African Journal of Business Management Vol. 7(3), 183-195, 21 January, 2013 Available online at http://www.academicjournals.org/AJBM DOI: 10.5897/AJBM12.907 ISSN 1993-8233 ©2013 Academic Journals

Full Length Research Paper

Electricity market in the free contracting environment (ACL) by the sugar-energy sector in Brazil: Overview

and analysis of threats and opportunities

João, Iraci de Souza1,2* and Merlo, Edgard Monforte2

13900, Bandeirantes (av), Monte Alegre, zip code 14040-905, Ribeirão Preto – SP – Brazil.

2Faculty of Economics, Administration and Accounting of Ribeirão Preto - FEA-RP/ São Paulo University, USP, Brazil.

Accepted 8 December, 2012

In recent years, the Brazilian electricity market has gone through provision crises, due to: the greater increase in demand with regard to supplies, the lack of infrastructural investments and the concentration of the energy matrix in hydroelectricity, this scenario can be minimized by the bioelectricity coproduced based on sugar cane pulp. This research aimed to characterize bioelectricity commerce in a free contracting environment (ACL) and compare it with a regulated contracting environment (ACR), identifying the threats, opportunities, strong and weak points of each. Interviews were held with managers: of four sugar-electricity mills, the local energy distributor and a free consumer. Data were processed using SWOT and PEST analysis, as well as content and correspondence analysis techniques. The results indicated that the main advantage of ACR is security about energy prices, while the disadvantage is the contract’s lack of flexibility, in combination with high penalties. The relevant strong point of ACL is the flexibility to define term, price and quantity, and the weakness is price volatility. Due to these characteristics, agents tend to act in both markets. Key words: Bioelectricity, free contracting environment, regulated contracting environment, sugar-energy sector, free consumer, energy cogeneration.

INTRODUCTION Electricity can be generated using renewable sources such as hydraulic, windy, solar, and produced using biomass or non renewable sources as fossil fuel. In Brazil almost 77% of electricity comes from the water resources (Brazil, 2010). Besides this important aspect in last decade, other energy sources must be developed once demand becomes greater than supply.

This unbalance between supply and an increasing demand in short and medium term may be related to the lack of investments in the electrical sector (Pinto Junior, 2007). Furthermore, we may observe that the problem becomes more serious whenever climate problems occur. Recently, precisely in 2001, there was lack of rain

*Corresponding author. E-mail:iracijoao@yahoo.com.br. Tel: 55+34+3221 4800.

and a consequent reduction in the reservoir of hydro-electric plants causing a shortage of energy and consequently the use of the term electrical energy. When all these facts occurred, a new regulatory rule to the energy sector was established.

On the other hand, the diversification of energetic matrix with electricity cogeneration using sugar cane residuals (using sugarcane’s straw, bagasse and wastes) as a clean and renewable energy can be a short term solution, mainly if considered time to construct a new plant - only 12 months – as well as the low associated cost (compared with other alternatives). Electrical generation from sugarcane was only 5.6% of total energy produced in Brazil but this share can grow, considering the raw material produced in 2009 crop, it would be 12.5% (generating 13.346 MW) of all Brazilian electricity matrix. This potency is similar to the Itaipu power plant, one of biggest in the world.

184 Afr. J. Bus. Manage.

Considering the electricity commerce in Brazil there are two distinct markets: one called the regulated market (ACR) and the free market (ACL). The free market offers more advantages such as greater concurrence and flexibility; however, it is still in process of consolidation and after seven years of its creation (act 10.840; 2004) has not developed as expected by the government. So, the main contribution of the study was to analyze deeply this innovative form of energy trade in order to compare the two energy contract environments existing in Brazil: free contracting (ACL) and regulated contracting (ACR) used for sugar-electricity plants to supply market. SWOT matrix was used to identify the main opportunities and threats as strong and weak points of each environment. Our purpose was to offer vital information to market managers and policy makers to deal with decisions related to this sector. THEORY REVIEW

Brazilian electric sector and the free contracting environment According to Rocha et al. (2007), the main characteristic of the current Brazilian electric sector is the commercia-lization of electricity in two markets: the regulated contracting environment (ACR) and the free contracting environment (ACL).

In the first market segment (ACR) energy is comer-cialized using auctions of quantity and lower price promoted by the National Agency for Electricity (ANEEL) or through the Commercialization Bureau of Electricity (CCEE). Besides, long term standard bilateral agreements (Power Purchase Agreements - PPA) are established in order to guarantee that costs with acquired electricity are transferred to the final price paid by the consumers.

The ACL was created from deregulation of sector, with the goal of reducing consumer prices and increasing their social welfare, as well happened in others countries, despite the considerable differences in each other (Shahrjerdi et al., 2012).

Analyzing the second electricity segment (ACL), energy was commercialized using bilateral agreements, freely negotiated and in accordance with specified rules and procedures. These contracts are used to free consumers, traders and producers which negotiate in an active way their electricity demand and supply.

The difference between ACR and ACL does not involve the agents who offer electricity in each environment but mainly the consumers’ demand of energy in each environment (Pinto Junior et al., 2007, p. 224). In this sense, free consumers are those who “are able to purchase energy from any chosen supplier, following specific rules and regulations” (Pinto Junior et al., 2007, p. 224), this means that they have the right to choose whichever supplier who meets their demand.

Pinto Júnior et al. (2007) points that in ACL the

relationship between supplier and consumer is managed by bilateral agreements in which price, volume and deadlines are negotiated, and the laws of a free competition prevails. From an operational standpoint, every generator or consumer who chooses the ACL market needs to be associated to the CCEE and inform the amount of energy to be offered or demanded every month. After the negotiation between the agents to establish the price, amount and length of time, the generator is responsible for registering a contract approved by the consumer, in an electronic ambience controlled by CCEE. This register must obligatorily specify the amounts of energy to be supplied in the length of time established in the contract, as well as the seller, the buyer, and their respective submarkets – North, Northeast, Southeast/ Mid-western and South (Palomino, 2009).

By the end of the term, CCEE reviews the amount of demand/offer informed and the amount negotiated. In case of spare amounts, the generator may establish short-term contracts (sell) or quit

1 the remaining energy in

the spot market on the Price for the Settlement of Differences (PSD)

2. The consumer, in turn, must have to

pay the contracted value established in the agreement and will quit positively the difference between the values in agreement and the used amount

3. In case of contrary

situation (lack of energy), the generator has the option to deal purchasing contracts to carry out the contract or negatively quit the PSD, and in consequence the consumer may be able to purchase energy using short-term agreements or quit using the PSD (Palomino, 2009). Cogeneration of bioelectricity The bagasse is the waste of the sugar and ethanol production after the sugarcane is crushed. Each ton of crushed sugarcane, on average, results in 250 kg of bagasse. One ton of burned sugarcane bagasse generates approximately 188.2 kW (Conab, 2011). The bagasse is a polluting waste involving environment threats, for this reason it was considered a production problem for many years. In order to deal with such adverse situation, it was implemented a process to reuse the bagasse, which now is used as fuel for boilers in sugar mills and distilleries. Now, sugar and ethanol companies turn steam into electric power by means of a process called cogeneration, defined by ANEEL as: Art. 3º - Energy cogeneration is defined as a production

1 Process of debt payment and receipt (liability) and credits (rights) assessed in

the CCEE scope in what concerns buying and purchasing electric power in the

short-term market. 2 PSD is applied in order to assess the sale and purchase of electricity in the

short-term market. It is calculated to enhance the operation of the national

interconnected system. 3 The consumer is not allowed to sell the remaining amounts by means of short-

term bilateral agreements.

process combining heat and mechanic energy, totally or partially converted into electricity from chemical energy made available by one or more fuel (ANEEL, 2000).

In the specific case of the sugar-ethanol-energy sector the production process consists on “burning sugarcane bagasse in boilers generating high pressure and temperature steam enough to feed electric power turbo generators” (Palleta, 2004, p.28). The generated energy is used to supply the internal demand of the mill and can be commercialized in the regulated contracting ambience – ACR and/or in the free contracting ambience – ACL. Figure 1 presents the Brazilian bioelectricity production.

Even in short term, bioelectricity production has a potential to triple and grow 80% in case not only the bagasse, but also the leaves and the points, will use as raw material (CONAB, 2011).

The bioelectricity production has shown an expressive growth of 97% in the last 39 years in Brazil. This growth was higher after 1996, when there were some changes in the regulator laws and some free purchasing started occurring. In a short time the bioelectricity energy has the potential to be tripled using bagasse as well as sugarcane straw and wastes (CONAB, 2011). METHODOLOGY

The present research was qualitative and exploratory, and has the main objective “to know the characteristics of a phenomenon in order to, later, search for explanations for its causes and consequences” (Richardson, 1999, p. 326). In order to carry out this study, interviews with six managers of bioelectricity companies located in the meso-region of Ribeirão Preto were conducted, which is composed of 76 municipalities, representing approximately 30% of the sugarcane production in the

state of São Paulo (the three largest Bureaus of Rural Development – BRD – and sugarcane producers in 2007 are located in this region). Besides, this region concentrates the biggest number of sugar and ethanol mills and bioelectricity power plants in the state of São Paulo.

Considering the total amount of 153 plants of cogeneration in the state of São Paulo (Datacogen, 2009), 54 were selected which suit the condition of self-producer of energy (PIE). From this 18 mills

which attended the location condition, four mills located in the meso-region of Ribeirão Preto were chosen using convenience selection according to Malhotra (2001). It was a selection of units conducted by the researcher using such aspects as accessibility among others. The selected companies participated on the research representing the bioelectricity generator and due to being PIEs they were able to purchase their produced energy in both energy environments ACL and ACR. When the research was conducted three of these companies were dealing with both

environments and only one of them acted in the free environment (ACL).

The distributor responsible for serving the region studied was identified. Since there is only one company for this region it can be assumed that this company represents the population for the considered area. In order to choose the final consumer, a non-probability, “snowball” type sample was used, in which “subsequent respondents were selected based on the information gathered by

the previous respondents” (Malhotra, 2001, p. 308). In this manner, from indications given by electricity generators and the distributor four free consumers located in the studied region were obtained.

João and Merlo 185 These four companies were asked to answer the research, but only one accepted to collaborate with the study. The interviews were carried out following a semi-structured script, in loco, in the second semester of 2009, in a total of six interviews, all of them recorded and later transcript.

To analyze the obtained data two methodologies jointly were used; PEST and SWOT, in order to obtain an overview of the situation and then relate it to the competences and weakness of each contractual environment using SWOT analysis. By this procedure we aim to identify the main obstacles to develop the bioelectricity commercialization and opportunities to be exploited.

PEST or STEP analysis is an acronym constituted by the four largest macro-environmental forces: political-legal; economical;

social-cultural and technological universes (Johnson and Scholes, 1997). It refers to major issues by which organizations are individually influenced, and must be considered one of the most used tools for environmental analysis (Wright et al., 1996).

SWOT is also an acronym (Strengths, Weaknesses, Oppor-tunities, and Threats). Kotler (2000, p.98) defines this methodology as “a global evaluation of the strengths and weaknesses, oppor-tunities and threats” of a company/sector. Although opportunities and threats may be considered external forces to the company,

which affect it but cannot be controlled by the company, different from internal aspects such as strengths and weakness usually managed by the company/sector (Mintzberg et al., 2000).

As analysis unit, no company was chosen, different from what traditionally occurs in studies which apply PEST and SWOT. Otherwise, energy trade environments were chosen to be evaluated. The data gathered in the interviews were studied using correspondence and content analysis.

Content analysis was applied using the quantitative propositional

analysis - PQA (Madeira et al., 2011) and followed three basic steps: summarization, where contents whose meaning did not contributed as a valid answer were eliminated; segmentation of interviews in propositions (SIP) – (subject, verb and predicate) and finally propositions grouped into four themes of the PEST analysis – named category of study: FOL (strengths in free contracting environment), FOR (strengths in regulated contracting environ-ments), FRL (weaknesses in free contracting environments), FRR

(weakness in regulated contract environments), OL (opportunities in free contract environments), OR (regulated contracting environment opportunities), AL (threats of free contracting environments), and AR (threats in regulated contracting environments).

A frequency enumeration of propositions was carried out in order to transform qualitative into quantitative data and then constructing the correspondence analysis, which according to Hair et al. (2005) facilitates the perceptual mapping, making possible the reduction of objects in a small set of attributes.

RESULTS AND DISCUSSION

PEST and SWOT analysis for bioelectricity

Political and legal environments

In the scope of political and legal environment, every preposition whose content was related to the regulation or legislation of electric power; acts from government and institutional agents were analyzed. Figure 2 presents the results of a correspondence analysis where red points represent a secondary theme of the political and social environment and blue squares represent the study cate-gories (FOL, FOR, FRL, FRR, OL, OR, AL, AR).

In the correspondence analysis for the political and

186 Afr. J. Bus. Manage.

Year

Pro

du

ctio

n (

MW

h)

Figure 1. Bioelectricity production from sugarcane in MWh.

Source: UNICA (2011).

represent the study categories (FOL, FOR, FRL, FRR, OL, OR, AL, AR).

Fig. 2. Correspondence analysis for the political and social environment

Secondary themes Study category

Figure 2. Correspondence analysis for the political and social environment.

social environment, it was observed an accumulated lack of activity of 0.5898, which indicated that approximately

59% of the original variability of data was preserved by the analysis. This variability occurred in two dimensions

in order to facilitate the visualization of the distance from the secondary themes from the four adopted categories. It is interesting to highlight that when nearer the point representing a secondary theme from the study category (signaled in blue), the stronger the relationship with the classification.

The first secondary theme listed was “regulations”. According to the frequency count regulations can be considered a weak point of ACR. The main problem was related to the strictness of the rules, once they were defined due to hydroelectric power characteristics, whose predictability is stronger and does not fulfill the flexibility needs of the cogeneration from sugarcane bagasse. In this manner, an adjustment of market regulations considering biomass peculiarities (seasonality) may be considered as an opportunity.

In this sense we can analyze the “generation man-datory”, which was characterized as a strong point of ACR and a weak point of ACL. In the regulated market (ACR), according to the respondents, the energy delivery must be constant. In case the generator does not deliver the contracted energy, even if it buys energy from other supplier and does not fail to source the energy, the company is penalized. This situation does not occur on free market, where the supplier has the duty to deliver the product and is allowed to generate bioelectricity only in the harvest period, when the cogeneration process naturally occurs

4.

Furthermore, in what concerns regulations, it was identified as a weakness from ACL, the effects resulted from the constant modifications on transactions rules

5,

once they, at first, confuse the market operators. This aspect can lead to information asymmetry and eliminate competitiveness sources from some of the parts.

Another legal aspect of major importance is the account for energy performed by CCEE. It is aimed at pointing problems concerning extra consume in the case of the consumer, or less delivery of energy by the generator. In the case this situation happens on heavy load, there will be a negative balance in the moment when price is higher. In this case, , it can generate significant changes in the end of the month on the expected profitability to the generator or on the bill expected by the consumer.

The second secondary theme was “penalties”, indicated as a weak point of the regulated environment and an opportunity for free environment. According to the respondents, in case the settled agreement is not fulfilled, the penalties to the company in the ACR are severe and can produce cash flow constraints, thus making the transaction costs much higher if compared to

4 Energy generated twice, when the boiler is activated to produce sugar and

ethanol and when the generator is activated. 5 It is noticed that although the regulatory market is stabilized, there were

alterations in the operational forms of the energy commercialization in the

ACL .

João and Merlo 187

the ACL, wherever there is more flexibility related to sanctions. Considering these penalties can represent an opportunity to the free environment, since it determines the market choice where to operate and how much energy should be sent to each one. However a strong point in both environments is the mandatory energy delivery, which guarantees the security of the market regarding energy supply.

In what concerns security in supplying electric power (which is fundamental to the growth of a country) and the necessity to diversify the energy matrix, the strong point of bioelectricity is that the highest level of production occurs in a period of drought, when the generation of hydroelectricity is more difficult. Brazilian energy system is focused on hydroelectric plants and it can be an opportunity to co-generated energy due to this characteristic, since bioelectricity would balance the availability of the energy generation in the system.

In this scope of valorizing renewable energy sources such as biomass or wind energy, the respondents pointed out the political recognition the importance of these sources and their contribution to a different energy matrix as an opportunity for the development of bioelectricity energy, as well as the preservation of the environment. Following this reasoning, the wire tax discount is a rule which decreases from 50 to 100% the payment for the use of distribution cables by small generators, which injects up to 30 megawatts in the electricity matrix. It can be pointed out as a strong point in both environments, since it makes the energy offered by small generators (mostly when renewable sources are analyzed), more competitive on costs on the energy market.

In accordance with this aspect PRODIST is the law which regulates the connection of power plants to the distribution energy system. In this manner, in order to perform the connection, sugarcane mills must meet some requirements, such as to build a substation and a connection line. In the legal aspect, the connection is indicated as a strong point of ACL and ACR, since its cost is not transferred to the final consumer. However, these legal requirements can make the cogeneration project financially unfeasible.

The legislation which regulates the free contracting environment is still in the adaptation phase, but their rules are already defined. In this manner, it can be understood as having both a strong and a weak point of ACL, since the necessary adjustments have been tried to be adjusted on the legislation in order to meet the market requirements. However, according to interviewees, the adjustment process was not concluded and there are problems to be solved.

In this aspect, the role of ANEEL (the regulator bureau of energy) may be considered fundamental and characterized as an ACL strength point. ANEEL acts in two different ways: first identifying a need to adjust the legislation - in this case it opens a public hearing so that the agents can make their contributions; second acting as

188 Afr. J. Bus. Manage. mediator, since it searches for fair solutions for conflicts among agents, who have to agree with the rules determined by the agency.

The weak point related to ANEEL results from the slowness the actions are processed and decisions are made which leads to an unbalance from the moment the requirements are made to the expected feedback and the processing time. The lack of deadline for an answer is indicated by the respondents as a threat for both regulated and free environment.

Some institutional environmental agents such as CCEE, Sugarcane Industry Union (in Portuguese, UNICA 2011), and the National operator of the energy system (in Portuguese, ONS) were analyzed. They were considered strength points by the respondents. The performance of the first agency is a positive one, since it aims to consult the agents before making changes in any market rules. In this manner, UNICA especially contributes to the development of the free market, since it promotes meetings and offers qualified staff to put in practice the contributions suggested to CCEE and ANEEL. The National operator of the energy system, in its turn, tries to make cost as low as possible for the consumers.

Auction is another characteristic of ACR where both generator and distributor must submit to the conditions established in an edictal issued by the government, thus making a search for better transactions impossible, being this aspect a weak point. Another issue was that after the first sale of co-generated bioelectricity, it was to be sold in common auctions with no direct purpose to develop alternative energy sources. In this environment, bioelectricity could not compete with existing sources, which lead generators to operate only in the free environment after the end of the first contract. This problem induced one modification in legislation. Although, the agreements settled before this change follow the old legislation, which is another weak point in this environment. In this manner, biomass exclusive auctions are opportunities to be explored as it has occurred with wind power.

In the free market, the commercialization involves the analysis of the Group Company (history and background reputation) and guaranty source (surety bond or bank guaranty covering, at least, three months of billing). According to the respondents, these requirements give the transactions high reliability, which is a strong point in ACL.

However, the development of this environment faces a legal barrier which defines the profile of the final consumer. Besides the denomination, final consumer must contracted demand to buy more than 3.000MW, voltage of 69.000 MW or higher, and it must have its own substation. In case it decides to leave the free market, a termination has to be asked for five years earlier. All these factors make the migration of a client from the regulated to the free market much more difficult and can be understood as a free market weakness. An

opportunity to minimize this weak point is the growth of the number of special consumers. This category, comprising less strict rules, requires the consumers to hire a load from 500kw to 3.000kw, to acquire power resulting only from hydroelectric or alternative sources (wind, biomass or sun), and in case they decide to return to the captive market (regulated), the termination must be filled 180 days earlier.

In what concerns the environmental legislation, it can be classified as a threat for the production of bioelectricity and its consequent commercialization. According to the respondents, besides verifying whether the damage caused will not be greater than the benefits generated by the implementation of the cogeneration power plant, the legislation is very strict, making agents to dedicate extra attention on it, since the acceptance process is a long one and its positive conclusion is not guaranteed.

Related to established contracts on ACL, despite free negotiation there is a trend to use standard contracts which attend legislation and have defined safeguards to protect the contract and each player. These charac-teristics may be considered signals of strong points in the free market. Economic environment The economic environment is the widest one, and it is made up by the greatest number of secondary themes. Its correspondence analysis kept 60% of the initial data variability (accumulated lack of activity of 0.6005). Figure 3 shows the results, but it is important to point that when the closer to a secondary theme in a study category, a greater relation between them is noticed.

According to the respondents, for enhanced results and less risks, the operation in both environments is paramount. In this manner, both markets present strong points and draw the agents’ interest.

ACR is attractive for generators especially due to security matters, since the definition of the bioelectricity price is made in reverse auctions (from higher to lower bids). Thus, the generator analyzes whether the offered price is able to cover investment costs and generates the desired profit. This price is kept stable and is not affected by the forecast of energy supply and consume, as well as by the PLD volatility. As for the supplier, operating energy price in the captive market is regulated by ANEEL, and it is adjusted once a year. It works as a limit higher than the price operated in the free environment, since the consumer will migrate to another market and take the risks only if it enables him to obtain cheaper energy.

ACL has strength points for the power generator, for example: flexibility to commercialize small or great amounts of energy according to its capacity of production and number of consumers, due to the free characteristic of the market and the interconnected power distribution systems (no restriction of physical space), which

João and Merlo 189

point that when the closer to a secondary theme in a study category, a greater relation

between them is noticed.

Fig. 3. Correspondence analysis in the economic environment

Secondary themes Study category

Figure 3. Correspondence analysis in the economic environment.

increases the number of potential clients and suppliers, thus making the transactions more balanced and with more characteristics of market competition. Such configuration stimulates a better service once it is allowed changing suppliers, different from the regulated market. However, according to the interviewees, price has been a final parameter and there is no benefit aggregated to commercialization.

On the other hand, price volatility is a weakness of ACR (regulated market), and due to it, generators send to free market (ACL) only the amount of energy which was not commercialized in the regulated market, which is their major option. The demand for a high value financial guarantee in ACL agreements also reduces the amount of energy destined to this form of trade.

The market price in ACL is strongly influenced by PLD and can be higher or lower depending on its rate, which is determined by two factors: reservoir levels and consume forecast. Besides, PLD can vary according to

the load level: light (when there is lower power consume), medium (intermediary consume) and heavy (high consume, therefore, higher price)

6. In these variations,

the agents may have considerable gains or losses, and according to the respondents, that is why the method to calculate the price is a weakness of this market. However, companies may operate by means of creating strategies such as, for instance, purchase of energy when the PLD is low and sale to another generator or consumer when the PLD is high.

A strong point for bioelectricity in ACL and ACR upon the other renewable power sources is the cost to implement a power plant, since it is only necessary to change the boiler and to install a generator. As sugar and ethanol production is a settled business structure.

6 In case the offer for power is higher than the supply, the power yield referring

to each load can be equal.

190 Afr. J. Bus. Manage. Another positive factor is the production scale, much greater than other clean and renewable energy sources, except the hydraulic one. In this manner, according to the interviews, other bio-energy sources must not be seen as competitors but complementary to hydraulic-based power.

As direct competitors of biomass energy, there are the non-renewable energy sources: thermal and gas energy. According to the respondents, cost is an advantage point of these sources and, therefore, in the following negotiations they are able to offer a better price. The development of other sustainable energy sources to substitute electric power represents a threat to bioelectricity.

Considering the contract periods, this can be con-sidered a strong point in both ACL and ACR. In regulated markets, the agreements has a 15-year term, and from the moment the agreement is settled down, the generators (sugar and ethanol power plants) are entitled to sell their bioelectricity for a settled price, as well as the distributors of their supply, thus making feasible to develop long term plans. This form of stability allows the agreement to be offered as guarantee in bank financings.

In the free market, agreements with different horizons are settled, that is: a) very short term agreements, lasting one month and price established by PLD; b) medium term agreements, in which the price is compound by the projection of the PLD value plus a markup, and c) long term agreements, in which the period of contract can be longer or equal to 15 years. In this manner, given the characteristics of agreement period and consumer profile, the generator (sugar mill) can also make use of this bond as a financing guarantee. In practice, there is a greater latent conflict. While commercializing companies search for settling long term agreements in order to guarantee supplying in a previous established value (since the retail price is adjusted once a year), the generators, due to price volatility, prefer shorter term negotiations.

Relating to financing of cogeneration associated business, an improvement opportunity is the operation of private investors, that is, the development of partnerships (between co-generators and distributors) to execute and expand power cogeneration. Nevertheless, it is neces-sary to consider that the power plant also has investors linked to sugar and ethanol generation, and actions to promote maximization of profitability for one product may result in the reduction of dividends generated by other one. Thus, although it is a valid alternative, taking this opportunity requires the development of a model to manage such complexity.

The matter is even wider due to the classification of bioelectricity. Some power plants consider it as a by-product (threat to production), while others consider it a product due to its importance to profitability (opportunity), as a third income source. In this manner, the power plant can choose to quit the commercial cogeneration for interferences in the production of ethanol and sugar

(threat) or to increase its resources destined to bio-electricity production (opportunity).

The cogeneration also allows the commercialization of credits of carbon, since it prevents a non-renewable fuel being used in power generation. This is an additional income obtained with the sale of bioelectricity and can be considered a strong point both in ACL and ACR.

Regarding the connection of co-generator power plants to the distribution matrix, it can be considered a weakness in both environments. Independently from the market the company will operate, it shall meet the same technical requirements related to the connection. According to the present legislation, power plants are responsible for paying the costs resulting from such connection. However, they claim they do not have great expertise and resources to accomplish the enterprising, since this activity is not part of their core business. Besides, after its construction, in case the plant does not have concession assets, it should donate the substation to the authorized dealer.

In turn, the distributor claims that it is unable to pay the costs to build the line, since it renders a service whose payment comes from fees, and if the company itself pays for the costs, such value will be spread among all con-sumers. The respondents indicate government actions as an alternative and also opportunity to solve the problem where the government would take the construction or expansion of shared implementation projects.

The distance from the power plant to the transmission line is a major factor in this issue, and it directly influences the feasibility of the cogeneration project. For the generators located near the matrix, according to the respondents, the cost of the connection has not dramatically affected the profitability of the project, but has made farther generators to quit it. Thus, when making decisions about where to locate new power plants, it is considered the question of accessibility to transmission network.

As a threat to ACL, the final consumer fears that conditions of the free market such as price lower than the captive’s and established in agreement (which led them to change markets) are not kept.

For the interviewees, the scenario for bioelectricity is promising, since its potential has not been fully exploited yet, for example, in the generation of electricity using sugarcane straw. After the crisis of 2008, they also believe that cogeneration was the only investment in the sector that was being made to solve the energy problem. It is also believed that the trend is biomass becomes a complement to hydroelectric power and other renewable and clean sources will grow while the use of fossil fuel will decline.

As a threat to a positive scenario, it is presented one of the characteristics of electricity: standardization, once this energy was put into the system; it is not possible to know the origin, thus making impossible a higher profitability due to being clean and renewable. The market

development of bagasse hydrolysis can also interfere negatively, due to bagasse opportunity cost which will increase. Social and cultural environment

A few factors make up the count frequency of pro-positions concerning the socio-cultural environment. In correspondence analysis, we observed an accumulated inertia of 0.6222 and a dispersion of points due to the variation of classifications - all at low frequencies.

By analyzing Figure 4, there was a strong presence of the factor "relationship", whether between generator and consumer, between this one and the concessionaire and between the marketer and the consumer. The relation-ship between co-generators and their clients is a weak point of the ACL, because despite being a friendly relationship, this boils down to a purely financial transaction in which the parties do not know each other. Similar is the relationship between marketer and customer.

Relationships of this kind, where price is the only parameter determining the occurrence of the transaction inhibit the development of cooperative behavior, as parties often do not feel committed or encouraged to maintain a long-term deal, since it negotiates a commodity like product with large numbers of buyers and sellers.

Moreover the relationship between generators and concessionaire can be considered both as weak and strongpoints of ACL. In this, the parties may be competitors or customer / supplier which tend to cause some difficulties in the negotiations, but the benefit of repetition can be a reduction in uncertainty. According to respondents, both parties seek to meet the standards to ensure system security and good relations.

Regarding the mobilization of industry, there is a study group that verifies the impact of changes in the law in their contracts and sends contributions to the relevant bodies. This behavior demonstrates the development of a cooperative culture, with a positive point for the free market.

The way the free contract is structured in its provisions was a factor identified by respondents as an inhibitor of the practice of opportunistic behavior and therefore a strong point of the ACL. In this sense, they say, there will hardly be a bad debt, including being accepted receivables as security agents of some funding. Thus, due to the importance of a good reputation, given that trading in ACL is backed in the analysis of consumer profile, opportunism has not been reported as frequently occurring.

In terms of generators and consumers' aversion to market risk, the ACR has a strong point compared to the ACL because the risk of financial loss or non-receipt is considered minor. Thus, the prevalence of this view is an obstacle to the growth of the FTA, whose main features

João and Merlo 191 are flexibility and volatility.

Environmental awareness and consequent recovery and higher pay, because it is a clean and renewable energy, yet appear as a weakness of both consumers as captives free, which so far are not willing to pay more for this type of energy

7. However, a possible change of view

can be seen as an opportunity for growth of cogeneration from bagasse.

Another possible positive scenario for the development of both the free and regulated markets are the projections of energy consumption compared to the same provision, as it is estimated that there will be an increased demand for electricity promoted by population growth

8 and

increasing purchasing power (GDP in 2030 from R $ 3,337 and R $ 6,712 billion in 2005), much higher than the capacity of electricity generation (between 5.2 and 3.6 kWh / person / year) (Brazil, 2007). Technological environment As technological environment was considered beyond the new technologies available and required for the cogeneration of energy and factors that interfere with the production process in its development or part of it. Correspondence analysis, presented in Figure 5, was the one which most conserved the initial variability of the data (83%) because there was an accumulated inertia of 0.8282.

On the technological side, according to the interviewees, a weakness for bioelectricity which even makes losing market share to other sources is its generation capacity, since, due to the need for raw materials, it is not constant, often invalidating longer term contracts with both the ACL as ACR.

However, depending on the heat balance of the sugar mill (bagasse availability), it is possible to generate electricity a few months before and after the sugar cane harvesting season. The rain also interferes with the generation, for the production of ethanol and sugar stops and consequently so the generation of power should be interrupted, since co-generate is to take the same energy twice (boiler drive and generator). Thus, the use of boilers with efficient technology that allows the process of water condensation and its reuse, even if the rest of the plant is not in operation, is an opportunity for growth of cogeneration from sugarcane bagasse. It is noteworthy that these boilers are already within the requirements of environmental legislation regarding to gas emissions. For this purpose, it is necessary that a still existing weakness be eliminated both in the ACL and ACR, which is the exchange of low-boilers by high pressure (preferably

7 According to the literature, in some countries, there is a better payment for

electricity coming from clean and renewable sources. 8 It is expected that the average rate of annual growth of the Brazilian

population reaches 1.03% and maintains above the world average (Brazil, 2007

a)

192 Afr. J. Bus. Manage.

Secondary themes Study category

Figure 4. Correspondence analysis in the social and cultural environment.

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

Secondary themes Study category

2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 Figure 5. Correspondence analysis in the technological ambience.

using condensation technology), since the existing plants are not designed for power generation but for burning and disposal of bagasse, which was regarded as waste with environmental impact.

The amount of energy to be produced depends on the amount of bagasse available. This, in turn, can be used in several ways, but, according to those interviewed; the CHP technology is the only one that can consume the high volume originated in the production of sugar and ethanol, not being another destination point techno-logically, a competitor in the production of bioelectricity.

It is noteworthy that, although it has been pointed out in interviews as technological threat, the possibility of transforming the bagasse of sugar cane into ethanol through hydrolysis is a perspective that should be considered by the agents, since the main raw material used in the cogeneration of electricity tends to be destined to ethanol production, the main product of the sugar-ethanol industries.

Availability and quality of bagasse can interfere with the generation of bioelectricity, due to its threatening and uncontrollable exogenous factors such as temperature, relative humidity and rainfall in the previous year, once the higher is the humidity in bagasse; the more it is needed to generate energy.

With regard to the distribution system, a strong point for both the ACL as ACR is the technology that allowed the system interconnection. However, as all generators are connected to the same network, every new connection, an interference is caused, being necessary to reconfigure and reinstall equipment that support the load and it generates costs that are reversed in energy prices, what makes it a weakness of this system. Results of SWOT analysis After studying the macro and micro environment, Table 1 was prepared summarizing the results of the research, making the second stage of the SWOT analysis possible, which consisted in crossing the threats and opportunities with strengths and weaknesses, so that when relating the variables which have complementarity between them, business strategies / policies are set up.

The first crossing occurred between the threat (hydrolysis) and strengths (price and carbon credits). The commercial development of hydrolysis can threaten the generation of bioelectricity once it also competes for bagasse. However, this threat can be minimized due to the bioelectricity price that is classified as a strong point, once the bagasse price is defined in terms of opportunity cost.

Other benefits such as income earned by the sale of carbon credits, the close relationship between energy production and sugar and ethanol are elements that must be considered together in a profitability analysis. Addi-tionally, the already made investment can be considered

João and Merlo 193 a barrier to quit (active use with high specificity).

Regarding to opportunities that can be explored due to the existence of strengths, we highlight the estimated population growth and GDP, and consequently the demand for electricity and the search for more sustainable electricity generation. In this sense, the production of bioelectricity still behind its potential and has some fundamental characteristics such as the production peak period which is shorter than hydraulic generation, the primary energy source in the country; and the use of a completely renewable fuel, making it a clean and sustainable energy that attends the new demands. It is noteworthy that the interconnected distribution system allows the trading of energy anywhere in the country.

However, for full utilization of this energy it is required the development of two environments of commercia-lization: in the regulated one, it would be interesting specific auctions for biomass, and in the free one, improvements in trading environment, such as in an interactive CCEE site to obtain information from contracting conditions (price, time, specifications) in real time, thus reducing information asymmetry and high demand for financial guarantees, although that inhibit opportunistic behavior, and reliability to the market makes the transaction more costly.

The weak point of non-continuous generation and existence of low pressure boilers can be minimized if the opportunity of replacing them by high-pressure boilers is exploited. The adoption of this technology would also reduce the risk of the plant suffering a penalty in the regulated environment due to non- generation. To this end, it is necessary, in most cases, the completion of a financing. Accordingly, improvements in the forms of credit could also facilitate the connection of the power plants to the distribution network, one of the main problems in both environments. In ACR, the use of the sales contract as guaranteed funding is a practice to be widespread. On its turn, in the ACL, the development of models to manage partnerships with high degree of complexity, such as partial ownership of an asset or shared connections is needed. In parallel, the creation of finance for the sector by the government and the consideration of their specific legislation is essential.

The classification of bioelectricity as a byproduct is kept for most of the sugar and ethanol industries. Thus, in order to efficiently and effectively explore the positive scenario for bioelectricity and demand growth, it is necessary that cogeneration becomes an industry strategic business unit, enabling investment in generation equipment more efficient and use of straw in the energy production.

Finally, to mitigate problems such as volatility in ACL and the penalties for non-generation in ACR, mecha-nisms such as price correction clauses could be incur-porated in the contracts, which in atypical situations that generate sharp price distortions could be revised to minimize the impact of price volatility and energy delivery

194 Afr. J. Bus. Manage. Table 1. SWOT analysis result.

ACL strengths ACR strengths ACL weaknesses ACR weaknesses

Bagasse

Bioelectricity

Distribution system

Technical Specifications

Relationship generator /dealer

Absence of opportunistic behavior

Contracting environment

Free market

Other sources of energy

Term

Security of the contract

Carbon credits

Regionalization

Discount of wire tax

Price

Energy matrix

Change of legislation

ANEEL

CCEE

Contract structure

Legislation

Free market structure

Bagasse

Bioelectricity

Relationship generator /dealer

Other sources of energy

Term

Stability/security

Security of the contract

Financing

Carbon credits

Regionalization

Discount of wire tax

Energy matrix

Change of legislation

Generation is not constant

Cogeneration technology

Low-pressure boilers

Technical Specifications

Relationship generator / consumer

Relationship dealer / consumer

Consumer awareness

PLD

Bagasse

Volatility / Flexibility

Connection

Financing

Product / by-product

Commodity

Rules

Requirement for to be free consumer

Consumer awareness

Generation is not constant

Cogeneration technology

Low-pressure boilers

Regulated market

Bagasse

Connection

Product/by-product

Commodity

Rules

Penalties

Mandatory to generate

Auction

Regulated market structure

ACL Opportunities ACR Opportunities ACL Threats ACR Threats

Boilers with condensation technology

Population growth

Supply/ demand scenery

Bioelectricity scenery

Renewable sources

Boilers with condensation technology

Population growth

Supply/ demand scenery

Bioelectricity scenery

Renewable sources

Weather climate

Risk aversion

Bagasse

Level of the reservoirs

Hydrolysis

Environment legislation

Weather climate

Bagasse

Level of the reservoirs

Hydrolysis

Environment legislation

Source: by the authors.

in ACR after the action of some uncontrollable factors, such as natural ones. FINAL CONSIDERATIONS Analyzing both markets we can conclude that regulated environment compared to free environment offers a better security in transactions. When the mill wins an auction there is a contract with all conditions which include: remuneration, amount of sold energy, technical aspects, rules and penalties. These aspects give conditions to both parts to forecast all the aspects in a scenario of next 15 years. However, the legislation can be considered rigid, inflexible and offering penalties for both parts, in case of contract rupture.

Free market, otherwise, has some weakness such as

price volatility (influenced by PLD) and the attendance of the consumer profile legal needs, which restraints prospective clients. In this environment there is a great flexibility to establish prices, ways of payment, and amount of energy charges.

There is a great problem to be solved by government which is the connection costs which can make some projects unfeasible, both ACR and ACL, once they make the energy price inconsistent with market price. It is concluded that both markets are necessary to maintain a good operation of the Brazilian energy market. ACL guarantees ongoing supply, while ACL increases compe-titiveness. In what concerns bioelectricity, according to the conditions revealed in the present study, ACL is the most advantageous alternative, especially because of its flexibility. In this manner, there must be a market improvement, both as form of development in the energy

sector and renewable energy sources (except hydro-electricity), whose main characteristic is unforeseen generation.

Finally, dealing with managerial implications of the study we can postulate: 1) in ACL case, the importance of the trade environment is crucial to success; and 2) probably always there will be conflicts to deal with the end destination products of sugar mills whose investors need to manage interests conflicts of gains oriented for sugar and sub products or to produce energy, so there is a need of a consistent public policy for the energy market. ACKNOWLEDGEMENT Authors thank The State of São Paulo Research Foundation - FAPESP for their support. REFERENCES

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