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Brazil goes green

Despite having vast oil reserves and only slowly emerging from recession, the country is focusing on growth in its energy sector and renewables are key to its strategy

Slowly emerging from the worst recession in its history, Brazil is now trying to lure investors back to its energy sector but not for hydrocarbon exploration. Instead, the country is focusing on the launch of greener energy projects.

Last year Brazil added 9 gigawatts of renewable energy capacity, according to the International Energy Agencya 43% rise from 2015's level.

This is an impressive feat considering Brazil's economic woes has led to the cancellation of renewable project auctions and power purchase agreements (PPAs) in the past year, putting the financing for such projects into doubt. The government awarded only 0.6 GW of new capacity from hydropower and bioenergy projects in 2016, low when compared to the 5-7 GW awarded annually 2013-15.

Growth in the sector over the past decade has been driven by a combination of auctions with long-term PPAs, and low-cost financing from the Brazilian Development Bank (BNDES). But more recently capacity growth has slumped-along with demand increasesdue to the country's economic crisis.

Trade body Apex Brasil is aims to kickstart financing again from bonds, private equity and NGOs. The organisation's president has made recent visits to London and Singapore in a bid to drum up support.

Apex Brasil President Roberto Jaguaribe told Petroleum Economist in London that Brazil has thousands of renewable energy projects which need infrastructure investment. Nevertheless, he is confident he will find the money needed.

"It (investment) is growing every year, from a few million at the start to billions of dollars. No one wants to lose money, not even for the best cause in the world," Jaguaribe said."But being green is fashionable, it's very marketable."

The IEA estimates that Brazil will add 21GW of renewable energy capacity over the next five years. This increase has been revised down by over a third because of funding constraints during the economic crisis.

The country is blessed with abundant natural resources from which to harness renewable energy, including a coastline of nearly 5,000km and more than 300 days of sunshine every year in some states.

But Brazil's deputy energy minister, Paulo Pedrosa, said in July that the government would not be issuing new licences for solar or wind power generation projects-the last one was given in 2015.

"There is no significant support from government, but we get close to 90% of our electricity from renewables in Brazil," Jaguaribe says. Most of this comes from hydropower which comprised 66% of the total in 2016, with fossil fuels and other renewables such as biofuels making up smaller shares.

Jaguaribe believes there are attractive opportunities for investors, even without the sweetener of government subsidies.

"The only question is why we didn't start earlier. But we can still go ahead and become a big player," he said.

Talks have already begun with the Climate Bonds Initiative (CBI)a not-for-profit organisation aiming to increase liquidity in the green and climate bonds market to lower the cost of low-carbon energy projectsand the Green Finance Initiativea UK government investment fund. Jaguaribe said Apex will also lobby Brazil's government to do more to encourage investment in green energies.

He identified wind power as a key area for growth, but there are obstacles. Another 6.5GW of capacity is expected to come online in Brazil in the next five years, the IEA says, though there are some grid connection challenges from remote locations. The relative weakness of the Brazilian real compared to the US dollar also makes turbines and other equipment expensive to import. However, hydropower's growth is expected to soar. The IEA forecasts Brazil will be the second-fastest growing market for hydropower between 2017-22. Only in China will capacity increases be added quicker.

Hydropower already makes up the majority of electricity generation in Brazil with its share forecast to increase from 66% in 2016 to over 68% in 2022, according to the IEA. These forecasts are based on the assumption that two large projects, Belo Monte and Baixo Iguacu, will be fully commissioned and online in that timeframe.

Biofuels boost

When it comes to biofuels, Jaguaribe is keen to stress that Brazilthe world's largest sugarcane producerhas been selling ethanol as a transport fuel since the 1980s and has made flexible fuel vehiclesvehicles which can run on more than one fuel, for example, both gasoline and ethanolsince 2003.

"Even when you fill your car with gasoline, it is still 25% ethanol and there is the option of 100% ethanol," he said.

Brazil aims to increase the share of sustainable biofuels in its energy mix from about 9% last year to 18% by 2030.

Jaguaribe admitted this use of environmentally-friendly biofuels in transport has made the push towards electric vehicles less urgent than it has been in other nations.

One thing which might deter investors from Brazil's low-carbon sector is the perceived risk premium of doing business there, exacerbated by the Lava Jato (Carwash) corruption scandal which implicated the country's state-run oil firm, permeated to the heart of its government and spooked investors. But Jaguaribe stressed that international oil majors such as Shell, which have been involved in Brazil's upstream for more than 100 years, remain operating there.

"450 of the top Fortune 500 companies are in Brazil," he said. "I'm not going to say it is easy to do business in Brazil because that would be a lie, but those who are there stay because they know the benefits."

Recent changes to the rules for oil and gas exploration, including a reduction of domestic content requirements, are examples of how Brazil is becoming more open to outsiders. And it seems to be working.

ExxonMobil bid on eight blocks in the country's latest licensing round this month putting down a total of $0.6bn in signature bonuses, a sign of faith in Brazil and its recent reform measures.

"We are back. It's a good signal," Jaguaribe said.

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