Globally, energy generation accounts for approximately 73% of the total greenhouse gas emissions. While part of this energy is used for transportation (~16%), the bulk is used to generate electricity supplied to residences, commercial and industrial establishments. One of the key factors for this figure is that ~60% of the total electricity produced comes from burning fossil fuels. While we know there will not be a single solution for climate change, we believe diversifying and increasing the participation of renewable sources is a start.
On the other hand, Brazil has been in the forefront of electric sustainability, with one of the most renewable electric matrices in the world, with 83% of renewable sources such as hydroelectric, wind and solar power. However, there is a strong reliance on hydroelectric power, ~65% of the total electricity produced in the country, which despite the lower emissions, exposes the country to other sustainability concerns and a concentration risk, which helped explain the recent crises we faced with the spike in energy prices due as a consequence of the 2021’s drought.
At the same time, Brazil also has a great (and underexplored) solar potential due to its natural climate and geographical conditions. As of 2020, solar’s participation in the energy generation was only 1.7%. Despite recent growth, 4th country to add most solar capacity in 2021, there still is a lot of room to be explored, as Brazil has only ~25% of Germany’s installed capacity, a smaller country with smaller levels of solar radiation.
The highly regulated and concentrated reality of the energy sector in Brazil
The electric sector in Brazil, from generation to distribution, has different market dynamics ranging from public monopoly to natural oligopoly. Large government owned companies dominate the generation. Federally owned Eletrobras holds about 40% of capacity (including 50% of the Itaipu dam), with state-companies CESP, Cemig and Copel controlling 8%, 7% and 5% of generation capacity respectively. Transmission has remained almost exclusively under government control through both federal (Eletrobras) and state companies until recently, while distribution is in the hands of 49 utility companies, where 64% of Brazilian distribution assets are controlled by private sector companies.
In addition, there is a strong dependence on the regulated, or captive, market for energy supply. Generally, consumers have access to electricity through regional distribution companies that contract energy from generators through auctions authorized by the government and regulated by the Electric Energy National Agency (ANEEL). While the price is regulated, due to the different generation conditions, electricity prices can vary inside predetermined ranges and be subject to annual adjustments that consider inflation, generation costs and distribution investments.
Key problems of the sector today
Concentrated and centralized market: as of today, the sector is dominated by few players while consumers are stuck in the regulated market. This is the result of a concessions’ market dynamic, in which the government assigns big and long term contracts to selected energy providers, with no room for change until its expiration date. As a result, prices tend to stay in the upper range, and without the threat of competition or shift in the market dynamics, companies lack incentives to digitize and innovate.
Structural inefficiencies: the Brazilian energy sector relies on a challenging infrastructure scheme. Operational costs – in the generation, transmission and distribution phases – are high, and there is a considerable amount of technical and non technical losses in this system that are also reflected in the final costs. Moreover, other companies’ inefficiencies together with high government taxes, ~47% of gross revenues, contribute to make Brazil the 4th country with the most expensive electricity.
Concentrated electric matrix: as mentioned, Brazil has a strong dependency on hydroelectric power, which is responsible for 65% of the total electricity generated in the country. This higher dependency on this unique source of energy helps to expose us to limited generation capacity and price surges as a consequence of adverse climate conditions, such as the drought period we’ve recently faced.
Despite the challenges, Brazil’s energy sector has great potential
Huge addressable market: in 2020, the amount of energy consumed in Brazil was ~476TWh, with 65% being consumed from the captive market. There were a total of 86.6 million consumer units, of which 93% were residential and commercial consumers. Companies like Nextron provide an alternative for those consumers that are still locked in the captive market today paying one of the most expensive energy tariffs in the world.
A lot of space for technological improvements: according to EPE and IRENA, the Brazilian energy sector is still in its initial phase of digital transformation with a lot of opportunities in generation, distribution and consumption. For example, the massive implementation of smart meters needed to measure the energy flow and to compute the contribution of distributed energy resources should provide greater flexibility to the demand and efficiency to the system. As digitalization evolves we should see new business opportunities, more efficient systems with improvements in tariff structure and pricing. Naturally, digitalization will also bring along new challenges, such as greater vulnerability to cyberattacks.
Favorable regulation: in the last years we have seen regulating entities and the Government establishing more favorable regulations, making it attractive to new business opportunities that will help digitalize the sector. For example, in 2012, Aneel gave permission to consumers to produce and use their own energy, establishing the first stimulus to distributed generation. In January of this year, a regulatory mark was sanctioned by the president creating the federal law 14.300. This new law helps to increase legal security and previsibility by laying out the framework for how units can produce renewable energy and distribute it in the grid in exchange for credits, which can then be ‘monetized’, to improve project returns and payback periods, with the help of companies like Nextron.
Changing consumer behavior: as the market becomes more open and competitive, we should see a shift in the dynamics when the previously passive consumers start to take control and set a higher bar of expectations, similar to what happened in other sectors, such retail with ”the Amazon effect”. As this happens, value creation and competitive advantages for companies in the sector will be defined by their ability to captivate customers instead of the purely traditional asset ownership model. And we believe there are a few trends driving this new consumer expectations: more cost-efficiency, as Brazilians get tired of the increasingly high energy tariffs; less climate impact, as sustainability concerns increase among consumers; and seamless user experience, as a reaction to the distribution companies track record of low customer satisfaction and high number of complaints.
Nextron: Valor’s new investment is developing a platform to disrupt the distributed generation market
Potential of distributed generation: in addition to the reasons mentioned above, we believe that distributed generation (GD) has great potential in Brazil for a few more reasons: GD is already a reality in other countries, in Germany for example ~50% of renewable energy capacity is decentralized and owned by citizens, individuals, farmers and local communities, and in the US, the leading community solar startup, Arcadia Energy, recently raised US$ 200M to continue helping to drive the energy transition by connecting companies and consumers to clean-energy products; According to Empresa de Pesquisa Energética the installed capacity for distributed generation will grow 4-5x between 2021 and 2031, increasing its participation from 4% to 17% (~37GW); but we believe Nextron, and other similar companies, will help accelerate the growth of GD as they improve monetization for generators while democratizing the access to solar energy, and other renewable sources, with their subscription models offering;
Complementary AAA team: Nextron’s founding team has a unique (and winning) combination of expertise and relationships in both the energy and technology sectors. While Ivo has spent the last years immersed in the renewables energy sector, where he worked as a business development director for Mori Energia and Sou Vagalume, a pioneer in distributed generation space; Roberto was leading engineering teams for Docker in Silicon Valley and more recently, creating a next-generation fraud prevention and risk management platform powered by AI and machine learning.
Bold vision with customer at the center: from day one of meeting the founders we understood that Nextron was the platform best positioned to capture the opportunities in the distributed generation space. The founders have a vision of creating a seamless and engaging experience for consumers, and generators, while providing access to cheaper and renewable electricity. Starting with its “sustainability-as-a-service” platform, we believe Nextron will help accelerate the dissemination of GD and democratize the access to solar and other renewable sources.