can be considered as favorable towards foreign Energy Trading Companies. 30