Energy, Climate Change & Extractive Industries

The Inter-American Dialogue’s Energy, Climate Change & Extractive Industries Program seeks to improve understanding and communication on energy and climate policy issues in Latin America through research, public events, and roundtable discussions. By producing balanced analysis and convening policymakers, corporate leaders, and industry experts, we inform and shape policies that promote energy security and climate change mitigation while encouraging economically, socially, and environmentally responsible development of natural resources.

 

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An interview with Andrés Mogro, regional manager of the Climate Action Programme in Fundación AVINA.

The 27th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP27) will be held in Sharm El-Sheikh, Egypt from November 6-18, 2022. The world’s premier climate negotiations will bring together over 30,000 participants, including heads of state, ministers, mayors, negotiators, journalists, civil society, and private sector representatives. While the official purpose of the event is to review progress made since COP26 in Glasgow and outline updated country-level climate commitments, certain themes with relevance for the global south such as climate finance and loss and damage have emerged as defining topics of the conference. 

Countries in Latin America and the Caribbean (LAC) face similar adaptation financing challenges, which appears to be increasingly propelling the region to collaborate around COP. Historically, LAC negotiated at climate talks via different groups. This year, calls for climate finance and adaptation assistance, as well as an incoming wave of leftist presidents in leading economies in South America, have brought LAC together at COP27, with some even calling for a joint bloc for negotiation purposes. The Community of Latin American and Caribbean States (CELAC), a bloc including all Latin American and Caribbean countries, issued a joint declaration at COP27 calling for increased financial support from developed countries, sovereign bonds, debt swaps, and most importantly, regional climate coordination.

To learn more about LAC's increasing regionalization, subnational action, climate finance, and other salient issues at COP27, the Energy, Climate Change, & Extractive Industries Program at the Inter-American Dialogue spoke to Andrés Mogro, Regional Manager of the Climate Action Programme in Fundación AVINA.

COMMENTS FROM ANDRÉS MORGRO

Question (Q): Traditionally, LAC does not act as a region at COPs. Is there an opportunity for regional interests to align at this year's COP? If not, how can national governments exchange knowledge regarding best practices for adaptation and resilience?

Answer (A): It is true that LAC does not act as a region at COPs, but that is also true of every other region in the world aside from Africa. It remains unclear whether incoming left-leaning governments will bring new perspectives regarding regionalism. Regardless, Latin American countries face very similar climate impacts, so regional projects are an opportunity to collaboratively tackle these common challenges.

Despite Latin America’s fragmented positions at COPs, countries do collaborate with one another to share climate knowledge through networks like Euroclima+ and NDC Partnership. On a more regionalized level, Resilient Andes (Andes Resilientes), a project Fundación AVINA implements with Helvetas Swiss Intercooperation focusing on familial agriculture and adaptation in Ecuador, Bolivia, and Peru, brings together together representatives of diverse sectors—regardless of country relationships to COPs—to discuss how to improve resilience.  

Q: Over 80 percent of climate finance is aimed at mitigation and reaches only national levels. How can Latin American leaders make increasing adaptation finance a priority at COP27 discussions, and how can international finance become more accessible for smaller projects in remote communities?

A: Latin America has made it clear that it prioritizes adaptation over mitigation and that its needs are local in nature, but climate financing continues to be primarily channeled toward national mitigation. Nevertheless, the region as a whole does not advocate for increasing the ratio of adaptation to mitigation funding at a political level as much as it should.  

Financing of smaller, more local projects has been stymied byseveral barriers. At an international level, funding allocation depends on an organization’s project requirements. The Green Climate Fund (GCF) for instance, rarely finances a project that is smaller than $10 million, and for a local community, that amount is beyond their capacity to administer, implement, or monitor, as local needs tend to be smaller in scale. Thus, increasing financial access for local communities requires funding sources to adjust their administrative requirements to fit local capacities and their access to information. Overall, international funds like the GFC are inaccessible for local stakeholders and focus on large programs that can only be brought to the table by organizations the size of United Nations agencies.  

 A second barrier at the international level is that many projects require costly preliminary studies to provide proof of “climate rationality,” which becomes a disincentive for local communities. Climate rationality refers to scientific studies and data proving that a proposed action constitutes a measurable response to a problem caused by climate change. In practice, this is unnecessary because the Intergovernmental Panel on Climate Change (IPCC) already publishes detailed information on the impacts of climate change per region and the types of actions needed to combat them, but most funds demand a case-by-case argument, and it is their role to contest that argument. Given resource disparities for local communities, this often becomes a prohibitive requirement deterring proposals for projects addressing local needs.

Finally, access to finance for local communities also depends on the support of national governments, which tend to prioritize projects with a better opportunity of being approved by international funds or that will attract investment.  

Q: How has the international community's failure to deliver the promised $100 billion in climate finance affected Latin America? Will the developed world follow through on this promise? Does the $100 billion plan address the region’s needs?

A: Governments in the region need to bring to light not just the failure to deliver the $100 billion promised but also how the funding allocation fails to meet the region’s needs. The commitment says that these $100 billion will be mobilized for developing countries, taking their needs and priorities into account. However, most financing flows towards mitigation, and most of it is offered in the form of loans, not grants. This has forced developing countries to acquire debt to reduce emissions, even if their main need has been grants to finance adaptation. This primarily owes to the fact that mitigation projects can generate returns on investment (such as through electric cars or solar panels). In contrast, adaptation funding will almost never generate returns. Thus, much of the climate finance we are seeing is motivated by generation of revenue instead of consideration of developing countries’ most urgent needs.    

Not only have developed countries failed to fulfill the promise, but now they are shifting the responsibility of their commitments to the private sector. This can be seen, for example, in forcing developing countries to become “more attractive” to investment; otherwise, they are to “blame” for the fact that they have not received climate financing (in loans, because grants are rare). Developed countries have refused to agree on replenishment values for the Green Climate Fund or the Adaptation Fund, have refused to define what climate finance is, have insisted on reporting non-concessional loans (granted under less generous terms compared to concessional loans and clearly motivated by revenue), and have turned a blind eye to loss and damage finance needs by designating it as a humanitarian aid issue, not a climate finance issue.  

Q: How can different Latin American countries integrate Indigenous and local and community-based voices to identify climate priorities, design commitments, and delineate future updates of their Nationally Determined Contributions (NDCs) and National Adaptation Plans (NAPs)? How can these organizations’ capacities be strengthened while building governments’ institutional capacity to integrate their knowledge and feedback?

A: Feedback from local organizations is invaluable for governments, since local stakeholders know their unmet needs and the actions that will directly affect their territories or constituencies. Integration of Indigenous and local knowledge depends upon two factors. The first is the level of openness of governments to include local and community-based voices in climate planning. Oftentimes increased openness results from pressure from the media and organized social movements. The second factor is thus the level of coordination among these local stakeholders to exert that pressure.  

To that end, local actors should work to create a shared agenda and solidify links among themselves. Creating governance mechanisms for a local network and increasing spaces for dialogue can enable these organizations to speak with a single voice. This could include, for example, organizing assemblies to determine an agenda, priorities, or demands, and identifying spokespersons to articulate them, including at a technical level. 

After solidifying a shared agenda and building communal organization, these groups can advocate for their needs with the governmental body assigned to work with local or Indigenous voices. By creating fora to bring all these stakeholders to the table, they can build power to demand the government branch in charge of climate planning includes them in all stages of climate action.   

On a final note, government functions and capacities in Latin America are often supported by international agencies dealing with issues related to gender, Indigenous peoples or human rights. National governments and local stakeholders can seek support from these organizations to create spaces for conversation and bring technical expertise.  

Q: Digitalization and digital inclusion have gained relevance as enablers of resilience and adaptation. How can Latin America leverage this international forum to use information and communications technology to combat climate change?

A: Digitalization has aided in the fight against climate change by increasing access to essential information and facilitating interaction between local and international stakeholders. However, different categories of new technologies have different applications.

Most countries in Latin America have used tools related to digital inclusion and knowledge sharing to consult and involve local actors in climate policy development, implementation, and monitoring. The efficacy and impact of such technologies continue to improve. Given that COP discussions tend to be far from local realities, any effort to either bring those realities to those deliberations or bring results back to a local level can be much improved through today’s communication technologies. 

In contrast, intellectual property rights restrict access to various tools related to climate mitigation, which is an additional obstacle for widespread technology adoption in developing countries. Given that many of these patents come from countries with higher historical emissions, monopolizing essential climate mitigation technologies and withholding them from the global south is an issue of climate justice. According to the Organisation for Economic Co-operation and Development, 36.7 percent of patents related to technologies aimed at clean energy generation are held in European Union countries, 20.2 percent in the United States and 19.8 percent in Japan. This disincentivizes research & development in the global south and prevents scaling up much-needed climate technologies.  

Q: Going into this year's COP, justice is at the forefront of debates and negotiations. Within that context, what lessons can we learn from under-represented communities? How can we amplify their voices before, during, and after COPs?

A: The knowledge these groups share has much to teach us; so, a first lesson to be learned is that any conversation with local stakeholders and communities must begin from a point of mutual respect and acknowledgment of diverse practices, beliefs, governance schemes, and traditional and ancestral knowledge. It is important to be aware that modern economic and political practices have brought the world to the current state of climate crisis, whereas local communities have played a crucial role in preservation of biodiversity and sustainable practices.  

A second important lesson learned from these groups is that climate efforts can never have sustainability or scalability over time if they do not strengthen and empower the role of local stakeholders. Governments change; projects open and close. The processes and capacities needed to promote long-term collaborative action have the potential to remain at the local level.  

Finally, it is important to realize that COP, regardless of its good intentions, is not a fully participatory process in which anyone who is interested in attending can do so. Being at COP requires considerable work and resources such as an organization to accredit one’s participation; in most cases, visa arrangements (especially for the global south); and funding for flights, accommodation, transport, and food. On top of high socioeconomic barriers, from a global south perspective, COP takes place in a foreign language and remains mostly led by heterosexual, middle aged, white men. Great efforts must be made on the side of all non-governmental and governmental organizations in the global south to guarantee that local voices can participate. This could be improved through allowing increased virtual participation, through the sharing of information pre and post COPs, or through processes to discuss developments at the international level and their national and local implications.  

Q: Usually, we think of COPs as fora for national governments. How can cities and local jurisdictions become protagonists at these events, and what can they commit to in terms of assessing their level of dependence on ecosystem services or of delivering on urban sustainability and resilience?

A: It is true that the governmental side of COPs, which is to say, negotiations, are fora limited for national governments, who are attending in their capacities as ratifying parties to the UNFCCC or the Paris Agreement. However, a COP is also the largest meeting in all the UN system, and it is an opportunity for all stakeholders working around climate change to meet, discuss and agree on anything they see fit, taking advantage of the forum.   

These summits have provided the opportunity to create all kinds of initiatives, like the Covenant of Mayors, Resilient Cities Network, and other spaces where cities may create links, exchange best practices, and communicate their climate commitments, which may lead to potential cooperation. Fundación AVINAS's Resilience Hub, is another example of a regional initiative aimed at generating regional dialogues with local actors around priorities and lessons learned to further resilience. 

In many cases, Latin American cities are independent from national governments in the ways in which they manage solid and liquid waste, provide clean water, determine which technologies to use in the provision of energy and public transport, and which criteria to use in public purchases, conservation standards, or resource preservation within their jurisdiction. All of these provide avenues to improve the use and preservation of ecosystem resources and to promote citizen climate empowerment. A COP may provide public spaces to announce these actions and plans, either through participation in events, panels, press conferences, high-level meetings, pavilions, exhibits, or networking. Cities’ representatives attending a COP should make use of all these opportunities in-situ and strategically assess their options in advance.  

[post_title] => Latin America’s Role at COP27: Q&A with Andrés Mogro [post_excerpt] => An interview with Andrés Morgro, regional manager of the Climate Action Programme in Fundación AVINA [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => latin-americas-role-at-cop27-qa-with-andres-mogro [to_ping] => [pinged] => [post_modified] => 2022-11-30 14:32:26 [post_modified_gmt] => 2022-11-30 14:32:26 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.thedialogue.org/?p=131074 [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw ) [1] => WP_Post Object ( [ID] => 126686 [post_author] => 97 [post_date] => 2022-07-27 21:12:10 [post_date_gmt] => 2022-07-27 21:12:10 [post_content] => Many of the energy and climate commitments made at the Ninth Summit of the Americas last month focused on the promotion of a clean and just energy transition in the Western Hemisphere. In one of the more noteworthy pledges, five countries announced their intention to take part in the Renewables in Latin America and the Caribbean (RELAC) initiative: three as members (Barbados, Guyana, and Jamaica) and two as collaborators (Argentina and Brazil). These commitments, combined with the professed willingness of the United States to provide financial support and technical assistance, could renew regional efforts to decarbonize economies through the transformation of electricity systems. Beyond the rhetoric of these pledges, though, specific questions are raised: What does the RELAC initiative consist of? What challenges will it face in implementation? In achieving its goals, what new opportunities could emerge?   Colombia launched RELAC during the 2019 UN Climate Action Summit with the aim of accelerating the carbon neutrality of electricity systems in Latin America and the Caribbean (LAC), setting an ambitious overarching target for over 70 percent of power generation to come from renewables by 2030. With a regional baseline of around 59 percent in 2019, such a target requires doubling the growth rate of both renewable installed capacity and the share of renewables in total electricity generation over the period 2020-2030 compared to the previous decade.  In addition to Colombia, two other regional energy transition leaders, Chile and Costa Rica, originally collaborated to promote this initiative. Since then, a total of 15 countries in the region have become members and established their own renewable energy targets. Technical coordination and assistance are provided by the Inter-American Development Bank and the Latin American Energy Organization in collaboration with a group of high-level energy agencies such as the International Energy Agency, the International Renewable Energy Agency, and the US National Renewable Energy Laboratory, among others. With the support of these actors, member countries benefit from four project instruments: 1) tailoring of regulatory and normative frameworks; 2) coordination and optimization of energy agencies; 3) financial connections between project developers and funders; and 4) provision of a platform for monitoring climate action.  The enabling context driving the initiative is the fact that LAC’s energy mix is considered “the world’s cleanest” given the high share of hydropower in electricity generation (around 45 percent in 2019). Nevertheless, the growth of hydropower, particularly large dams, has been stalled for at least five years due to recurring governance issues (such as citizen opposition, corruption, or lack of prior consultation), acute socio-ecological damage, and water stress exacerbated by climate change. Within this context, RELAC focuses on mitigating climate change while improving the resilience, competitiveness, and sustainability of the electricity sector through diversification and expansion of renewable energy sources, especially non-conventional ones (i.e., excluding large hydropower projects).  However, a variety of challenges impede the initiative’s implementation. For one, the initiative is complicated by disparities in the region’s national energy profiles. Significant differences in natural resource endowments and economic models have contributed to the uneven development of energy sources across the region. While some countries have an overwhelming renewable installed capacity (such as Paraguay, with 100 percent renewable energy largely sourced from hydroelectric dams such as Itaipú) or an extraordinary renewable resource potential (such as Chile, whose Atacama Desert has one of the highest levels of solar radiation in the world), other countries are extremely dependent on fossil fuels for power generation (such as Bolivia and Trinidad and Tobago, which is not yet a member of RELAC). Such differences have led to divergent levels of readiness for the transition to renewables which, reinforced by fossil fuel path dependence (i.e., the chronic reliance of some countries, Bolivia and Trinidad & Tobago among them, on fossil fuels not only for producing electricity, but as a key economic sector), affect the level of climate ambition among LAC countries (including their interest in participating in the initiative).  A second challenge is regional fragmentation and asymmetry of national goals. While RELAC seeks to foster a collective effort that recognizes distinct national contexts and resource endowments, differing domestic policies have led to highly varied energy transition pathways. While some countries like Uruguay and Costa Rica have bet heavily on renewables, the development strategies of other countries are based on boosting hydrocarbons. In the context of RELAC, this means that, although 15 countries have signed on, the initiative currently covers less than half of regional greenhouse gas (GHG) emissions—the region’s three largest emitters (Brazil, Mexico, and Argentina) are not full members yet. Whereas Brazil and Argentina have announced their intention to join the initiative in an ambiguous “collaborator” role, Mexico remains completely on the sidelines. Chronic political instability, energy policy volatility, and geopolitical uncertainty (such as that produced by Russia’s invasion of Ukraine) are additional factors that hinder the achievement of renewables targets regionally.  A third and final challenge to RELAC concerns the creation of healthy investment environments across all LAC countries, including those historically left behind. In 2021, three countries (Brazil, Chile, and Colombia) accounted for 88.78 percent of investments in renewables, with Brazil taking the lion’s share (68.75 percent of the regional total). Deconcentrating these investment flows to foster equitable development of renewables across the region requires adapting regulatory and normative frameworks to attract investors, in accordance with RELAC’s first “project instrument.” That being said, difficulties persist even among the most prepared countries. While the least advanced countries in the region have a low institutional capacity to develop regulations that improve investor confidence (as in Central America’s “Northern Triangle” or in some Caribbean islands), most of the better prepared countries still struggle with issues like environmental licensing and prior consultation with local communities. These challenges frequently delay the development of utility-scale projects, as is the case for socio-environmental conflicts associated with wind farms in La Guajira, Colombia, or in the Isthmus of Tehuantepec in Oaxaca, Mexico.  In addressing these challenges, however, RELAC presents an opportunity to transform electricity systems while improving energy equity regionwide. First, it offers a chance to foster a more inclusive and resilient development of renewable energies. On the one hand, it can right the wrongs of large hydro, notably regarding socio-environmental conflict resolution and human rights abuses in the renewable energy sector. This is significant given that, between 2010 and 2020, 61 percent of recorded human rights abuses linked to this sector worldwide were found in LAC. On the other hand, RELAC can trigger distributive justice actions in order to achieve, among other things, the ‘last mile’ in universal access to electricity (e.g., through solar microgrids or kits of photovoltaic panels and batteries for non-interconnected areas) and tackle energy poverty phenomena, including the use of rudimentary fuels for cooking. This approach has the potential to incentivize an equitable expansion of renewable capacity that minimizes conflicts between local communities and energy companies.   Second, RELAC could foster integration of energy systems, bridging intra-regional gaps and strengthening energy security. One way to advance these objectives is by improving access to financing in the short term, e.g., through agreements like a recent commitment by regional development banks to mobilize up to $50 billion in climate financing over the next five years. It is also key to harness RELAC to support technical assistance and the regional sharing of experiences in order to achieve the policy and regulatory adjustments required by each member country. Additionally, enhancing energy security requires collective, long-term efforts to leverage differences in energy resource endowments to build a robust, sustainable, and secure regional energy system that mitigates LAC’s risks related to shocks to global energy markets and to the impacts of climate change. For example, actions like interconnecting national electricity grids and upgrading and modernizing transmission infrastructure are critical. Throughout these efforts, an active role for the United States will be a decisive factor given its financial and technical resources.  Finally, this initiative provides an outstanding opportunity to align regional energy and climate policies. LAC only contributes to 7 percent of global GHG emissions—55 percent of which come from the energy sector (23 percent less than the world average). Nevertheless, setting the region on a deep decarbonization pathway is essential to keep alive the goal of limiting global warming to 1.5ºC above pre-industrial levels. The engagement of Mexico, Brazil, and Argentina will be crucial to such efforts, making the intention of the latter two to collaborate with the RELAC initiative a potentially considerable, albeit uncertain, step forward. RELAC can act as a framework for correlating renewable targets with Nationally Determined Contributions under the Paris Agreement and increasing climate ambition through international cooperation. Ultimately, that is the golden opportunity this initiative brings to the table: to make consistent and coordinated steps towards making LAC a global champion of climate action and sustainable development.   [post_title] => RELAC Initiative: An Opportunity to Raise Climate Ambition While Leaving No One Behind  [post_excerpt] => Despite many challenges in implementation, RELAC presents an opportunity to transform electricity systems while improving energy equity region-wide. 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An interview with Dr. Mark Langevin, adjunct professor and senior fellow at the Schar School of Policy and Center for Energy Science and Policy (CESP) at George Mason University and senior advisor to Horizon Client Access 

Brazilian President Jair Bolsonaro came into office in 2019 vowing to privatize state companies and sell government assets, with the large state presence in the energy industry as a focal point. In early June, the first major privatization of Bolsonaro’s administration finally came to fruition as the government reduced its share in Eletrobras, one of Latin America’s largest power companies, from 72 percent to 45 percent. Later in the month, the measure was approved by Congress. The share sale, which had been years in the making and raised roughly US$6.9 billion, was the world’s second largest of 2022 and has significant implications for a company that accounts for 28 percent of Brazil’s power generation and 40 percent of its transmission lines.

Meanwhile, Bolsonaro has repeatedly discussed the full privatization of mammoth oil company Petrobras, which is currently 36 percent owned by the government—an effort that was expected to gather steam in the event of a second term. However, under Adolfo Sachsida, the new energy minister who took office in May, the government has made the Petrobras privatization a top priority, requesting studies and preparing a bill on the measure in June. This acceleration took place as Bolsonaro’s long-standing conflict with the firm over its policy of linking fuel prices to international levels reached a fever pitch following Russia’s invasion of Ukraine and the ensuing spike in global oil prices. This clash produced two new CEOs in just two months, bringing the number of chief executives under Bolsonaro to four.

With the first round of Brazil’s presidential election less than three months away, the Petrobras privatization timeline appears tight. Furthermore, former President Luiz Inácio Lula da Silva, a fervent critic of privatizing state companies, has led first-round polls by as much as 19 points, raising questions over whether he could reverse what Bolsonaro has managed to achieve, including the successful privatization of Eletrobras.

To learn more about the implications of the Eletrobras sale, the prospects of Petrobras privatization, and how both are affected by the likely return of Lula, the Energy, Climate Change, & Extractive Industries Program at the Inter-American Dialogue (IAD) spoke to Dr. Mark Langevin, adjunct professor and senior fellow at George Mason University and senior advisor to Horizon Client Access. 

COMMENTS FROM MARK LANGEVIN

Question (Q): Let’s start with Eletrobras, the privatization that has gone through. While the company is expected to cut costs under its new ownership structure, congressional opponents argued that the privatization would raise electricity prices. What will be the main impacts of the reduction of the government's stake on the company’s competitiveness and electricity rates in Brazil? 

Answer (A): The privatization of Eletrobras raises questions about Brazil’s national energy security and climate change strategies after last year’s devasting drought. President Jair Bolsonaro’s administration and his congressional allies promised that the state-owned enterprise’s tender would attract private investment to the generation and transmission sectors and lower consumer rates for electricity. The company was profitable before its privatization despite the government’s neglect over the past several years. Federal Accounts Court Minister Vital do Rêgo, the only dissenting opinion on the vote to authorize the privatization, suggested that the estimated sale price would fall far short of the real market value of the company. The difference between the stock offer and estimates of fair market value are sufficiently significant to suggest that the tender was rushed, and the model designed to favor the financial services sector rather than strengthen the power sector. Most importantly, the privatization does not directly advance the country’s low-carbon development path, although Eletrobras plays a central role in generation and transmission. 

While it is too early to draw any conclusions, the sell-off of Eletrobras was messy and will probably trigger considerable legal activity to reshuffle the transactions’ distribution of costs. In the process leading up to the privatization, the administration and Chamber of Deputies President Arthur Lira conceded to several conditions, including attaching a gas-to-power mandate, that increases the costs of generation over the longer term and diverts investment away from cheaper renewables while also leaving public finance to assume much of the risk for the construction of gas pipelines. Prominent analysts, including former Energy Research Office President Mauricio Tolmasquim, have estimated that the gas-to-power mandate and accompanying need for gas transport infrastructure could cost an additional US$10 billion beyond the costs of displacing gas-fueled generation with renewables, aside from the lost opportunity to further reduce carbon dioxide and methane emissions. This gigantic opportunity cost wipes out the gains made from the tender of Eletrobras shares and will probably lead the new management to either seek the removal of these onerous conditions or obtain compensatory subsidies. 

Meanwhile, the current administration will redirect earnings from the sale of Eletrobras to indirectly subsidize residential and industrial tariffs to win votes. In my view, it is too early to conclude that the company’s privatization will increase its competitiveness and profitability, decrease rates, or keep the lights on for all Brazilians. Under private management and the onerous gas-to-power conditions, Eletrobras will have to cherry-pick short-term, higher-earning opportunities rather than invest in the lower-earning, longer-term energy transition. Moreover, we can expect the divestment of assets with lower-earning horizons to further undermine the strategic role of the company in the nation’s development. The challenge of meeting shareholders’ expectations could encourage the company to focus on the “free consumer” market rather than a broader-based strategy to advance energy security and deepen low-carbon development. (The “free” market provides flexibility to choose a power supplier and negotiate pricing and other terms for large consumers in energy-intensive industries, in contrast with the “regulated” market, which mandates that consumers purchase power from a utility or a company with a distribution concession at a rate set by the energy regulator ANEEL.) Certainly, the new management will invest in renewable energy and associated transmission when it is profitable in the shorter term, but such a time horizon is not compatible with an aggressive national strategy to guarantee energy security and a steady reduction of greenhouse gas emissions. Unlike most countries, Brazil has what it takes to lead on the energy transition, but the privatization of Eletrobras takes the biggest tool out of the kit. 

Q: The prospectus for the share offering alludes to renewable energy, transmission, and energy storage, as well as emerging technologies such as artificial intelligence and blockchain, as possible areas for investment. To what extent will the company’s new shareholders and management accelerate its focus on the energy transition? What role will digitalization play in this effort?

A: Shareholder fragmentation, subsidiary sell-offs, and the government’s retention of a golden share veto will discourage efforts to reimagine the company, although it will certainly undergo restructuring to mitigate the onerous conditions and maximize its earnings. The restructuring and application of information and communication technologies will likely be concentrated toward the free consumer market after the initial round of negotiations over contract duration and tariff rates amid the gradual phase-in of expanding supply to these special consumers over the next five years. While this market consumes only 10 percent of Brazil’s overall generation capacity, Eletrobras will lobby for additional increases to this market because of its earnings potential, leaving the country with an increasingly segmented market between free and regulated markets. The company will likely invest in technological innovation to reduce generation costs and transmission losses for the free segment that serves energy-intensive industries while the government struggles to coordinate a patchwork of lower-earning private generators, public finance mechanisms, subsidies, and regulations to spur on a similar effect for more regulated segments. We should expect that Eletrobras and other firms servicing the free segment will work with their large customers to jointly pursue technological development to achieve greater energy efficiency and cost savings. However, these gains will not be immediately passed on to residential users. At some point, policymakers will need to decide whether the bifurcation of the national power system is politically sustainable, and if not, whether the government needs to get back in the game, as the French government plans to do by regaining full control of state power utility Électricité de France.

Q: In the event of a Lula victory in October, would Lula seek to reverse the Eletrobras privatization? What barriers would he face, and what would be the likelihood of his success?

A: Former President Lula opposed Eletrobras’ privatization. However, I do not expect him to reverse it, although other political forces will continue to challenge it in the courts. Rather, a Lula administration would exercise its shareholder voice and policy influence to try to bend the company around its energy security and low-carbon development strategies. Even with a minority stake, a government with a well-defined energy sector strategy can move the company toward its policy objectives through pressure on management, subsidies, and regulation. Lula has told me that he wants Eletrobras and Petrobras to become “development” companies rather than just generation-transmission and exploration & production (E&P) firms, respectively. His vision entails greater research and development investments in cutting-edge technologies that can advance energy security and the transition while also spinning off goods and services that add value to the economy, create jobs, and raise human development. His ambitions go beyond low tariffs, although he is certainly mindful that energy costs can make or break a Brazilian enterprise in a competitive market environment. 

I think Lula favors working with private-sector shareholder representatives at Eletrobras, in collaboration with Petrobras and the newly created Empresa Brasileira de Participações em Energia Nuclear e Binacional (ENBpar), to jointly finance and administer aggressive research and development investments aimed at energy efficiency, renewables, and carbon capture within a broader fourth industrial revolution push. During my own work with the Lula camp in the past year, the former president has emphasized Brazil’s urgent need to work with environmental, social, and governance (ESG) investors and the information and communications technology sector to advance the country’s sustainable development goals and strengthen the energy sector. 

Q: Moving on to Petrobras, first of all, what is behind the sudden push for Petrobras privatization so close to the election? What are the prospects of such a measure passing in the Brazilian Congress and/or achieving Bolsonaro’s political objectives?

A: Bolsonaro has promised voters lower fuel prices and investors a controlling share in Petrobras ownership. In essence, the president’s gambit exchanges the possibility of the national oil company (NOC)’s privatization, if re-elected, for tolerance of his meddling in the pricing policy of company. His gambit appeals to motorists, truckers, and the financial services sector, which would accrue immediate gains from the tender of the NOC’s controlling shares.

However, a majority of Brazilians do not support the privatization and most of these citizens will vote for Lula. If Lula wins, the next government will not only suspend the NOC’s divestment program but will likely expand Petrobras’ portfolio, returning it to a broad-based energy company that will make the most of the pre-salt play but also invest in low-carbon development. Even if Bolsonaro were to win re-election, the proposed privatization would elicit steadfast opposition within Congress, face legal challenges and trigger significant social mobilization to slow, if not kill the process.

Q: What is the administration’s target timeline for privatizing Petrobras? Is it seeking to do so before the election, or before Bolsonaro’s current term ends on December 31? If so, how likely would that be? For one thing, the national development bank, BNDES, is required to evaluate the proposal, and the bank has not taken less than 15 months in previous privatization processes.

A: If Bolsonaro loses, which is likely, then his administration will pull out all the stops to privatize and concurrently accelerate the divestment of Petrobras assets with a focus on the re-tendering of the Alberto Pasqualini Refinery in Porto Alegre and the Gabriel Passos Refinery in Betim, Minas Gerais. These efforts have galvanized protests by the Federation of Petroleum Workers and other civil society organizations opposed to the dismantling of the company. Although BNDES would normally take more time to assess the privatization plan, the Bolsonaro administration is not timid about casting aside precedent, standard operating procedures, and rules to achieve its political goals. Bolsonaro, Economy Minister Paulo Guedes and Mines and Energy Minister Adolfo Sachsida will pressure the bank to finalize its evaluation, eliminating one more obstacle to the sell-off. 

Overall, the drive to privatize Petrobras before the end of 2022 poses a high level of legal uncertainty, discouraging congressional collaboration and, most importantly, investors. I think there are too many legal and legislative obstacles to tender the company in such short order. However, if the incumbent were to win, then he would be obligated to advance the process, but at a slower pace. This would necessarily require significant logrolling in Congress—vote trading for earmarked spending. Such a legislative route would intersect with Chamber of Deputies President Arthur Lira’s re-election bid, further delaying deliberations until the lower chamber selects its leader in early February 2023. Although Lira has openly supported the privatization of Petrobras, he would have to carry much of the political burden on an issue that is unlikely to win him additional supporters but will cast a spotlight on his relations with current and prospective shareholders. If Lira is re-elected, then his focus will turn toward removing the constitutional prohibition on his continued tenure, a goal he will do just about anything to achieve. If the NOC’s privatization can advance this goal, then he will move forward, but if it cannot, he will retreat. 

Q: What would be the impacts of fully privatizing Petrobras in terms of its strategy, efficiency, and the overall Brazilian oil and gas industry, which it currently dominates?

A: Since the impeachment of former President Dilma Rousseff in 2016, we have witnessed the asset-by-asset divestment of the NOC, mostly focused on the downstream and marginal fields. Under a privatized Petrobras, this process would accelerate, leaving the remaining corporate structure with the highly profitable pre-salt play and other low-risk, high-return fields. The company would be very profitable for average and high crude-price scenarios but removed from national efforts to speed up the energy transition. While the company could be expected to collaborate with international oil companies (IOCs) interested in carbon capture projects, it would be poorly positioned to pivot toward a broader portfolio as several of its international competitors and partners have done in recent years. More importantly, under the current government, the returns from its privatization would not be spent on decreasing the public debt or investing in low-carbon development. Rather, it would likely be spent on more populist measures aimed at boosting Bolsonaro’s approval and legacy.

In the longer run, Brazilian E&P will become increasingly shared among the NOC, IOCs, and domestic private firms, with capital-intensive projects coordinated through partnerships and bidding consortia. Governments at the federal, state, and municipal levels will continue to count on royalties and taxes paid by Petrobras, but its large carbon footprint could attract considerable opposition from an increasingly robust national environmental protection movement. I expect this opposition to grow along with the renewable energy sector and as the Brazilian government retakes its historic leadership role in global environmental governance initiatives. 

Q: Same question as in the case of Eletrobras regarding Lula’s return. Would he be able to reverse any progress made by Bolsonaro on privatizing Petrobras? 

A: I do not think that Bolsonaro will be re-elected or that Petrobras will be privatized before he exits the presidential palace on January 1, 2023. However, if the incumbent administration successfully privatizes or tenders key assets of the NOC before the inauguration of the next president, then the next administration will challenge the legality of any such measures. Currently, under newly appointed CEO Caio Mário Paes de Andrade, the company has re-tendered several refineries that failed to attract bidders in the past. To successfully carry out these tenders and award a contract to the winning bidder, the company would have to agree to a very low asking price, a move that could be easily challenged in the Federal Accounts Court or Supreme Court. The same investors that grabbed Eletrobras shares in June would be more reluctant to assume the risk of buying Petrobras assets given the likely prospects of a Lula victory in October. Moreover, a Lula victory will usher in greater legal and political scrutiny of prior divestments. For this reason, I think many investors will shy away in the coming weeks and months if the polls continue to show a significant lead for Lula.

[post_title] => What Do Privatization Efforts in the Energy Sector Mean for Brazil? [post_excerpt] => To learn about the implications of the recent Eletrobras sale, the prospects of Petrobras privatization, and how both are affected by the likely return of Lula, the Dialogue's Energy & Climate Program spoke to Dr. Mark Langevin, adjunct professor and senior fellow at George Mason University and senior advisor to Horizon Client Access. [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => what-do-privatization-efforts-in-the-energy-sector-mean-for-brazil [to_ping] => [pinged] => [post_modified] => 2023-01-08 14:26:46 [post_modified_gmt] => 2023-01-08 14:26:46 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.thedialogue.org/?p=126886 [menu_order] => 0 [post_type] => post [post_mime_type] => [comment_count] => 0 [filter] => raw ) )
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