Loss of competitiveness in energy segment

Energy is a key-factor for competitiveness of base industry in any country of the world. Historically, Brazil was one of the most competitive countries on such area, with a great potential of hydroelectric generation and the costs are compatible or low-priced than worldwide average. However, we can watch, in the last few years, a growth of tax and duties which have generated the loss of competitive advantages of the country. We can say, currently, that Brazil no more offers such competitiveness condition to its industries, and this fact can inhibit the arrival of new investments in the future, redirecting job generation to other countries. In addition, such situation can result in an unwelcome dependency of the import of industrial consumption materials, always subjected to political and exchange risks.

 

There is no country that can join all the ideal competitive attributes in its borders. Each one of them must intensify and take advantage of its potential the best way ever. This will make possible to the companies to have good conditions for compete in the global market.

Brazil had one of its main competitiveness factors in energy, by the generation of electrical energy. With a model based on compulsory loans for financing of the great infrastructure works (from 1964 to 1973 applied to all the consumers of the system, and from 1973 to 1993, to industrial consumers only), Eletrobras has undertaken its building program of great industrial hydroelectric plants, which resulted a context of significant energy offer with very competitive prices.

We can consider that such context held out up to the 90's, when many new taxes begun to increase industrial tax to levels that we know by now. Currently, the difference between theoretical tax of energy and the real cost is of 100%, due to burdens and duties, some of them even collected on investment before the industrial plant get into commercial operation.

Additional burdens are composed by: Global Reservation of Reversion (RGR), Fuel Consumption Account (CCC), Energetic Development Account (CDE), Alternative Source Incentive Program (PROINFA), Financing Compensation for Hydric Resources Utilization (CFURH), rate paid for National Operator of the System (ONS), in addition to a series of burdens which result in a domino effect all over the productive process and constitute a myriad of taxes that are almost unintelligible to entrepreneur – a real outrage to economical logic.

This increase of burdens and taxes was the main responsible by the costs with energy in Brazil : in 2001, medium tax for Mwh was of R$ 82; in 2006, it became R$ 206 for Mwh or about US$ 100 – an accumulated increase of 150%. In the mean while, the IGP-M in addition to the IPCA had been accumulated near 50%.

This value makes Brazilian energy one of the most expensive in the world, overcoming India, China, USA, Russia and even France, of which generation model is based on nuclear energy and which has fixed contract's price for great industrial consumers in US$ 45 up to 2015, against US$ 100 in Brazil, according to what was previously mentioned. How to be competitive by having a cost up to 60% higher than its competitor? In order to sustain a competitive position, the Country needs to have as a goal that industrial tax does not exceed US$ 40.

Tax reform is an extremely important, polemic and discussed point, with no agreement for that matter. In Brazil duties on investments are paid, around 40%, even before the effective beginning of operation. It is a big mistake. The tax must be applied on consumption, as it has already been done, for example, in the European Union, which has a duties system on aggregate value (IVA). Such system is no-cumulative, that is, it allows the credit of the totality of the value paid on previously stages of the productive chain and it collects the tax based on the value added on each stage of the process. Moreover, the duty is discriminate in the invoice, which let the consumer know exactly the quantity of tax that is inserted in the price of the acquired asset or service.

National system is hermetic and complex, with duties that are hidden among extremely complicated rules. Tributary chain, previously mentioned, is result of the Executive Branch tendency of creating new rates for covering current expenses that are bigger and bigger, in addition to finance the building of the necessary infrastructure, instead of structure economic activities as model of business and proportionate a sustainable development.

Such tendency is responsible for the increase of the cost of energy in 150% in the last seven years and it can be examined on two projects that are currently in operation in the Executive and in the Legislative. The first of them is the proposal of utilization of the Global Reservation of Reversion, the RGR, for the financing of the building of the nuclear plant Angra 3. The idea is to extend the collection of the RGR to over 2010, year in which it would be extinguished, according to the law in vigour. In that case, Brazil will miss a great opportunity of starting to recover a part of the competitiveness lost in the segment.

The second example is the Law Project nº. 6.673, of 2006, better known as Gas Law. The proposal defends the utilization of the Energetic Development Account, the CDE, in order to build gas pipelines which are considered as being a public interest, which, according to the project, must be decided by the Ministry of Mines and Energy. Over again, it is intended to transfer resources of an already existent burden for financing infrastructure works, instead of decide for the exoneration of the energetic segment and for the creation of a business model. A self-sustainable model and that could attract private investments, which could enable the creation of a virtuous cycle of burdens reduction and investments increase.

Another worrisome point is the need of establishing fair price levels for already existent energy, also called “old energy”, which, as previously mentioned, was financed by means of compulsory loans paid by all the society. Brazilian government has privatized the greater part of energy distribution in the 90's, but about 70% of generation remains under state control.

The contracts of these state-owned entities for furnishing energy to private enterprise started to overdo from 2012, and they are thinking about including such energy in the auctions of the Chamber of Commercialization of Electric Energy (CCEE), which will certainly increase its cost to the new energy levels, essentially thermal, which is 50% more expensive than hydroelectric one and which investment is still getting amortized. The step, if adopted, will burden the population once again instead of stimulate the growth of the industry and job.

In view of such adverse situation, Brazilian Association of Great Industrial Consumers of Energy and Free Consumers (Abrace) introduced the Competitive Energy Project (PEC), in order to improve competitiveness of electro-intensive Brazilian industries. The PEC is based on three fundamental pillars. The first of them is the exoneration of investments. The second is the reduction of the segment burdens – among proposals are the suppression of taxes which are incident on building, assembly and equipments purchase, the immediate discontinuance of the RGR, the graduate elimination of the CCC and the restriction of the CDE to its original purpose (universality, low income subside and ready authorized coal).

The third PEC pillar is the option for the hydroelectricity.

Undoubtedly, Brazil has to valorize its hydroelectric potential. However, in the last few years, the environmental question, beyond doubt extremely important, has been an obstacle to the installation of new plants in the country, although hydroelectricity is considered all over the world as a renewable energy source. While the legal term to the emission of a Previous License (LP) for the building of a new undertaking is of 365 days, in the last decade it has been around 1,200 days. In the last four years, only ten environmental licenses were granted of a total of 27 undertakings that was waiting (or are still waiting) for environmental agencies release. Besides, socio-environmental costs overcome the initial budgets.

Such situation of unexpectedness discourages new hydroelectric undertakings. And we cannot say that this is due to the worry about the environment: in the last few years, the auctions for new energy generation has been centralized in thermoelectric plants, which are expensive and also cause an environmental impact much too serious. For 2008, for example, only 11% of the projects report to the hydroelectricity and the rest (89%) consist of entirely thermoelectric projects.

Obviously, we shall not pass over the thermal energy, but keep it in a security level, between 15% and 20% of the total of installed capacity, for utilization, for example, in periods of scantiness of hydric resources and in short term projects in which the high operational cost of thermal energy is not so impressive.

However, it is temerarious to base Brazilian energetic model in a bigger and bigger participation of a kind of expensive and polluted energy, when the greatest potential lives clearly in the hydroelectric model. That is, actually, Brazil 's vocation. And as long as the country doesn't find it again, we shall wait for increasing difficulties in an external situation more and more hostile to those who forget that, in a globalized world, it is fundamental to keep its own competitiveness.

 

*Jorge Gerdau Johannpeter , 70 years old, is president of the management council of the Gerdau Group, founder president of the Competitive Brazil Movement (MBC) and coordinator of the Entrepreneurial Action

 

(Article originally published in Getulio Vargas Foundation's magazine Conjuntura da Construcao in 2007 September)