Creating a Market for Ethanol - Challenges Faced in the Brazilian Experience

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Creating a Market for Ethanol - Challenges Faced in the Brazilian Experience Agnes Maria de Aragão da Costa Tiago de Barros Correia João Paulo Resende Ministry of Mines and Energy - Brazil

Oldest economic activity in Brazil Almost all Brazilian States produce sugarcane, but São Paulo concentrates about 60% of the National production 320 industrial units - usinas Crop Growing Characteristics Growth cycle 5 years Number of cuttings 5 cuttings Sugarcane productivity 85 ton/ha (160-65) Sugar yield 138 kg/ton Ethanol yield 82 l/ton Source: Ministry of Agriculture, Livestock and Food Supply (2007)

Brazil was responsible for more than 30% of the sugarcane produced by the main producing countries in 2005. Main sugarcane producing countries - 2005 Country Sugarcane Production (thousend ton) Crop area (thousend ha) Productivity (ton/ha) 1 Brazil 422,926 5,794 72.99 2 India 232,300 3,602 64.49 3 China 87,768 1,361 64.49 4 Paquistan 47,244 967 48.86 5 Mexico 45,195 636 71.06 6 Thailand 43,665 1,097 39.80 7 Colombia 39,849 426 93.54 8 Australia 37,822 434 87.15 9 Indonesia 29,505 435 67.83 10 USA 25,308 373 67.85 11 South Africa 21,265 428 49.68 12 Philippines 20,795 369 56.36 13 Argentina 19,300 305 63.28 14 Guatemala 18,500 190 97.37 15 Egypt 17,091 135 126.60 Source: Ministry of Agriculture, Livestock and Food Supply (2007)

Sugarcane is used as input to several industries, but mainly for sugar and ethanol production. 88.67% of the 2007/2008 sugarcane production will be designated to the sugar and ethanol industry The remaining 11.33% (59.82 million tons) will be used for the production of cachaça," animal food, seeds, rapadura, muscovado sugar and others. Ethanol: 80% of the ethanol produced in Brazil is for fuel use, 5% for food, perfumery and chemical industries, and 15% for exports Anhydrous ethanol is used for gasoline C production Hydrated alcohol is directly used in automotive vehicles refueling

Evolution of alcohol and sugar production by crop 12.000.000 30.000.000 10.000.000 25.000.000 8.000.000 6.000.000 4.000.000 2.000.000 0 48/49 51/52 54/55 57/58 60/61 63/64 66/67 69/70 72/73 75/76 78/79 81/82 84/85 87/88 90/91 93/94 96/97 99/00 02/03 05/06 Alcohol (m3) 20.000.000 15.000.000 10.000.000 Sugar (t) 5.000.000 0 CROP 51/52 CROP 05/06 CROP Anhydrous Hydrated Sugar Anhydrous: 47,997 m3 Anhydrous: 7,663,245 m3 Hydrated: 122,365 m3 Hydrated: 8,144,939 m3 Sugar: 1,595,706 t Sugar: 26,214,391 t Source: Ministry of Agriculture, Livestock and Food Supply (2007)

Variables to the production decision at the usinas : Long term contracts with independent sugarcane producers Seasonability, unpredicted effects of climate changes and possible crop ruptures due to plagues or other factors Flexibility of producing several products with the same input: sugar, alcohol (anhydrous and hydrated) and electricity Relative price and demand of sugar (considering internal and external markets) and alcohol Commodities: exogenous market instability International oil prices Vehicle fleet Mix of anhydrous ethanol to gasoline

Alcohol and sugar production system Electricity Planting Harvest Bagasse Distillation Anhydrous Alcohol Hydrated Alcohol Domestic Consumption Transport Milling Exports Refining Sugar Agriculture Industry Consumption

Products and byproducts of the sugarcane industry are playing a more important role as sources of energy in Brazil. Production system has a big advantage in saving fossil energy. In 2006, ethanol accounted for 40% of the fuel burnt in automotive engines (Otto cycle) in Brazil. The Brazilian sugarcane industry generated as much as 11,3 TWh of electric and mechanic energy, mainly for selfconsumption. The sugarcane industry has a strong potential of energy supply growth, especially through the generation of electric energy.

Electricity generated by the sugarcane industry covers the consumption of its industrial processes and has also been sold to the grid. Electricity generation by the sugarcane industry is limited to the crop season which means for the Center-South region of Brazil the months from May to December - the period of lower storage capacity at the Southeast / Center-West submarket

Storage Curve at the Southeast / Center-West Submarket (%) x Crushed Sugarcane in the Center-South Region (thousand tones, monthly average, 2001) feb apr aug sept oct dec Water storage curve Crushed SC Source: Souza (2002)

Incentives to invest in electricity generation PROINFA : 3,300 MW of installed capacity of small hydro plants, biomass-fired thermal plants and wind turbines by 2008 benefice: long term PPAs Restructuring of the contracting framework set in place by the 2004 reform of the ESI: Self-producer Independent power producer (PIE): electricity may be partially or totally commercialized Commercialization in the regulated bi-lateral market (ACR) or in the free-bilateral market (ACL)

Incentives to invest in electricity generation Distributed generation: distribution companies are allowed to contract energy from distributed generation plants public bidding directly promoted by the DISCO may not exceed 10% of the DISCO s load

The importance of the sugarcane industry to the Brazilian power system is expected to grow in the next year 100% 80% 60% Electricity Supply by source IMPORTS3.7 8.8 OTHERS 5.2 2.5 BAGASSE 3.9 2.9 1.4 OIL 1.6 2.7 1.6 4.5 NUCLEAR 4.3 COAL 3.6 NATURAL GAS 9.2 40% 75.5 HYDRO 68.6 20% 0% 2005 2030 425 TWh 1,196 TWh

The PRÓALCOOL Experience Strong interventionist policies since the thirties PRÓALCOOL (1975): response to the oil crisis Phase 1 : increase of installed production and storage facilities Phase 2: production expansion due to hydrated alcohol Lower prices for ethanol were guaranteed Results: New technology: 100% ethanol-fired vehicles Vertiginous growth in ethanol production Productivity gains in agriculture and in the handling of sugarcane Sensitive reduction of ethanol production costs 90% of the new vehicles commercialized in Brazil from 1983 to 1988 were ethanol fueled

The PRÓALCOOL Experience Light Cars Sales - Fueled with Alcohol and with Gasoline C Sold cars total - unit Alcohol fueled cars - unit Alcohol / Gasoline percentage composition

Recent Ethanol Market Development in Brazil Liberalizing structural changes: End of Sugar and Alcohol Institute (IAA) in May 1990 Creation of Inter-ministerial Sugar and Alcohol Council (CIMA) in 1997 Regulation by National Agency for Oil, Natural Gas and Biofuels (ANP) End of the Annual Crop Planning Deregulation of prices Exports liberalization Some consequences: Capital concentration/ centralization Constitution of producers cooperatives or associations CONSECANA: system to share revenues among sugarcane, sugar and ethanol producers

Recent Ethanol Market Development in Brazil Development of a a world concept of car with an engine fired by any type of gasoline C the flex fuel vehicle (FFV) Eliminated consumers exposure to fuel shortage risks 2003: 2.9% of the total light vehicles sold were FFV 2006: 56.3% of the total light vehicles sold were FFV 6 automobile companies installed in the country, which offer nowadays more than 52 FFV car models FFV fleet (May / 2007): 3.3 million units

Final Considerations Perhaps the most important role to be played by Brazil is disseminating the technologies developed related to sugarcane production (varieties, plague control, efficiency gains). Ethanol Production Costs US$/l Raw Material Brazil 0.20 Sugarcane USA 0.40 Corn EU 0.60 Beet, Wheat Evolution of Brazilian alcohol exports (million liters) Source: Ministry of Agriculture, Livestock and Food Supply (2007)