ITESM CAMPUS MÉXICO

Final Business Case Renewable 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

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Table of Contents

Executive Summary .................................................................................................................................... 3

1. Introduction ........................................................................................................................................... 4

2. 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

2.3.1.1 Hydroelectric Energy .................................................................................................. 18

2.3.1.2 Wind Energy ................................................................................................................. 20

2.3.1.3 Biomass ........................................................................................................................ 22

2.3.2 Energy Policy ......................................................................................................................... 24

2.3.3 Legislative Framework ........................................................................................................... 27

3. Conclusion ............................................................................................................................................ 29

4. Recommendation ................................................................................................................................. 33

5. Bibliography ......................................................................................................................................... 34

6. Appendices ........................................................................................................................................... 37

7. Further Reading .................................................................................................................................... 45

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Executive Summary

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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1. Introduction

In 2007, James Martin, founder of the 21st Century Institute and Institute for Science and

Civilization, 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 not

only 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 changes1”. James Martin was keen to

realize that, above all other challenges, the saving of the planet should be our utmost priority as it provides

both the home and shelter we depend on.

Nowadays people, and especially companies, see themselves confronted with the rising issue of

global warming that goes hand in hand with the conspicuous increase in greenhouse gas emissions. This

malicious “trend” is omnipresent, and brings about the need for environmental responsibility. Being the

number one producer of greenhouse gases, the production industry has to start rethinking its energy

portfolio, as conventional energies such as oil, coal, or gas (so called fossil fuels) are not only subject to

scarcity, but also jeopardize the environment significantly. The alternative to fossil fuels is renewable

energy. This rather “modern” type of energy is renewable, because it is generated from the very essence

that James Martin sought to protect: the earth and its nature. Renewable energy is both infinite and

ecologically 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 more

becoming a reality in the heads of many people.

Unfortunately, the willingness of companies to go green is merely a futile undertaking if the

politics of a country do not provide the incentives for green energy. The most prominent and prevailing

examples 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 in

terms of economic output have not yet undertaken a clear commitment to a greener future. Be that as it

may, developed countries are leading the way concerning renewable energies, and appear to be a good

role model for nations to follow. Interestingly, developing countries are increasingly taking part in the

pioneering task of developed countries despite their huge demand for and dependence on natural

resources. Brazil for example, has long been dependent on oil, also given the fact that it is one of the

world`s biggest oil producers. In 1970, following a series of severe oil shocks, Brazil began to diversify its

hitherto unilaterally-developed energy portfolio in order to reduce its dependence on oil and other fossil

fuels. Nowadays, according to the Energy Research Corporation (EPE), 85.4% of Brazil`s domestically-

produced energy comes from renewable energies – mostly ethanol and hydroelectric power2. Favorable

government incentives alongside with the global movement towards a greener future have made Brazil an

interesting market for renewable energies.

1 Martin, James. “The Meaning of the 21st Century: A Vital Blueprint for Ensuring our Future.” 21st century Institute and Institute for Science and Civilization. January 2007. <http://www.elon.edu/docs/e-web/predictions/17_Great_Challenges.pdf> 2 Hübner, Nelson. “Brazil`s Wind Power Auction Spurs More Clean Energy Development”. ANEEL. 29 December 2009. <http://www.renewableenergyworld.com/rea/news/article/2009/12/brazils-wind-power-auction-spurs-more-clean-energy-development>

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This case study has been written with the purpose of analyzing the Brazilian market of renewable

energies, and gauging it upon possible investment opportunities. The case study is tailored to the request

of any foreign Energy Trading Company, which seeks to expand its business into the Brazilian energy

market. Throughout the subsequent pages, I will not only take a look at the market and all its

characteristics, but also analyze the government`s energy policy and the corresponding legislative

framework. I will then conclude the business case with a recommendation on possible entry strategies and

investment opportunities. In essence, this paper serves as a preliminary entry-guide for CEOs of foreign

Energy Trading Companies that seek to dwell upon formidable investment opportunities of an increasing

market in an aspiring country.

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2. Analysis

2.1 Structure of the Analysis

The subsequent analysis forms the main body of this business case, and will justify the conclusion

and 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 the

introduction, lies in helping the client (foreign Energy Trading Companies) gain a better understanding of

the Brazilian renewable energy market, and to offer him, based on the analysis, a suitable entry strategy

and 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 Brazilian

renewable energy market. Preceding the recommendations, the conclusion will summarize the findings of

the 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 of

this market study. The main question states the reason for conducting this business case, and also depicts

the 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, and

given answer to the main question.

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2.2 Country Analysis

Prior to analyzing the market for renewable energies, it is crucial to examine the country in which

the market of interest is located. Many times, the attractiveness of a specific market is defined or limited

by the characteristics of the home country. Those characteristics, which play an important role in

determining the ease of doing business in a country, can be dissected into 6 macro factors, commonly

known as DESTEP. Serving as a powerful analytic tool, the DESTEP is used to examine macroeconomic

factors that cannot be controlled by the company. By analyzing each factor, the management can be sure

to 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 renewable

energy 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 on

the 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 – the

DESTEP and the Ease of Doing Business – conclude the country analysis and set the focus on the

subsequent market analysis.

2.2.1 DESTEP

Macro factors, such as the economy, have a not to be underestimated impact on business activities

in a country. Therefore, it is of utmost prudence to gauge those factors upon their importance towards

business activities prior to entering a market. The DESTEP analysis will do just that, and it is divided into

demographic, economic, social, technological, ecological, and political factors. As it has been mentioned

earlier, political and legal aspects will be dealt with in-depth later in the analysis. In order to keep the

analysis within the scope of this business case, I will only emphasize the most predominant trend(s) of

each 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 sustained

economic growth, the emergence of a new lower middle class, with growing disposable incomes and

easier access to credit, reshaped Brazil`s thitherto unequal class society. Although income disparities

continue to be an issue, future scenarios predict that Brazil and its young population (mean age 29.3 in

2010) will be one of the most attractive consumer markets in the world3.

A rising and young middle class with growing disposable income not only has a positive effect on

the consumer market, but also benefits other sectors, such as the energy sector. This is because an

increasing 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 news

for 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.” Euromonitor International. Euromonitor, 2007. Web. 12. November 2011. < http://blog.euromonitor.com/2007/09/brazils-new-middle-class-has-a-growing-appetite-for-consumption.html>

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Economic Factors

It goes without saying that Brazil is among the fastest growing economies in the world. Everyone

who 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 developing

economies. What sets Brazil apart from the other South American economies, is its striking ability to

recuperate from economic calamity. In 2009, when most of the world was fighting off the aftershock of

the 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 that

fuels 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 gradually

building 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 and

ascending economies. In essence, they portray the increasing prosperity of a country. Coupled with equal

income distribution – a factor that is improving year by year – and an expanding middle class (as

explained under Demographic Factors), it has a positive effect on the client`s target group. The annual

consumption of electricity supports this trend (see appendix2). As the graph shows, annual consumption

has been increasing constantly, and except for the years 2007 and 2008, where the financial crisis struck

the country, energy consumption continues to grow. In fact, growing electricity consumption emulates the

trend 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 South

American 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 is

unemployed (according to the World Factbook). Social unrest, especially in rural areas, stand for the other

side of the coin in midst of Brazil`s economic wonder. Be that as it may, rising living standards and a

tightening gap between the poor and the rich (see appendix3) may alleviate the social pressure that is

currently 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 thus

contribute to the country`s prosperity. The only requisite is that the government allows foreign firms to

gain 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 enterprise

operating in an economy other than that of the investor5. Since the beginning of the century, the Brazilian

government has made a considerable effort to foster and promote the inflow of FDI into the Brazilian

4 The World Factbook. “Country: Brazil.” The World Factbook. Central Intelligence Unit. 2010. Web. 13. November 2011. < https://www.cia.gov/library/publications/the-world-factbook/geos/br.html> 5 The World Bank. “Data: Brazil.” The World Bank. IBRD&IDA. 2010. Web. 13. November 2011. < http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD/countries/BR?display=graph>

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market (see appendix4). An open and uninhibited flow of FDI should be an encouragement for foreign

firms to think about entering the Brazilian market.

What foreign Energy Trading Companies should also take into account upon expanding their

energy portfolio into Brazilian market is that although the majority of Brazil`s population is in favor of

renewable 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 10,000

families living beside the Paraná River had to be displaced. The thitherto world`s largest waterfall by

volume, the Guaíra Falls were drowned completely by the newly formed Itaipu reservoir6. Back then, the

government 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 the

world`s third largest hydro-electric dam (only second to the Itaipu- and Three Georges Dam), a Brazilian

hydro-electric project once again spurs social resistance both nationally and internationally. The Belo

Monte 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 in

water 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 km

of railway, about 96,500 km of paved roadway, and 50,000 km of waterway4. Considering the fact that

almost 57.2% of the country is covered in rainforest, and therefore only accessible via boat or airplane, the

magnitude and quality of Brazil`s infrastructure is outstanding. Apart from a decent infrastructure, the

communication 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 up

to almost 20 million. Both measurements are among the top 5 ranking worldwide (according to the World

Factbook). However, the client might be more interested in the condition and quality of the infrastructure

directly related to renewable energies. In terms of wind energy, there are 36 wind parks and wind farms

mostly located along Brazil´s 4,600 mile coast line. Biomass constitutes another important element in

Brazil`s energy portfolio. Today, more than 1 million people work in the production of biomass, and the

energy represents 27% of Brazil`s energetic matrix8. In fact, since the oil shocks in the 1970s, the

Brazilian government has done much to promote the use of renewable energies. Nearly 40 years after the

shift towards green energy, Brazil`s infrastructure for renewable energy is in formidable shape and can

surely 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 Free Encyclopedia, 20 Jul. 2011. Web. 15 Nov. 2011. 9 Global Intelligence Report. “China and Brazil leading Energy Infrastructure Investment in Latin America.” Global Intelligence Report. Southern Pulse. 2010. Web. 14. November 2011. <http://oilprice.com/Energy/Energy-General/China-and-Brazil-Leading-Energy-Infrastructure-Investments-in-Latin-America.html>

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A sophisticated infrastructure is of utmost importance for companies. Not only does it facilitate

transportation, but also foster marketing and information efforts (e.g. developed online infrastructure). It is

even more advantageous for a company, if the infrastructure of a specific market is outstandingly

developed. This is the case with Brazil, where 40 years of continuous development and aggregating

expertise have transformed a country from an oil-dominated economy into one of the world`s most

advanced renewable energy producer. Brazil truly is the perfect breeding ground for Energy Trading

Companies.

Ecological Factors

The ecological variable of the DESTEP is probably the most crucial one for Energy Trading

Companies. In a time where global warming is a pending issue, topics like climate, energy, and

sustainability are more frequently seen on discussion boards and political agendas. In fact, energy, the

very essence with which energy companies are dealing with, is supposed to be environmentally-friendly

and also sustainable. Nowadays, companies are expected to not only excel in social responsibility but also

environmental stewardship. The government, who to some extend is responsible for the domestic

manufacturing sector, is trying to guarantee a clean environment by issuing environmental regulation. In

2008, the Brazilian government launched its National Plan on Climate Change, which among other

objectives seeks to “maintain a high proportion of renewable energy in the national electric power

network10

”. Emulating the environmental policies of European governments in recent years, it seems like

the 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 Trading

Companies. Given the legislative power of the political institution, the government is able to alter both the

political and entrepreneurial playing field in its favor. In essence this means that in the near future, Energy

Trading Companies are more likely to prosper on favorable legislative conditions concerning renewable

energies. The overall ecological mindset which has acquired Brazil in recent years, namely reducing

greenhouse gas emissions and placing emphasis on renewable energies, have turned the country into a

formidable market for clean energy-oriented companies.

Political Factors

Concerning political factors, I have already touched upon environmental legislation in the

previous paragraph (Ecological Factors), which will be further elaborated on under the section Legislative

Framework (2.3.3). However, companies that are new to a particular market should not only focus on

legislation concerning their products or services, but also consider legislation that might have an impact

on more subtle areas within the companies, such as labor law or corporate law. Furthermore, the company

should 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 a

new expansion strategy. Especially Energy Trading Companies, who are labor-intensive due to the use of

extensive fixed assets (solar parks, windmills, electricity networks, etc.), are keen to not infringe upon

labor rights, as labor strikes and governmental penalties would be the logical consequence. Labor law in

10 Lehman Baracui, Pedro. “Brazil: Recent developments in Environmental Law.” Mondaq. February 2009. < http://www.mondaq.com/article.asp?articleid=74154>

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Brazil turns out to be “favorable to all Brazilian workers – both blue and white collar”11

. In general, the

quick 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 that

the labor code not only is beneficial to employees (minimum wage, fixed working hours), but also

provides certain benefits to employers. For example, the enforcement of labor contracts is not mandatorily

limited to a fixed time period, and can be terminated without cause at any time. This leaves the employer

with more flexibility when dealing with his human resource plan. Be that as it may, the employer should

be careful to not take advantage of the relatively loosely defined “termination of the contract” paragraph

in the Brazilian Labor Code, as strong, social bonds among workers within the organization can be

damaged and subsequently lead to dissatisfaction, turnover, or strikes. This is because the Brazilian

culture is intrinsic, meaning that people tend to care about each other more than any other aspect of their

lives. Decapitating employees without reason may not only backfire on the company’s reputation but also

cause unrest within the organization.

Corporate law defines the business etiquette of a company within the domestic business

environment. In general, it denotes the interaction of the company with its stakeholders, also including

indirect stakeholders such as the community and the environment. Corporate Law is particularly important

for companies that seek to penetrate a market with the help of partnerships, as it regulates the various

types of business entities. In the subsequent paragraph, I will take a closer, though brief look at the 3 most

common 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 a

minimum capital requirement nor does it constitute a capital reserve. There is no need to publish annual

financial statements, and it can be converted easily into a Corporation. The company can be founded by

11 Viegas, Juliana, Benito Machin, Gloria. “Summary of Employment Law in Brazil and Mexico.” Fredikson. Spring 1997. <http://www.fredlaw.com/articles/international/intl_97sp_jlv.html> 12 Villa da Costa, Mariana. “International employment law Quick Facts: Brazil.” International HR Forum. January, 2010. <http://internationalhr.wordpress.com/2010/01/07/employment-law-quick-facts-brazil/>

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two partners but neither of them needs to be a Brazilian. A partner can either be an individual person or a

legal organization. If the Ltda. is managed by the foreign managers, he needs to have a Brazilian work

permit13

.

2. Corporation - S.A. (Sociedade anónima)

Forming a corporation is by far more complex than forming a limited liability company. The S.A.

is subject to a detailed regulatory framework for corporate activities. It is obliged to publish annual

financial statements, and a reserve of 10% of the total capital in use needs to be kept at a bank account. It

needs 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 Brazilian

Stock Exchange13

.

3. Joint Ventures - JV

Joint Ventures are a common way to form a partnership in Brazil. Many times, companies

compete for contracts with the government or in regulated sectors, such as the telecom y energy. Both the

Ltda. and S.A. models are suitable for the forming a Joint Venture. In fact, the models HAVE to serve as a

blueprint 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 the

recommendation (4), I will pick one of the above-mentioned partnerships and explain why I think it is the

most 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 possible

subsidies or other government funds that support Energy Trading Companies. Being part of the

government’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 as

wind power must stand on their own merits. Concerning wind energy, the Brazilian government “does not

intent to pay a premium for wind […] there are no overt incentives in terms of energy price subsidies such

as feed in tariffs14

.” Despite the absence of subsidies in the wind sector, investors have the opportunity to

benefit from a host of other incentives: first and foremost, the rigorous commitment of the government

towards clean energy provides investors with benefits in the long term, stipulated by power purchase

agreements of up to 20 years. Furthermore, the government covers the installation costs of transmission

networks, which alleviates fixed asset costs on behalf of the company. In addition, favorable purchase

loan 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-called

public wind auctions – a first time event that took place in December 2009. Public wind auctions give

foreign investors the opportunity to gain a foothold in the Brazilian renewable energy sector by

13 Fujikawa Nes, Egil. “Should you form a S.A. o Ltda. Company in Brazil?” The Brazil Business. October, 2010. <http://thebrazilbusiness.com/article/should-you-form-a-ltda-or-s-a-company-in-brazil> 14 Cleantech. “Building Brazil`s Wind Business.” Cleantech Magazine. Cleantech, 2010. Web. May/June 2010. <http://www.cleantechinvestor.com/portal/wind-energy/5374-building-brazils-wind-business.html>

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contracting projects. In case of wind energy, those projects take the form of wind parks. In December

2009, 71 projects were contracted to provide 1,800 megawatts of generation capacity, and the government

aims to increase capacity to 10,000 megawatts over the next decade14

. Even without governmental

subsidies, 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 basic

understanding of the macro-economic environment and the impact it can have on his business (later in the

conclusion, the DESTEP will be included in the overall OT-analysis). Finalizing the country analysis, I

will 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 doingbusiness.org – a distinguished research site of the IFC and the World

Bank – about doing business in Brazil may confuse the reader, especially after the DESTEP analysis

turned 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.org

only estimates the country at the 126th rank (out of 183 countries). In order to explain why start-up

businesses or subsidiaries of foreign firms apparently have a hard time gaining a foothold in the Brazilian

market, I will briefly analyze the ease of doing business in Brazil according to a set of pre-determined

variables. Each variable is influenced by certain key indicators, which will also be analyzed in the

subsequent section if necessary. In order to establish a standard of comparison, the variable will be

compared against the OECD ranking15

:

1. Starting a Business

The variable “Starting a Business” incorporates bureaucratic and legal hurdles an entrepreneur

must consider when he wants to register a new firm. The procedures and time to register a firm are by far

higher as compared to OECD-countries (13 procedures and 119 days against 5 procedures and 13 days for

the OECD). On the other hand, the costs of registration (as a % of capita) are with 5.4% almost equal with

those of the OECD (4.7%). Furthermore, new firms in Brazil do not have to deposit a paid-in minimum

capital prior and until 3 months after having registered the firm. OECD countries however, have to deposit

14.1% of income per capita in order to be permitted to start a firm. In short, starting a business in Brazil

can 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 the

market 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 Trading

Companies.

2. Dealing with Construction Permits

The variable “Dealing with Construction Permits” incorporates procedures, time, and costs of

building one warehouse, and acquiring the necessary licenses and permits. As with the previous variable

15 The following data was taken from www.doingbusiness.org. The author does not claim any property rights on the information whatsoever. Any additional and more detailed information, if needed, can be taken from the latter webpage.

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“Starting a business”, procedures and time required to deal with the construction permits is higher than in

the 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 much

lower than in their Latin-American counterparts (average 160.3%). In short, dealing with construction

permits 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 installation

costs 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 their

right to property. Procedures and time are estimated at 13 and 39 respectively, and are higher than in their

OECD 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 is

114.

4. Getting Credit

The variable “Getting credit” calculates on scale from 1-10 the strength of legal rights (with 10

being the highest degree of borrower and lender protection), and on a scale from 1-6 the depth of credit

information (with 6 being the highest information transparency for credits). In terms of legal rights, Brazil

is scoring substantially lower than in OECD countries (3 versus 7 points), meaning that collateral and

bankruptcy laws are less likely to protect borrowers and lenders than in the OECD. As of credit

information, 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 debts

or loan repayments. On the other hand, available information about credit terms is transparent and

flexible, reducing the chance that firms have to default on their debts or file bankruptcy. Another

important fact to mention is that getting loans in Brazil is generally perceived to be difficult, as the

commercial 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 sources

other than commercial banks, making it more arduous for them to operate in the fast-moving business

environment 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 available

from 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 the

16 The World Factbook. “Country: Brazil.” The World Factbook. Central Intelligence Unit. 2010. Web. 27. November 2011. < https://www.cia.gov/library/publications/the-world-factbook/geos/br.html>

15

extent to which a CEO is liable for self-dealing, Brazil scores a 7 (OECD: 5). This means that directors are

more likely to account for any mischief, take responsibility, and reckon with (financial) consequences in

case the company must file for bankruptcy, or is subject to any other type of calamity. In terms of

shareholder suits, which measures the shareholder´s ability to file a lawsuit against officers or directors for

misconduct, Brazil scores a 3 (OECD: 7), making it more difficult for shareholders to challenge

transactions. In short, the final index for investor protection scores a little lower than the one in OECD

countries (5.3 versus 6 out of 10), conveying that directors or CEOs have less problems dealing with

investor 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 a

year, and also measures the administrative burden that occurs when paying the taxes. Concerning total

taxes to be paid, Brazil ranks in the lower third of the population of 183 countries. This is because for the

2 mayor taxes, namely profit tax and labor tax, firms that reside in Brazil have to substantially pay more

taxes than in OECD countries (22.4% and 40.9% versus 15.4% and 24% in the OECD). The total

outstanding tax rate accounts for 67.1% as compared to 42.7% (OECD). And also in terms of the

administrative burden, Brazil does not come off that well: 9 payments and 2,600 (!) hours per year stand

in opposition to 13 payments and only 186 hours per year in OECD countries. In essence, Brazilian firms

have to pay more taxes than in the OECD (and even in their Latin-American counterparts [average

47.7%]), and also the administrative burden appears to be heavier than elsewhere. Consequently, the final

ranking for paying taxes is 150.

Note: Energy Trading Companies DO NOT receive tax cuts in forms of subsidies or other tax

benefits.

7. Trading Across Borders

The variable “Trading across Borders” is of particular importance for companies that think to

expand 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 foreign

market. For Energy Trading Companies, the variable is only important in the short-term, when special

equipment needs to be shipped-over from the home country in order to start constructing the power grid or

other fixed assets. In general, this is an advantage of Energy Trading Firms, as trading across borders is

quite 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, more

documents are required to wind up the trading process. As a result, the final ranking for trading across

borders is 121.

8. Enforcing Contracts.

The variable “Enforcing Contracts” refers to the ease or difficulty of enforcing commercial

contracts. It is determined by measuring the cost, time, and procedures in a payment dispute starting with

the plaintiff´s lawsuit and ending with the actual payment. In essence, the duration of a dispute take more

time and procedures than in OECD countries (731 days and 45 procedures versus 518 days and 31

procedures in the OECD). Litigation is more complicated in Brazil, but on the other hand less costly. The

final ranking for enforcing contracts is 118.

16

Note: As it has been mentioned earlier in the DESTEP, employers located in Brazil are allowed to

terminate any employment contracts without naming a cause, but are forced to litigate in case no

agreement has been reached between the parties concerning severance payments. Like I also mentioned

before, companies should be keen to not fire employees without cause, as it not only disrupts social bonds

within 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 and

cost 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 administrative

bottlenecks in the administrative process”. The time of resolving a bankruptcy is stated at 4 years, as

compared to 1.7 years in the OECD. The costs account for 12% of the estate, as compared to 9% in the

OECD. The worst indicator, however, is the recovery rate, which determines how many cents on the

dollar 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 in

Brazil are not only forced to withdraw from the market, but also risk a not to be underestimated loss on the

corporate financial statement. Hence, the decision to expand the business to Brazil should be carefully

pondered.

Having analyzed the Ease of Doing Business in Brazil, the client should have acquired a basic

understanding 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 and

sometimes 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 by

far not as expensive as in OECD countries. Be that as it may, the overall rank of doing business in Brazil

is only 126, placing the country in the lower third of the population. Companies have the opportunity to

circumvent 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 and

Ease of Doing Business in Brazil, it is time to go more into detail. The following market analysis will

examine the Renewable Energy Market of Brazil, and also be the last step in the overall market study.

17

2.3 Market Analysis

The country analysis should have already convinced the client that Brazil, at the moment, is a save

heaven for energy investments. Not only has the country transformed from an oil-depended economy into

a renewable energy colossus within just 30 years, but foreign energy conglomerates are also given the

chance to prosper on favorable market conditions that have been provided for by a going green-oriented

government. The most conspicuous evidence of Brazil`s recent pivot towards renewable energies, is the

extensive construction and development of its wind energy sector. Through this, the government is further

diversifying its energy portfolio, and gradually forming an alternative to the season-depended and

controversial hydro-electric energy, which has been subject to social as well as environmental concerns

for so long.

In the following section, I will analyze those renewable energies that are likely to have a

sustainable impact on the Brazilian energy market in the long term, and also enumerate their pros and cons

with respect to the expectations of foreign Energy Trading Companies. Later in the section, as a

continuation of the DESTEP, I will further enlarge upon the government`s energy policy and benefits, and

also take a more detailed look at the legislative framework for (renewable) energies. The overall objective

of the market analysis is to find the most thriving renewable energies that are beneficial and sustainable in

the long run, and also find legislative niches and governmental benefits on which foreign Energy Trading

Companies 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 its

good reputation by further larding its energy mix with renewable energies. According to the Energy

Research Company (EPE), almost 90% of Brazil`s energy mix comes from renewable energies17

. The

dependence 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`s

energy mix comes from hydropower. However, electricity generated from the pure force of water is not

the only alternative energy that Brazil can boast of nowadays. Biomass and especially wind energy seem

to emulate the rapid ascension of their hydro-electric archetype. Abide from wind energy, Brazil is

currently not tipping into any other second- or third-generation technologies, as developing costs are too

high, and technological standards are simply not as advanced as in developed countries. That is why

technologies such as solar heating, photovoltaic, and modern forms of bioenergy are rarely to be found in

Brazil, 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 is

gradually acquiring that status of a developed country. Until that date, the incentives are focused on the

following 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. < http://theenergycollective.com/solanalarsen/45228/brazil-research-and-advances-renewable-energy-sources>

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2.3.1.1 Hydro-Electric Energy

Hydro-electric power is the world`s largest installed renewable source of electricity, supplying

about 17% of worldwide electricity in 200518

. This number is estimated to grow further, as more and more

countries take advantage of extracting energy from the river`s fast-flowing currents. China, Canada, and

Brazil are leading the way with respect to total energy produced from hydro-electric power. All three

countries are home to vast reserves of standing or flowing water, which makes it possible for them to

extract energy from rivers or lakes. Whereas Canada is generating most of its hydro-electric power from

the numerous lakes that bedeck the countryside, China and Brazil are dependent on their mayor

waterways. In China it is the Yangtze River and the world largest power dam Three-Georges, which

generate the majority of hydro-electric energy in the country. Brazil`s Itaipu Dam, which began operations

in 1984, is with 14,000 MW only second to the Three-Georges in terms of installed capacity. After years

of public controversy, Brazil began construction on its second hydro-electric project; the Belo Monte

Dam, 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 the

construction process due to severe environmental concerns. The consortium is expected to refute the

decision19

.

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 total

installed capacity in Brazil (2010). The total hydropower recourses (maximum hydro-electric capacity of

Brazil) are estimated at around 261.4 GW. Until 2019, the government is planning to expand capacity

from 80.7 GW (80,704 MW) to 116.7 GW20

. The country´s hydro recourses group themselves around the

Amazon River, which is with 3,900 10³ km² the biggest source of hydro-electric power in Brazil (see

appendix6).

Clearly it can be seen that Brazil will be utilizing its hydropower recourses in this decade, and is

planning 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 GW

has been reached. For foreign Energy Trading Companies this means interesting investment opportunities

in 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 years

18 Mark Z. Jacobson (2009). Review of Solutions to Global Warming, Air Pollution, and Energy Security. P.5 <http://www.stanford.edu/group/efmh/jacobson/EnergyEnvRev1008.pdf> 19 "Brazil court orders halt to work on $11 bln mega-dam". AFP. September 28, 2011. Web. Retrieved November 29, 2011. <http://www.google.com/hostednews/afp/article/ALeqM5hozl75EyofcdcgxFwmweUWnfKaBA?docId=CNG.a74b73b5ae6d1ed2253441687f7eeda4.dc1> 20 Carvalho, Erton. “Hydropower in Brazil.” Brazilian Committee on Dams, January 18, 2011, Rio de Janeiro. Rio de Janeiro: WEX, January 18, 2011. Print

19

Brazil is home to the world`s largest reserves of renewable fresh water21

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 the

Brazilian hydro-electric sector. Although the sector appears to be saturated due to the high and increasing

number of installed hydropower plants, there still is room for potential investment given the enormous

size of the country and its water reserves. In addition, Brazil can boast of over 30 years of continuous

expertise and development of its hydro-electric infrastructure, and the government`s immense faith in

hydropower will assure a secure and stable investment environment at least until 2019.

Despite the advantages, Energy Trading Firms should pay attention to the following disadvantages

that 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 many

people, Brazil`s second hydro-electric dam with a capacity of over 10,000 MW is considered to be an

ambitious, but also infamous project. This is because the project entails certain social and environmental

problems. Appendix7 shows the construction area of the Belo Monte Project. The graphic clearly shows

that the Xingu River is forcefully redirected, and channeled through an area that until then has been pure

rainforest. It is important to notice that the construction of the Belo Monte Dam is affecting the

environment in two mayor ways: First of all, the main dam causes the water flow to be redirected into the

rainforest, where it forms a huge water reservoir. Secondly, the water level behind the main dam will be

drastically reduced. This has both social and environmental consequences. In terms of social

consequences, 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 so

that local tribes have absolutely no chance of a fresh supply of fish. Furthermore, the water reservoir

would entail the resettlement of a substantial number of people. Environmental groups say that the

construction of the Dam would affect the survival of indigenous groups, and the lives of up to 40,000

people would be threatened as 500 km² of land would be flooded22

. In terms of environmental

consequences, the dam would disrupt the aquatic ecosystem and lead to large scale destruction. Mating

season and mating areas of fish or other aquatic animals could be disrupted, jeopardizing fish population

and even driving them near extinction. However, not only aquatic creatures are endangered, but also land

animals. 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. < http://findarticles.com/p/articles/mi_hb3120/is_8_80/ai_n29454646/> 22 “Judge again halts Belo Monte dam auction in Brazil". AFP. April 20, 2010. Web. Retrieved November 29, 2011.. <http://news.bbc.co.uk/2/hi/8631711.stm>

20

putting at danger both plant life and animals that depend on the trees. At last, although hydropower dams

do not require and fuel, and therefore produce no greenhouse gases directly, it has a number of injurious

affects on the environment. Most notably, by flooding large areas of rainforest, and over a period of

months, a decomposing process sets in, emitting not to be underestimated amounts of methane gas, which

in many aspects is even more harmful to the atmosphere than carbon dioxide. In addition to social and

environmental disadvantages, hydropower, just as any other renewable energy, is dependent on the freak

of 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 an

increased consumption of electricity resulted in a series of so-called blackouts, which led to energy

shortages all over the country. It came to the attention of the government that hydropower, despite its huge

generation capacity, is only as powerful as the monthly rainfalls, which were missing in the raining

seasons of 2001 and 2002.

As it can be seen, hydro-electric power does not only have attractive advantages but also certain

drawbacks. Given the huge energy capacity of hydro-electricity, this sector is probably the most attractive

and profitable one for Energy Trading Companies. However, environmental and social concerns

frequently lead to damaged reputation and expensive lawsuits. On top of everything, hydropower is very

dependent on monthly rainfalls. With more than 70% of Brazil´s energy production relying on

hydropower, the fast-growing country cannot afford another period of power shortages. In order to

counterbalance the risks of power shortages, the government, in 2002, called into existence the Program

for Incentive of Alternative Electric Energy Sources (PROINFA), to foster the use of other renewable

energies such as wind energy and biomass.

2.3.1.2 Wind Energy

Just like hydropower in the 1980s, wind energy is experiencing an unprecedented boom that began

with the beginning of the new century. Supported by government incentives and public wind auctions, the

capacity of wind energy has more than tripled since 2006 (see appendix8). Nowadays, wind farms portray

a reliable alternative to hydropower, and further help diversifying Brazil`s energy matrix, thus reducing

the risks of energy shortages in case of droughts. In 2010, total installed capacity was measured at around

931 MW, constituting a 53% growth from 2009 (606 MW)23

. At the end of 2009, wind energy accounted

for only less than 1% of the Brazilian energy mix (see appendix5), which by today should have crossed

the 1% mark. The main reason why wind energy is experiencing unprecedented growth rates year after

year, is not so much due to favorable government incentives, but rather due to Brazil`s impressive wind

potential. 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 than

the estimated potential of hydro-electric sources (261.4 GW). The source of Brazil`s wind energy comes

from its large, unpopulated land areas, and its 9,650 km coastline. Excellent wind conditions prevail in the

North / North-East of Brazil (see appendix9). In addition, hydropower and wind energy are perfect

partners, 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 the

PROINFA, 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. <http://www.gwec.net/index.php?id=118>

21

The program was recently extended to the end of 2011, setting the target to 1,400 MW, which is most

likely met by the end of December this year.

Clearly it can be seen that wind energy in Brazil is an interesting investment opportunity for

foreign Energy Trading Firms. This can be said not only with respect to the huge wind potential (350

GW), 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 the

better expertise and technical know-how to bring forward Brazil`s energy program. What seems to be

beneficial for Brazil also pays off for the companies that enter the Brazilian market. Those companies, of

which most are Energy Trading Companies or producers of energy technology like General Electric from

the United States or Siemens from Germany23

, benefit from both attractive investment opportunities and a

facilitated market entry. The wind auctions held in 2009 and 2010 alone contracted 112 projects with a

total 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 Trading

Firms should consider the following drawbacks:

Noise pollution

Unpredictability

Costs

Noise pollution is probably the most preeminent drawback of wind energy. However, since most

of 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 an

unpredictable force of nature, but just like droughts are likely to be predicted in fall periods, it appears that

wind experiences its most active season during the fall and winter months. I will take the north-eastern

region of Brazil as an example. North-eastern Brazil is one of the most promising regions for wind power

use, where high wind speeds are measured just when the flow of the local Sao Francisco River is at its

lowest (see appendix10)24

. The graph is showing the converse alignment of the wind speed at the coast

and the water flux of the Sao Francisco River. The wind speed that never drops below 4 m/s reaches its

peak in the fall season and maintains wind speeds of up to 6-7 m/s during the winter season, while the

river, who accounts for the power supply of most of the region, is at its lowest. This phenomenon occurs

every year, which makes the wind calculations more predictable in North-eastern Brazil. Concerning

costs, 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 first

thought, wind parks, especially off-shore wind parks, require a higher investment than hydro-electric dams

24 Krauter, Stefan. “Wind Power Conversion in Brazil.” International Journal of Distributed Energy Resources. 1.3 (2005). P. 223. Technology&Science. Web. November 29, 2011

22

(except for big projects such as the Three-Georges). Wind parks many times have to be constructed on

inaccessible cost land, or mountains, to be profitable. Furthermore, long term costs are quite substantial as

continuous maintenance is necessary due to lightening strikes, mechanical fatigue failure, hub stress, and

heavy weather damages25

.

Wind energy certainly does not have the environmental and social drawbacks, which have made

hydro-electric projects infamous among Brazil`s population. In addition, the government has currently put

its emphasis on wind energy in order to reduce the dependence on hydropower. Be that as it may, the costs

per 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 auctions

have greatly facilitated the market entry for foreign Energy Trading Firms, thus spurring FDI in Brazil.

2.3.1.3 Biomass

The market for biomass in Brazil has tradition and a significant potential. It has potential because

of a) the size and availability of land, b) the adequacy of its weather, c) the availability and low cost of its

working force, and d) the domain of biomass production and biomass conversion technologies in the

agricultural and industrial sector26

. In 2010, Brazil produced approximately 157,992,556 tons of forest

residues, which is enough to meet all domestic energy demand26

. In addition to forest residues, agricultural

waste, waste from extraction plants, and waste from fruits together account for 603,393,952 tons of waste

residues (see appendix12). Biomass has many advantages for a green future, provided that it is used

correctly. This means, that no primary forest should be used in biomass production, but rather mature

forest at the end of its growing life. As well, producers have the obligation to reforest the trees they have

cleared for biomass production. If producer adhere to those norms, biomass can be a continuous basis

serving 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`s

largest and most sustainable energy source26

. The fact that the plant life cycle is infinite also makes

biomass 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 other

words, power plants fueled with biomass generate hundreds of Megawatts of energy every year. By the

end 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 for

biomass, one can see that the energy capacity of bioelectricity is expected to reach 13,000 MW by the end

of 2020 (see appendix13)27

. Interestingly, the same inverse relationship between hydropower and wind

energy can be observed between hydropower and biomass (see appendix14). Just like wind, biomass is a

perfect alternative to the hydropower, compensating for dry periods in the fall and winter months. The

advantages for Energy Trading Companies are apparent:

25

“Directory: Cents per Kilowatt-Hour.” Peswiki. Pure Energy Systems. January 5, 2007. Web. November 29, 2011 < http://peswiki.com/index.php/Directory:Cents_Per_Kilowatt-Hour> 26 Marcelo de Oliveira, Celso. “The Future for Bioenergy and Biomass Brazil.” Brazilian Association Industry Biomass 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. < http://english.unica.com.br/opiniao/show.asp?msgCode=FACE0631-8C71-4E82-A52B-33FBC04E125E>

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 Energy

Trading 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 of

resources make it possible for biomass producer to generate electricity. The production of biomass also is

the most laborious form of renewable energies in the long run. Many workers are needed to collect

agricultural waste, chop down trees, and transport the remaining residues to the production site. The

production process itself is neither labor-intensive nor complicated, as little personnel are required to turn

biomass into bio products or bio fuels. In fact, biomass not only has many sources (agricultural, paper

mill, 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 also

highly utilizable, meaning that production is even possible on underutilized agricultural land. Just like

wind energy, biomass is likely to profit from the increasing necessity to have an alternative energy to

hydropower. This is why PROINFA also schedules energy auctions, where energy contracts are sold to

foreign Energy Trading Companies. At last, production costs for biomass are significantly lower than for

hydropower 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 a

consequence, 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 competition

between renewable energies, which is further spurred by energy auctions. Competition between different

sources of energy is designed to obtain the lowest tariffs possible for the final consumer, but it takes place

in a public bidding procedure in which participants are vying to meet the same demand27

. With already

small margins, biomass producer have a clear disadvantage over other energy producer if competition

continues 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 leave

companies with fewer winnings than in other energy sectors.

24

2.3.2 Energy Policy

Renewable energies in Brazil are directly affected by the government`s energy policy, which is

trying to regulate the distribution of energy contracts, the production, and cost structure of renewable

energies. In the following paragraph I will briefly analyze the government-owned Electricity Regulatory

Agency (ANEEL), the energy programs that were launched on behalf of the Agency, and the impacts

those programs have on foreign Energy Trading Firms who are planning to enter the Brazilian Energy

Market.

ANEEL`s mission is to “provide favorable conditions for the electric power market to develop a

balance between agents and the benefit of the society28

.” The agency is the regulatory arm of the

government, and manages the electricity distribution and supply for Energy Firms. ANEEL is part of

Brazil`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, where

oil monopolies were ended and subsidies reduced, a new regulatory framework was applied in 2004, in

which ANEEL was to play a major role. With the surge of renewable energies, new incentive programs

were launched with the objective to make the Brazilian (renewable) energy market more attractive for

local and foreign investment. The following section will analyze the most important programs, plans, and

auctions (projects) that the government launched in the last decade or is about to launch. Also, the current

prize 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 the

National 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, the

economy will have an annual growth rate of 4.1%, and energy demand will grow at an annual average rate

of 3.5%29

. In order to meet the increase in demand, the plan suggests the following changes in the energy

mix:

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 203029

28 ANEEL. 2011. November 30, 2011. < http://www.aneel.gov.br/?idiomaAtual=1> 29 Keith, R. “A sustainable Energy Plan for Brazil?” The Temas Blog. Temas. November 28, 2006. Web. November 30, 2011. < http://www.temasactuales.com/temasblog/environmental-protection/a-sustainable-energy-plan-for-brazil/>

25

Note: It shall be noted that by today (2011), waste-to-energy generation (in the form of biomass) has

already surpassed the plan`s objective of 1,300 MW (see appendix13), and wind energy with almost 900

MW 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 as

foreign companies, in order to counterbalance increasing energy demand in the future. Some of the

objectives 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, for

foreign Energy Trading Companies this is good news, as Brazil takes a positive stance to renewable

energies in the future. In addition, the Ministry of Mines and Energy has estimated that between 2008 and

2017, public and private investment of around R$ 352 billion will be put into the expansion of the

country`s national energy output30

. Most of public funds will come from the Growth Acceleration

Program (PAC), of which R$ 83 billion is planned for hydro-electric projects, and R$ 23 billion for the

production of bio fuels.

Alternative Energy Source Incentive Program (PROINFA)

PROINFA was created in 2002 by the Ministry of Mines and Energy, with the objective to

develop alternative and renewable energy sources for electrical energy production. The program, as

mentioned earlier, was recently extended until the end of 2011. Initially, the program`s aim was to deploy

3,300 MW of installed capacity through the use of wind-, hydro-electric-, and biomass energy. In total, the

program foresees the deployment of 144 plants, totaling 3,299.4 MW of installed capacity, 1,191.24 MW

coming from small hydropower plants, 1,422.92 MW from 54 wind farms, and 685.24 MW from power

plants fueled with biomass30

.

Although the program is to end at the beginning of 2012, PROINFA has paved the way for renewable

energies. According to the Ministry of Mines and Energy, the energy has a guaranteed market for the next

20 years.

Energy Auctions

Energy auctions are the threshold for foreign Energy Trading Companies into the Brazilian

Energy Market. In January 2003, one year after the energy crisis, the government decided that they needed

to bolster the country against possible energy shocks in the future. The solution at hand was to quickly

diversify the country`s energy matrix to a) render it less vulnerable to energy shocks, and b) make it more

effective with the help of different types of renewable energies, not just hydropower. In the end, the

government opted for an energy model that was both driven by rigorous competition and attractive for

long term private investment. One important element of the new energy model was the establishment of

energy auctions. The idea behind energy auctions was to first make the market more competitive so that

the 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, bringing

along expertise, know-how, and technology, which would make Brazil an attractive and developed energy

market in the long run. According to this system, energy auctions are held 3-5 years in advance of delivery

30 “The Energy Matrix.” Brasil.gov.br. Brasil, n.d. Web. November 30, 2011 < http://www.brasil.gov.br/cop-english/overview/what-brazil-is-doing/the-energy-matrix/print>

26

dates, and plants are only built if designated companies have won the bids in energy auctions and are

guaranteed long term contracts31

.

In September 2010, the government held a wind, hydro-electric, and biomass auction that is

expected to prompt US$ 5.52 billion in investments in renewable energies in Brazil32

. All investments are

expected 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. On

December 20, 2011, the government will hold its next energy auction (A-5), with 20 years energy supply

contracts on the table33

.

It is an essential requisite for foreign Energy Trading Companies to join the energy auctions, as

they are the easiest way to gain a foothold in the Brazilian Energy Market. Companies like General

Electric and Siemens have already made the jump, and are now contributing technologies and services to a

thriving market. However, companies who are willing to enter the Brazilian Energy Market should not shy

away from fierce price competition. Energy auctions, which on the one hand offer companies an easy and

uncomplicated 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 keep

up with.

Tariffs

Concerning the current price per mWh, to which Energy Companies have to sell their electricity to

the end-consumer, the most recent energy auction on August 18, 2011, rendered the following

information:

Type of Energy Price per megawatt hour (in R$)

Wind Energy 99.85

Hydropower 102

Biomass 58.84

Note: The price per mWh for biomass is from 2008.

The fierceness of the price competition can best be pictured by comparing the price for wind

energy of this year’s energy auction to the average price of wind power of last year’s energy auction. The

average price for wind energy in 2010 accounted for R$ 130.8634

, which compared to this year, is a price

reduction of 31.4% (!). Those drastic price reductions are made possible by the competition of large

Energy Trading Companies, who have the capital strength to be able to afford low per mWh prices. Small

and 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 Free Encyclopedia, 23 Nov. 2011. Web. 1 Dec. 2011. 32 Pasolini, Antonio. “Brazil to Invest $5.5 Billion in Renewable Energy Sources by 2013.” CleanTechies. EnergyRefuge.com. September 14, 2010. Web. November 30, 2011. < http://blog.cleantechies.com/2010/09/14/brazil-invest-renewable-energy-sources/> 33 “Date Set for next Brazilian Wind Energy Auction.” BWEC. Cleantechinvestor.com. Web. August 29, 2011. < http://www.cleantechinvestor.com/events/en/bwec-blog/300-date-set-for-next-brazilian-wind-energy-auction-.html> 34 “Average Wind Price below R$100 in Brazilian Energy Auction.” BWEC. Cleantechinvestor.com. Web. August 18, 2011<http://www.cleantechinvestor.com/events/en/bwec-blog/291-average-wind-prices-below-r100-in-brazilian-energy-auction.html>

27

2.3.3 Legislative Framework

The legislative framework for (renewable) energies determines the rules, norms, and standards to

which (foreign) companies have to adhere to in order to legally participate in the market. For many

companies, the legislative framework is the last hurdle into the market, and therefore needs to be

examined carefully.

The legislative framework for foreign Energy Trading Companies is important in two ways: First

of all, it is important to know for the company what requirements and conditions have to be considered

when establishing a subsidiary or a business in Brazil (corporate law). Secondly, what impact does local

environmental law have on the business? It goes without saying that the latter two areas of law do not

cover the entire legal perspective of a company, but they are the most important ones. Furthermore, in

section 2.2.1 under “political factors”, employment law and corporate law have already been briefly

touched and therefore taken care of. The following section will completely be dedicated to environmental

law in Brazil:

Environmental Law

Renewable energies have a significant advantage over conventional energies (fossil fuels). Due to

the fact that clean energies do not emit greenhouse gases, emission legislation does not directly apply for

them. 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 agriculture

presently covers one-third of the land area, and has expanded substantially due to the demand for food

products and biofuel feedstock35

. Although agricultural activities are most of the time limited to already

existing crop lands and pastures, some crops (e.g. soybean) have recently expanded and are jeopardizing

the natural grassland ecosystem or forestal areas. In order to prevent the loss of biodiversity, ecosystem

diversion, and resource degradation, the government has established a legal environmental framework

for agriculture, which has two mayor aspects: Forest law and Preservation Areas. Forest law divides rural

private land into productive land and land dedicated to preservation, which is further divided into Areas of

Permanent Preservation (APP)35

. In those areas it is not allowed to use any type of production. APP are

mostly located in the North / North-East of Brazil (see appendix15).The forest law covers all natural

vegetation, including the rainforest, savannas, wetlands, thorny woods, and the Atlantic forest. Biomass

producer who are looking for possible energy sources in those areas, and also Hydro-electric Companies

who 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 the

principal 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) the

Environmental Crime Law of 1998, which regulates criminal and administrative penalties for activities

35 Sparovek, Gerd. “Brazilian Agriculture and Environmental Legislation: Status and Future Challenges.” Environmental Science&Technology. ACS Publications. July 16, 2010. Web. December 1, 2011. <http://pubs.acs.org/doi/full/10.1021/es1007824>

28

harmful to the environment36

. The latter law imposes sanctions on forestry violations, and sets fines

ranging from R$ 50 to R$ 50 million. Furthermore, foresters who seek to use the forest for biomass

production or hydro projects need to acquire a logging permit in order to clear trees. It is important to

mention, 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 of

power plants (hydro and wind), must acquire the permit for “clear cutting36

”.

Even after decades of deforestation in Brazil, the legal framework for reforestation still encounters

loopholes 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 in

reforestation projects such as Planeterra.

Concluding it can be said, that Brazilian environmental law generally refers to Forestry and

Agricultural 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 the

Atlantic rainforest, jeopardize the natural flora y fauna and therefore the world´s largest source of forestal

oxygen. The Brazilian government has made a substantial effort to confine and regulate the deforestation

of the rainforest. Forestry laws and crime laws prohibit and fine infringers for activities harmful to the

environment. Nonetheless, the reforestation legislation still is subject to loopholes and fails to establish a

clear legislative framework for reforestation. Nonetheless, public as well as political protest have forged a

new sense of environmental responsibility in the mind of companies. Foreign Energy Trading Companies

are 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 the

market study about renewable energies in Brazil. The client should have obtained a general understanding

about the country`s macro-economic factors, the ease of doing business, and the markets of renewable

energies as well as the government´s energy policy and legislative framework to which the market is

subject to. In the following section, the market study will be rounded-up and evaluated with the help of the

OT-analysis. Later, in the recommendation, a possible entry mode and investment opportunities (as

derived from the OT-analysis) will be discussed.

36 Hirakuri, Sofia. “Can Law safe the Forest?” Desa Putera, Indonesia: CIFOR, 2003. Center for International Forestry Research

29

3. Conclusion

As it has been mentioned under section (2.1), the conclusion will give answer to the main question by

answering 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 Trading

Companies 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 Energy

Trading Companies. The rapid expansion of Brazil`s middle class with growing disposable income

increases the demand for essential goods like running water and also electricity. In terms of economic

factors, 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 expanding

middle class, it has a positive effect on the client`s target group. Concerning social factors, rapid economic

growth and social inequalities forge a wide income gap, which, though decreasing at a constant rate, forms

a perfect breeding ground for (international companies), because it gives them the opportunities to reduce

unemployment and thus contribute to the country`s prosperity. What foreign Energy Trading Companies

should also take into account is that although the majority of Brazil`s population is in favor of renewable

energies, 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 foster

marketing and information efforts (e.g. developed online infrastructure). The ecological variable of Brazil

is probably the most important one for Energy Trading Companies. In general, the Brazilian government

is highly concerned with environmental responsibility on behalf of private companies. In its National Plan

on Climate Change, the main objective is to “maintain a high proportion of renewable energies in the

national electric power network.” At last, political factors analyze corporate law, employment law, and

government funds. In terms of corporate law, foreign Energy Trading Firms have the opportunity to form

i) Limited Liability Company (Ltda.), ii) Corporation (S.A), and iii) Joint Venture (JV). Employment law

is quite favorable for companies, as the enforcement of labor contacts is not mandatorily limited to a fixed

time period, and can be terminated without cause at any time. However, companies should be keen to not

take advantage of the paragraph as strong, social bonds among workers could be disrupted and lead to

strikes or employee turnover.

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 doing

business in Brazil a difficult undertaking. Procedures to set up a business are time-consuming and

complex, however less costly. In fact, the bad ranking of Brazil concerning the ease of doing business

(according to www.doingbusiness.org), favors the formation of a partnership, because already established

local 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 have

the biggest share of installed capacity, were examined: Hydropower, wind energy, and biomass. All of

them are profitable energies in the long run, because the government includes all three energies in the

National 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 monthly

rainfalls. 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 Brazil

and agricultural and forestal reserves in the inland. According to ANEEL, wind and biomass are both

potential 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 most

profitable 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 National

Energy Plan can be considered the all-embracing blueprint for Brazil`s energy policy in the upcoming two

decades. EPE foresees a drastic increase in energy demand until 2030, and therefore urges the expansion

and construction of renewable energies. The Ministry of Mines and Energy estimates that between 2008

and 2017 public and private investment of around R$ 352 billion will be pumped into the realization of the

plan. In terms of short term programs, the government frequently holds Energy Auctions in order to sell

energy projects to foreign Energy Trading Companies. For them, the energy auctions portray a perfect

threshold 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.

31

However, companies should bolster themselves against fierce price competition, in which actually only

the strongest (in terms of capital strength) can succeed.

Sub-Question 5: How does the legislative framework for renewable energies affect the client?

The legislative framework for (renewable) energies in Brazil should not be a hurdle for foreign

Energy Trading Companies. Due to the fact that clean energies do not emit greenhouse gases, emission

legislation does not directly apply for them. Nonetheless, renewable energies have to abide to a certain

legal environmental framework. In order to prevent the loss of biodiversity, ecosystem diversion, and

resource degradation, the government has established a legal environmental framework for agriculture,

which has two mayor aspects: Forest law and Preservation Areas. Forest law divides rural private land into

productive land and land dedicated to preservation, which is further divided into Areas of Permanent

Preservation (APP). In those areas it is prohibited to carry out any production activities. Three mayor laws

govern forestry in Brazil: i) the Forestry Code, Law N* 4.771, which is the principal legal documents 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) the Environmental Crime Law of 1998,

which regulates criminal and administrative penalties for activities harmful to the environment. The latter

law imposes sanctions on forestry violations, and sets fines ranging from R$ 50 to R$ 50 million.

Furthermore, foresters who seek to use the forest for biomass production or hydro projects need to acquire

a logging permit in order to clear trees. Furthermore, Companies have to replant the trees they chopped

down, however the legislation covering reforestation has many loopholes and is not effective. Private

incentives like Planeterra, government funds, and increasing environmental responsibility on behalf of the

companies take care of Brazil`s reforestation.

Main-Question: What are the benefits / threats of expanding my business into the Brazilian Renewable

energy market?

By answering the main-question, the purpose of this business case is considered to be fulfilled. In

essence, if the benefits outweigh the threats, then the client should earnestly think about a possible

expansion of his business into the Brazilian Energy Market. The OT-analysis will summarize and

conclude the business case by answering the main-question:

OT- Analysis

Opportunities Threats

Increasing middle class

Economic growth

Good infrastructure

Favorable attitude towards RE

Favorable employment law

Government support (Energy Policy)

Long term benefits for Hydro-, wind-, and biomass energy

Energy auctions

Legislative Framework

Doing Business

Internal Price Competition

32

The OT-analysis concludes that the Brazilian Energy Market is a profitable investment

opportunity for foreign Energy Trading Companies both in the short and long term. The client

should, however, combine the OT-Analysis of this business case with his internal SWOT Analysis to

complete the final decision of expanding his business into the Brazilian Energy Market.

33

4. Recommendations

At the end of this business case, the client will be given a recommendation concerning a possible

entry strategy and investment opportunities. The recommendations are based on the findings of the market

study, and are the subjective opinion of the author.

Entry Strategy

Considering the analysis of the ease of doing business in Brazil, it should have come to the

attention of the client that starting an own business, or establishing a subsidiary in Brazil, is a complicated

and time-consuming endeavor. Global player might have fewer problems with expanding into Brazil, but

for local player, who lack capital strength and experience, starting out in Brazil might constitute many

problems. Therefore it is recommendable for them to form a partnership with a domestic company to

facilitate the market entry, the more so as the entry via energy auctions also is disadvantageous for small

Energy Trading Companies. The following table explains the pros and cons of forming a partnership:

The disadvantages of forming a partnership are apparent. However, good management skills and

help of an ethical consultancy firm may facilitate the integration process. Moreover, brain drain can be

prevented by keeping the R&D department in the home country.

Investment Opportunities

Investment opportunities in Brazil, as mentioned in the conclusion, are wind and biomass energy.

Increasing government support and favorable market conditions (wind speed and availability of

agricultural and forestal land) make those two energies a profitable business. The client would be keen to

further investigate and emphasize the opportunity to invest in those 2 types of renewable energies in

Brazil. Furthermore, for the long term perspective, second- and third generation technologies, especially

solar power, are formidable investment opportunities, as Brazil is a fast developing economy and may

soon acquire the status and technological know-how of developed country. Because one is for sure: Brazil

has sun in abundance!

Forming a Partnership

Pros Cons

Facilitated market entry

Compensates lack of market experience

Portfolio Extension

Shared Capital = Higher market strength

Circumvents entry barriers

R&D costs can be shared

Double management

Mixing cultures

“brain drain”

34

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36

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“Date Set for next Brazilian Wind Energy Auction.” BWEC. Cleantechinvestor.com. Web. August 29, 2011. <

http://www.cleantechinvestor.com/events/en/bwec-blog/300-date-set-for-next-brazilian-wind-energy-auction-.html>

“Average Wind Price below R$100 in Brazilian Energy Auction.” BWEC. Cleantechinvestor.com. Web. August 18,

2011<http://www.cleantechinvestor.com/events/en/bwec-blog/291-average-wind-prices-below-r100-in-brazilian-

energy-auction.html>

Sparovek, Gerd. “Brazilian Agriculture and Environmental Legislation: Status and Future Challenges.”

Environmental Science&Technology. ACS Publications. July 16, 2010. Web. December 1, 2011.

<http://pubs.acs.org/doi/full/10.1021/es1007824>

Hirakuri, Sofia. “Can Law safe the Forest?” Desa Putera, Indonesia: CIFOR, 2003. Center for International Forestry

Research

37

6. Appendices

DESTEP

Appendix 1

http://www.indexmundi.com/g/g.aspx?c=br&v=66

Appendix 2

http://www.indexmundi.com/g/g.aspx?c=br&v=81

38

Appendix 3

Depicting the tightening gap between the poor and the rich as of 2005 (stemming from an expanding

middle class and increasing economic prosperity)

http://www.indexmundi.com/g/g.aspx?v=69&c=br&l=en

Appendix 4

Depicting the sharp incline in FDI from a little bit more than $USD 10 billion in 2003 to almost $USD

48.5 billion in 2010 (notice the drawback in 2009 as a result of the 2008 financial crisis).

http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD/countries/BR?display=graph

39

Renewable Energy Market

Appendix 5

Graph depicting Brazil`s energy mix in December 2009. The majority of the Energy Imports are of hydro-

electric nature. Notice that conventional energies are kept to a minimum. Notice that the graph depicts the

total energy USED in Brazil (as opposed to total energy PRODUCED – Brazil still is a big oil producer!)

http://globalvoicesonline.org/wp-content/uploads/2010/09/Oferta-de-energia.jpg

Appendix 6

The Amazon River is the biggest supplier of hydro-electric power in Brazil.

http://www.w-e-x.com/downloads/WEX_2011_Hydropower_Erton

40

Appendix 7

Graphic showing the construction area of the Belo Monte Dam. Notice the flooded area (red) and the

drowned area (light blue)

http://news.bbc.co.uk/2/hi/8631711.stm

Appendix 8

Graph showing the rapid expansion of wind energy in the Brazilian Energy Market

www.thewindpower.net

41

Appendix 9

Map showing the emergence of strong winds in Brazil. Notice that the best areas for wind parks are

located in the North / North-East where the wind speed exceeds 8.5 meters/second.

http://econews.com.au/news-to-sustain-our-world/brazil-reaches-major-wind-energy-milestone/

Appendix 10

Graph depicting the converse alignment of wind speed (left) and water flux (right). Data extracted from

the North-eastern state Ceará and the river Sao Francisco

http://www.stefankrauter.com/info/DERJ_Krauter_Kissel_s.pdf

42

Appendix 11

Graph depicting cost (in $cents) for each kWh produced.

http://nuclearfissionary.com/2010/04/02/comparing-energy-costs-of-nuclear-coal-gas-wind-and-solar/

Appendix 12

Total residual waste accounts for 761,386,508 tons (2010).

43

Appendix 13

Graphic showing the energy outlook for biomass until 2020/2021. Notice that by 2021 the total energy

produced from biomass could be equivalent to 3 Belo Monte power stations.

http://english.unica.com.br/opiniao/show.asp?msgCode=FACE0631-8C71-4E82-A52B-33FBC04E125E

Appendix 14

Graph depicting monthly sugar cane grinding (in tons) versus monthly power generation (in MW) from

hydropower.

http://english.unica.com.br/opiniao/show.asp?msgCode=FACE0631-8C71-4E82-A52B-33FBC04E125E

44

Appendix 15

Graph depicting APP in Brazil. The area outside the red line (legal amazone), is used for agriculture.

http://pubs.acs.org/doi/full/10.1021/es1007824

45

7. Further Reading

The Author suggests the following document for further reading:

“Review of Solutions to Global Warming, Air Pollution, and Energy Security.” by Mark Z. Jacobson,

2008. www.stanford.edu/group/efmh/jacobson/EnergyEnvRev1008.pdf

“Wind Power Conversion in Brazil.” by Stefan Kräuter, 2005

“The Future for Bioenergy and Biomass Brazil.” Celso M. de Oliveira, 2010.

http://www.slideshare.net/cmoconsultoria/the-future-biomass-and-bioenergy-brazil

“Can Law safe the Forest?” by Sofia R. Hirakuri, 2003.

http://www.cifor.org/publications/pdf_files/Books/Law.pdf

© Copyright 2011 Maximilian Franke. All rights reserved.

This report is property of the author and may only be distributed / duplicated with his consent.