Tanzanian representatives examine reverse power auctions in Brazil

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Tanzania has 1,591 MW of installed grid generation capacity and approximately 76 MW in mini-grid systems to serve its population of over 51 million people. While these numbers are continuously increasing, electricity production meets less than 15 percent of the demand per year and only 30 percent of the population is connected to the grid.

[ Participants visit the Fonte dos Ventos Hybrid Solar and Wind Farm in Tacaratu, Brazil hosted by Enel Green Power.]

Within this energy context, Tanzanian agencies and companies charged with developing and regulating electricity generation, transmission, and distribution, took part in a ten-day executive exchange to Brazil, conducted by the World Energy Council’s American member committee, (USEA), as part of the Power Africa Initiative.

The goal of the executive exchange, supported by the US Agency for International Development (USAID), was to build upon a Reverse Power Auctions Workshop held in 2016, and augment the knowledge of key stakeholders in Tanzania responsible for power sector reform. Over the course of ten days the executives met with government entities and private sector companies involved in Brazil’s reverse power auctions and discussed national energy planning and procurement, competitive bidding processes and prequalification, and touched upon the topic of power purchase agreements.

The US/ Tanzania partnership program

[Participants meet with the Ministry of Mines and Energy in Brasilia, Brazil]

Tanzania is one of the six initial focus countries of Power Africa, a multi-partner initiative launched in the summer of 2013, which aims at increasing electricity access in sub-Saharan Africa by 30,000 MW. Three important factors that currently influence the direction of electricity policy development in Tanzania include: the Government of Tanzania’s (GOT) aim to increase generation capacity up to 10,000 MW by 2025; the unbundling of the public utility, Tanzania Electric Supply Company Ltd (TANESCO), by 2021; and the increase of the supply of natural has fired generation to meet base-load demand.

The delegation participated in a half-day reverse power auction simulation by Câmara de Comercialização de Energia Elétrica (CCEE), Brazil’s commercial electric market operator. Questions focused on how to set an appropriate starting bid price, how to prevent collusion, how to accurately define the technical requirements of the project.

A reverse power auction is a bidding process for developers to propose new energy projects at the lowest bid cost. The winner of the auction with the lowest bid is awarded a Power Purchase Agreement for an average of 20-30 years.

Within Brazil, “Energy Nova” or New Energy will have a reverse auction 3 to 5 years before the project is targeted to go online. A reserve power auction falls under the umbrella of the reverse power auction system, but it is only for renewable energy projects that are meant to support and secure the electricity supply within Brazil. It originated after significant shortages of electricity spurred the government to absorb the cost of adding more generation kept in reserve in to prevent future shortages.

These auctions are regulated by ANEEL in the “regulated market” and the electricity is sold to captive consumers, like distribution companies, who consume between 0.5MW< 3MW.

According to Alexandre Viana of CCEE, it took 2 years to prepare for the first auction in 2009 for a wind project and Rodrigo Sauaia of ABSOLAR stated that the first large-scale solar PV auction occurred in 2013. Now, CCEE holds 6 to 7 auctions a year, taking only 6 months prepare.

There has been a total of 36 auctions: 21 new energy auctions, 9 reserve auctions, 3 alternative sources auctions, and 3 special auctions. Paulo Pedrosa, Executive Secretary of MME, stated that in 2017 they will start holding auctions for projects to go online in 2020-2024. The first batch of PPAs that were issued in 2003 will start to expire in 10-15 years, around 2023-2033.

The delegates met with Empresa de Pesquisa Energetica (EPE), an Energy Research Company, and discussed short- and long-term energy policy planning, the structure and role of the Brazilian government. Angela Livino of Empresa de Pesquisa Energetica, explained that the structure of the Brazilian power sector is defined in the different roles. Each independent agency plays in the generation, transmission, and distribution of electricity.

The electricity market itself is divided between the “Regulated Market” which accounts for 76% of the market and the “Free Market” at 24%.
Brazil currently has more than hundred times the installed capacity as Tanzania at 143 GW. However, 65% of Brazil’s electricity generation comes from hydropower which has faced significant decline due to a drought that has lasted 2 years. This prompted Brazil to diversify its electricity mix.

The delegation met with the Brazilian National Development Bank (BNDES) which provides financing for power projects throughout the country. They discussed financing, policy and local content requirements. According to Alexandre Esposito of BNDES, developers can either get direct financing from BNDES or they can go through 70 different accredited banks in order to indirectly get BNDES financing. One key question the Tanzanian delegation had for BNDES was the regulation on local content requirements.

The Government of Brazil set forth that BNDES cannot finance projects that are primarily imported. Accordingly, the local content requirement states that projects with >60% local content are eligible for financing by BNDES. Projects that cost more than 20 million Brazilian Reals are eligible for direct financing, when those less than 20 million Brazilian Reals must be indirectly financed.

This is meant to be an incentive to support Brazilian businesses and to consolidate the supply chain. For example, a PV solar module has to be assembled in Brazil, but the rest of the material to build a PV solar farm can be imported. This was an important topic for many of the Tanzanians delegates who are currently considering the best way to attract foreign investment to expand their economy.

By the time the exchange was completed, the participants felt that they had a better understanding of how to evaluate bidders and have advanced their knowledge on reverse power auctions, hybrid auctions, and sealed-bid auctions.

The top three recommendations that the participants plan to bring back to their organisation are:

• Long and short-term planning should be independent of the utility, whereas currently it is done by TANESCO
• To create an independent institution like EPE to do energy market planning
• The need for a clear and standardised preparation of bidding documentation

Delegates included lawyers, procurement specialists, project managers, and engineers from Tanzania’s Electric Supply Company Ltd (TANESCO), Energy and Water Utilities Regulatory Authority (EWURA), and the State Mining Corporation (STAMICO)