Interview of the month: Lavinia Hollanda

It is important that civil society participates in the debate on the power sector.

Centralized and complex, the power sector, although vital for the day-to-day population, is still poorly understood and not open enough to participation. According to Lavinia Hollanda, executive director of Escopo Energia, an energy consulting firm in Brazil, it does not need to be like this. For the engineer and doctor in economics, who was research coordinator at the Getúlio Vargas Foundation’s energy studies center, it is possible and desirable to involve the citizen so that he knows what he is paying in his electricity bill – in which most are tributes – and can be consulted on the public policies of the industry. “An example of how it is possible for people to understand all this complexity is the telecommunications industry. Everyone knows how to choose the best package for themselves”, he says. For Hollanda, “the work on energy source attributes that Escolhas is developing is very important for that matter because it is the first time that we are analyzing the real benefits and costs of each source. It helps to understand what each source brings from positive and negative externalities to the system as a whole”

Escolhas – The Brazilian power sector is structured from the Federal Government, responsible for formulating the sector’s policies, from the price of energy to the definition of the sources that may be included in the electricity matrix and its percentages, which is reflected in the Ten-Year Energy Plan by the Energy Research Company (EPE). Since 1988, virtually all presidents have made changes in the power sector policies, bringing a great degree of unpredictability to a sector that needs to look for the long term. What are the effects of this for the country and for the power sector itself? Is there another way to structure this planning?


Lavinia Hollanda – Like all infrastructure sectors, the power sector has a long maturing horizon. I  also work with oil and gas, and they are all areas where, the lower the uncertainty, the better.   But one thing is to have predictability, another is to have centralized planning. Uncertainty is the most damaging point because whoever comes to invest here, will marry Brazil for 30 years. Seeing the return rate decrease suddenly by a change in regulation, for example, changes everything affects the imagined return. It is like being in a marriage that you can not leave. This does not mean that regulation and business environment cannot be improved, but the changes need to go in a direction that the investor understands. Otherwise, it affects the country risk rate. Not to mention that the power sector is already subject to risk factors, such as technological or environmental changes. Predictability, however, is not immutability. The role of government is to be an entity that softens these changes. But centralized planning depends on how the current government faces the market. It can centralize and even execute, or create the rules for the market to act, giving investment conditions for this. It does not mean letting everything in the market´s hand. You can decide that you want to invest in wind power and create biddings and incentives for that source. In this sense, we had a successful case in Brazil, which went from 0% to about 6% of wind power in its installed capacity in approximately ten years. Today, the industry itself understands that technology has matured and that it is possible to rethink the incentive. The technology is already established, the projects are dynamic and profitable and the market may be aware of this. It is time to argue. At the last bidding, several wind power projects entered. The government made the policy and the market reacted. The government has to have sound policies and predictable business environment.


Escolhas – The policies of the sector are usually decided in extremely technical discussions and are not transparent to society. Only those who belong to the government, the power sector entities, the companies and energy consultancies and the institutions that represent them participate. The population is left to pay the electricity bill without understanding what happens until the electricity reaches your home. How could these discussions be more inclusive, so that people can really understand and give their opinion on such an important issue for their day-to-day life, especially at a time when the State is in a fiscal crisis?


Lavinia Hollanda – The energy sector has indeed a complexity, but it is not as big as it seems. What happens is the effect of segments that close in on themselves, which restricts the discussion. It does not need to be like this. It can be easier. Allied to this, there are patches in regulation that only worsen the scenario of complexity. You need to be in the industry for years to understand. Besides that, is an engineer´s sector. Therefore, the work of the Escolhas Institute is critical, it is so important, in bringing up the topic and making it easier. It is important to educate people about the industry. An example of how is it possible for people to understand complexity is the telecommunications industry. Everyone knows how to choose the best package for themselves. In the power sector, it is possible to have more representations of society in the debate, but this representation is increasing, with organizations like Escolhas and the Brazilian Consumer Defense Institute (IDEC) getting involved in the discussion.


Escolhas – There is not enough clarity, for the population, about the power sector subsidies. Although they exist all over the world, it is not clear to Brazilian society the size of this account and to whom these subsidies are going, nor what priorities are at play in those decisions. How do you analyze this issue?


Lavinia Hollanda – If we think of the electricity consumer – which is everyone – every consumer is also a contributor. People, however, do not understand what they pay on the electricity bill. A good part of what is there is not energy, but charges. They do not know what (policy) choices are embedded there, which is one of the most damaging things in the industry. An example is distributed solar generation, of which the population knows little about. While solar farms throw energy in the grid, like other sources of energy, distributed generation is that produced on the roofs of the house where the owner consumes and supplies for the grid. The government says it is important and it does politics to encourage, which is great, as long as it is discussed with society and the population knows how much it is paying. Today, if I want to put solar energy in my house and place an eight units energy board and I consume ten, I will pay only for the two extra units. In the fee, however, besides the cost of energy, are the taxes, the cost of using the distribution network. That is, on the eight units that I produced, I also did not pay the taxes and the availability of the grid, while I should only stop paying the energy. The other consumers are paying the rest for me. If you have a lot of people using this system, it will burden those who do not have distributed generation, probably someone with a lower income. You must separate the components of the fee so that I stop paying only the energy. It is necessary to discuss the best way to do this, but this is not done, nobody knows. The problem is not the charge, the subsidy, but to pay without knowing what you are paying. This transfer to consumers and taxpayers is important. That is where society is brought to the discussion. We should remember that distributors (such as Light and Eletropaulo) have made investments that need to be respected and recognized because we will always need them. This is only one of the examples.


Escolhas – The power sector in Brazil, as well as around the world, has to deal with new challenges, such as climate change, which affect the provision of some energy sources – mainly hydroelectric dams – and limit the use of those based on fossil fuels. But why is the industry so unresponsive to the social and environmental effects of its projects and works, facing what it calls an externality – or non-technical risk – only after the investment decision is made?


Lavinia Hollanda – This subject is deeper than we want to believe. It seems that we have divided the country between engineers and environmentalists. It can not be like that. On the one hand, those who have always worked in the country worked with limited consultations with society. But society has changed, especially in relation to communities, and it is necessary to modernize the consultation process. In the oil sector, we call this a social license to operate. It is a process that has matured in many parts of the world, including here, but there is still plenty of room for progress. On the other hand, however, we need to understand that there are choices that need to be made. Only with renewable, we would not be able to meet the demand. If we need small hydropower or thermal generation, there have to rules. Thermals come with fossil fuels, they have greenhouse gas emissions, but we need to find ways to talk. The work on energy source attributes that Escolhas is developing is very important in this regard, as it is the first time that we are analyzing the real benefits and costs of each source. It helps to understand what each source brings from positive and negative externalities to the system as a whole.


Escolhas – At the same time, however, the industry needs to overcome technological challenges in order to allow the widespread use of renewable energy sources – such as wind and sun – to allow the storage of generated energy, or to create management models for a system that can rely on a mix of flexible sources with different supply patterns. What has been done? Is the Brazilian power sector prepared for this challenge?


Lavinia Hollanda – In the matter of the insertion of new technologies, we must think about the investment resources, since we must also invest in the infrastructure that adapts to these technologies. For example, in distributed generation, you need to change the home meter; electric vehicles need places to charge the battery. Another bottle-neck is regulatory. A company invests in innovation if it thinks it will have something to gain. To encourage it, it needs to be able to recover what it has invested, as with patents. It has to allow the company to capture part of the innovation costs. With current regulation, there is no inducement to innovate. For example, for distributors, there is potential for smart grids, with services associated with digital infrastructure. But by the current regulation, any gain has to be reverted to consumer fee. Only those who made investments need to be paid. Innovation will come at some point because its costs are decreasing. The sector is ready, but the regulation is not. The bill has to be right for everyone.


Escolhas – In this scenario, the Brazilian power sector needs to establish more objective standards of competition between energy sources, evaluating in a fair and technical way the attributes of each one, with its advantages and disadvantages, in a clear and transparent way.  All this is under discussion in the reform proposal draft by Temer´s government, which is under discussion in the scope of the Public Consultation 33. What is your view on the proposal being discussed?


Lavinia Hollanda – The regulatory modernization of the power sector is appropriate and welcome, but slower than how it was proposed in the public consultation. It envisages technological and behavioural changes. I would like to see implemented over the next few years, after an extensive dialogue with the industry. It goes in the modernization direction, as it has a good understanding of how the industry should work.