1 T r a n s m i tt i n g R e n e w a b l e E n e r g y t o t h e G r i d : The Case of Brazil 2014/2 85060 A KNOWLEDGE NOTE SERIES FOR THE ENERGY PRACTICE THE BOTTOM LINE Transmitting Renewable Energy to the Grid: Many biomass cogeneration plants and small hydropower The Case of Brazil plants are already in operation in Brazil, and more are under construction. Brazil met the Why is this case interesting? What was the challenge? challenge of connecting those Brazil has a system for connecting hundreds of small Local distributors were responsible for expanding plants to the grid by devising dispersed renewable energy projects networks but lacked the capacity to do so a shared transmission system that allocates transmission Brazil has one of the world’s cleanest energy portfolios, with One of the most promising sites for renewables in Brazil is the costs among providers of 85.3 percent of overall energy production coming from renewable Center-West region, which includes parts of the states of Mato renewable energy and allows sources (compared with the worldwide average of 16 percent), and Grosso do Sul and Goiás, where hundreds of biomass cogeneration providers to incorporate with 75 percent of the country’s 105,000 MW installed generation and small hydropower projects are spread over 200,000 square kilo- those costs into their bids for capacity coming from hydropower plants alone. In the last five meters (figure 1). The problem is that these resources are dispersed supply contracts. The process years, biomass from sugarcane production, small hydropower plants and located far from the grid. Connecting 80 biomass cogeneration has built the confidence of (below 30 MW capacity), and wind energy have rapidly increased and small hydropower plants totaling 4,100 MW required an invest- renewable energy developers their share in the renewable energy mix because of their relative ment of almost $400 million in 2,500 km of transmission and sub- by providing certainty about the ease of construction, low investment requirements, and lower overall transmission infrastructure (that is, lines less than 230 kV). Integrating interconnection and the energy investment risk. so many small plants challenged previously existing transmission contracting processes. Hundreds of biomass cogeneration plants and small hydropower planning and regulatory practices, raising doubts about the country’s plants are already in operation, totaling 5,200 MW in capacity, and an ability to secure sufficient contracts to support the development of additional 2,700 MW of capacity are under construction. The biomass renewable energy. plants use bagasse, the fibrous matter that remains after sugarcane The distribution companies in the zone where transmission stalks are crushed. More recently, wind power has emerged as services were needed lacked the personnel to plan network the fourth pillar of the country’s renewables portfolio: 800 MW of expansion. In addition, in certain cases, the network needs of the Marcelino Madrigal capacity are already in operation or under construction. renewable energy providers requesting transmission services (mmadrigal@worldbank The country has improved its procedures for building new energy dwarfed in size and capital cost the entire existing distribution .org) is a senior energy facilities and connecting them to the grid. New energy producers network in the area. While the government planning agency, Empresa specialist in the World enter the market by participating in centralized energy auctions for de Pesquisa Energética (EPE), had the wherewithal to handle these With Bank’s Energy Practice. contracts with Brazilian distribution companies. An auction con- network expansions, it lacked the legal mandate to plan investments Rhonda Lenai Jordan ducted in 2009 contracted an additional 1,800 MW of wind energy. in subtransmission and distribution. (rjordan@worldbank.org) is an energy specialist in the same practice. 2 T r a n s m i tt i n g R e n e w a b l e E n e r g y t o t h e G r i d : T h e C a s e o f B r a z i l Figure 1. Brazilian interconnected power system identifying Mato Grosso do Sul area (left), and renewable energy candidate projects in Mato Grosso do Sul (right) “Integrating so many small plants challenged previously existing transmission planning and regulatory practices, raising doubts about the country’s ability to secure sufficient contracts to support the development of renewable energy.” Source: Madrigal 2010. What solution was adopted? renewable providers are considered in the context of the auctioning of supply contracts. The providers are told that they will be respon- The government revealed transmission costs to sible for bearing most of the cost of extending the transmission potential bidders before renewable energy auctions system through what is known as a “shallow allocation policy.” The expense is allocated among all the providers of renewable energy To address the challenges of planning and paying for the transmis- who will share the transmission facilities based on the distance over sion infrastructure needed to bring energy from renewable sources which the energy must be transmitted (according to the usage- to the grid, Brazil devised a competitive process to develop shared based MW/mile transmission pricing methodology). Once the plan is transmission networks for renewable energy (figure 2). In this determined, the national electrical power regulator, ANEEL, informs forward-thinking process, EPE, with help of technical consultants, potential bidders of the transmission costs before the auction. This takes the lead on network planning (at both the transmission and is crucial: Before they enter into the auction to offer their energy subtransmission levels) where an auction to award energy contracts supply, renewable energy developers know that they will have for renewable providers is to be held (and, of course, where there access to the grid and are fully aware of the costs they will incur for is interest in connecting to the national grid). The network needs of 3 T r a n s m i tt i n g R e n e w a b l e E n e r g y t o t h e G r i d : T h e C a s e o f B r a z i l Figure 2. Brazil’s competitive process to develop shared transmission networks for renewable energy Technical EPE consultant “Before they enter into RE generator the auction to offer their Determine optimal Submit transmission ANEEL ensures transmission plan regulatory compliance energy supply, renewable RE generator extension and reinforcement needs and letter of intent and costs energy developers know RE generator that they will have access Approved to the grid and are fully If necessary, redetermine aware of the costs they will optimal transmission RE developers extension and Successful bids proceed to energy incur for that access.” reinforcement needs and costs, and resubmit auction to EPE No ANEEL holds New TSO Generators auction to constructs and commit to reserve select new End Yes Successful bidder maintains transmission transmission transmission capacity owner for network shared facilities Source: Prepared by the World Bank. Note: EPE = Empresa de Pesquisa Energética; ANEEL = Agência Nacional de Energia Elétrica, the national power regulator; RE = renewable energy; TSO = transmission system operator. that access. By knowing the network costs ahead of time, generators participant that requires the lowest annual revenues to develop and can safely bid in the auction and ensure sufficient operating revenue maintain the assets that will interconnect the renewable suppliers. and return on their investment. Winners of the auction receive a The winner receives a transmission concession for a period of 30 long-term energy purchase contract that simplifies the process of years. The allowed revenue (a result of the bidding process) is fixed obtaining project financing since access to the transmission network for the first 15 years and reduced by 50 percent for the remaining 15 is assured. years. The revenues for the transmission concessionaire are derived Based on the winning bids, the network expansion plan may be from network charges and applied only to the renewable providers modified. Once the final shared transmission network is defined and connected to the shared network that won energy contracts in the approved, renewable energy developers commit to reserve network auction. Costs not covered by the power providers are passed along capacity and ANEEL initiates a competitive bidding process to select to the customers. a new transmission owner to finance and maintain the infrastructure used by the developers. Similar to the process used for the expan- sion of the main transmission system, the bid is awarded to the 4 T r a n s m i tt i n g R e n e w a b l e E n e r g y t o t h e G r i d : T h e C a s e o f B r a z i l What is the key lesson? usage fees gave no incentive to develop the projects whose MAKE FURTHER combined generation and transmission costs were minimized. CONNECTIONS Anticipatory planning led to a faster and more • Awarding transmission concessions to investors using a efficient roll-out of renewable energy competitive scheme reduces the up-front costs borne by Live Wire 2014/1. “Transmitting Renewable Energy to the Grid,” Brazil’s competitive process to develop shared transmission renewable energy developers. by Marcelino Madrigal with networks for renewable energy not only has helped develop The procurement process provides transparency that helps Rhonda Lenai Jordan infrastructure that previously had languished in a regulatory void reveal the cost of efficiently delivering infrastructure, supports a (not clearly covered by other regulations and beyond the institutional realistic and sustainable pricing structure, and creates an environ- Live Wire 2014/3. “Transmitting capacities of existing distribution utilities); it also has built the ment for both generation and transmission that is attractive to the Renewable Energy to the confidence of renewable energy developers by providing certainty private sector. Further detail on transmission planning for renewable Grid: The Case of Mexico,” by about the interconnection and the energy contracting processes. The scale-up can be found in Madrigal and Stoft (2011). Marcelino Madrigal with Rhonda planning process also minimizes infrastructure and operational costs, Lenai Jordan allocates such costs more efficiently, and reduces electricity losses for the benefit of the consumer and a healthier generation sector: Live Wire 2014/4. “Transmitting References Renewable Energy to the • Sharing the cost of an integrated network can greatly reduce Madrigal, Marcelino. 2010. “Creating Renewable Energy Ready Grid: The Case of Texas,” by connection costs for renewable generators. Using an anticipatory Transmission Networks: Highlights and Emerging Lessons from Marcelino Madrigal with Rhonda approach to plan the integrated network eliminates the need Selected Developed Country Experiences.” Environmental Lenai Jordan to develop individual connections exclusively between each Economics Inception Paper, World Bank, Washington, DC. generator of renewable energy and the high-voltage grid. Madrigal, Marcelino, and Steven Stoft. 2011. “Transmission Expansion Planning also reduces the lengthy time delays associated for Renewable Energy Scale-Up: Emerging Lessons and with such exclusive connections. High upfront costs and Recommendations.” SEGEN Paper 26, World Bank, Washington, delays previously left many renewable sites undeveloped or DC. June. unconnected to the grid. • Assessing network usage fees in conjunction with energy The peer reviewers for this note were: Luiz Maurer (principal industry auctions provides price signals that ensure that the best specialist, IFC) and Waleed Saleh Alsuraih (senior energy specialist, MENA). renewable resources are developed first. While Brazil’s sector The authors acknowledge contributions from Jose Carlos de Miranda Farias was competitive before the current process was adopted, the (Energy Planning Agency, Brazil) and Luiz Augusto Barroso (PSR-Inc, Brazil). This note is based on original work by Marcelino Madrigal and Steven Stoft. absence of a “locational” signal as provided by the network