Brazil plans first power auction focused on gas
Brazil plans to hold its first auction geared specifically toward gas-fired thermoelectric plants, with the goal of increasing the reliability of electricity supplies as the grid grows increasingly reliant on intermittent sources.
The government had originally planned to limit the auction to the northeastern grid system, which has suffered from a multi-year drought, but is now planning to expand the program to the other grid systems.
The mines and energy ministry will be receiving suggestions from the public over the next two weeks as part of the program.
Under the current proposal, the government would hold regional auctions for new natural gas thermoelectric capacity in the first half of next year. For the southeast/centerwest grid, generators would have 15-year power purchase agreements (PPAs) starting in January 2023 and starting in January 2024 for the southern and northeastern grids.
Because of limited domestic supplies, the plants would initially need to rely on imported LNG, but the government plans to create mechanisms to substitute LNG with domestic gas as local production increases.
This model would be a departure from the current energy auction system, which has been in place for 13 years. Under the current model, distributors sign long-term PPAs based on the lowest cost, which has meant that wind and solar have played an increasingly dominant role in the generation buildout. Moreover, all of Brazil's recent big hydro projects have been run-of-river.
Although these renewable generation projects are extremely competitive, they are making Brazil's power supply more intermittent in nature.
While three LNG-to-power projects have also won contracts in recent auctions, it has not been sufficient to meet the growing need for more stable generation capacity to underpin baseload power.
At the end of August, Brazil's total installed power generation capacity reached 160.7GW. Of that total, wind farms have a total of 13.2GW, up 19.4pc from August 2017. With the increase in capacity, wind is now the third largest in terms of installed capacity, equivalent to 8.1pc, compared to 13GW for natural gas-fired thermoelectric plants.
Hydro power remains the largest in terms of installed capacity, with 102.3GW, or 63.6pc of installed capacity, followed by biomass with 14.7GW, or 9.1pc of capacity.
In recent years, Brazil has been forced to boost thermoelectric generation during the dry season, which typically runs between May and October, in order to guarantee power supplies. While much of the intermittent demand is met by imported LNG, the country has recently been forced to rely on high-cost diesel and fuel-oil powered plants.
The government-controlled energy research company (Epe) estimates that the changing profile of power generation in Brazil will require roughly 13GW of baseload capacity in five years.
Epe highlighted that the need for baseload capacity is even more critical in the northeast. After a decade of adverse weather, the government has concluded that hydroelectric generation along the Sao Francisco river basin will be of secondary importance because of the need to guarantee water supplies for other uses.
This was confirmed in the most recent report by the Intergovernmental Panel on Climate Change, which concluded that precipitation in the northeast will continue to be below historical levels, which will further deplete water levels of the Sao Francisco river.
The region currently has 2.6GW of high cost thermoelectric plants, which Epe believes could be replaced by low-cost plants, such as the 1,551MW Porto de Sergipe, the first independent LNG-to-power plant which will be built in the region.
In addition to lowering costs through more LNG-based plants, the government also cited the reduction of GHG emissions.
Although the plan aims to reduce costs for consumers, the government has proposed that the costs of operating these new plants would be shared by consumers on the regulated and non-regulated markets, which has created some opposition.
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