The modernization of the electric sector has caused changes in all links in the chain. In distribution, the future involves innovation, grid digitalization and integration. The CEO of Neoenergia, Mario Ruiz-Tagle, spoke about this and other relevant issues for the future of energy at the forum "Modernization in progress: challenges and opportunities", held during the National Meeting of the Agents of the Electric Sector (Enase), which was mediated by Luiz Augusto Barroso, president of PSR, and participation of Miguel Setas, CEO of EDP, and Andrew Storfer, director-president of América Energia.
Check out the main themes commented by Mario Ruiz-Tagle at the event:
Luiz Barroso: This post-Covid 19 world will have a great impact on the discussions of the coming years. How do you observe the impacts and actions of authorities and regulators in the countries where you operate?
Mário Ruiz-Tagle: The Covid-19 was a very special phenomenon, we started having the first information about the contamination in China in December 2019 and only in March 2020 we faced the critical situation in countries where Iberdrola operates and in Brazil a little further on. Europe was a little more advanced in relation to contamination, which brought a challenge to the electric sector, given the degree of ignorance of the spread and impacts of the virus. What was adopted by the authorities was a rapid confinement that would allow the reduction of industrial and commercial activities to avoid contagion. This had a strong impact on distribution, due to the fall in the market and the increase in default and all the elements associated with KW sold. But there is a difference between Europe and Brazil. In Europe, the world of distribution and trading are separate and this gives us an idea of how Brazil has to prepare itself for the free market in the future. We can identify the importance of separating these two areas. The distributors in Europe had much smaller impacts than the distributors in Brazil because of this combination of distribution and trading.
Luiz Barroso: In research conducted with the ENASE 2020 audience, the vast majority consider that modernization is taking place at a slow pace and that the ideal timeframe should happen within the next three years. In your opinion, what are the three priority items for the realization of this modernization and how to reach the deadline forecasted by the participants of our survey?
Mário Ruiz-Tagle: The separation of the known energy ballast is fundamental for a more flexible and prominent operation. Separating distribution and trading, incorporating new technologies is becoming increasingly necessary in order to adequately allocate the risk to the trader. In this way, the customer will increasingly pressure the sector for technological investments, requiring innovation, as liberalization advances in the market up to the residential tariff, when this customer can make the choice of his/her own trader.
Above all, we need a lot of investment on the change of the measurement system to allow this digitalization of the grid, which makes possible the trading of low-income customers. The modernization of the Brazilian electric matrix is what will bring great advances, like batteries, for example. I would still incorporate an item that extrapolates the electric sector, but I believe that, without doubts, it is a key business and can accelerate the transformation: the technological challenges post-Covid will have to be incorporated into this modernization agenda. The issue of resource allocation and the surplus of energy will be fundamental for those who contract today and in the long term, to be clear about what will happen in the future. The sector needs a certain degree of predictability and stability to lower the systemic cost and benefit with that the consumer tariff collection.
Luiz Barroso: The distributors will be interested in investing in distributed generation, looking at solar energy mainly? Opening companies that specialize in the business would, in fact, be good for them or it would be inevitable not to invest? In parallel there is a regulatory discussion on the subject. So, in your opinion, what would be the appropriate sphere to discuss the topic of Distributed Generation?
Mário Ruiz-Tagle: In Neoenergia we have our own trader and we have a DG area. I believe that this is a worldwide trend and to take advantage of the sun's resource, from the customer's point of view, is in fact an alternative of using clean energy. Solar generation is very much linked to the utility change of the future and we need to think that with each change in the distribution profile within our concession areas, our world of distribution grid operator also changes. We have different flows in the grid and all this demands new investments, new technologies, grid reinforcement etc.
We are not talking about "taxing the sun" or having restrictions on the expansion of distributed generation, but there are studies conducted in places where the technology is at an advanced degree and allows us a certain level of learning, signaling for tariff inefficiency. All the countries that initially incorporated solar energy into the customer´s measurement started with a system that makes a kind of compensation between distribution and generation. This behavior generates a serious distortion in value, making the safety of one segment also for the other.
The backbone of the sector is distribution and it is not possible to have everything and not have an adequate grid in this link of the chain. The distributor is the great battery of the system, so it is certain that the distributed generation shares a certain degree of safety of the system.
Barroso: How are you in this scenario of demand for innovation?
Mário Ruiz-Tagle: Iberdrola and Neoenergia are companies that have been treading the path of energies of renewable sources and the fight against climate change for many years now. Our first wind farm is already over 18 years old. And this is a path where we have new actors. We see the oil industry approaching the generation of renewable sources. This is a very good sign for the climate, for the world. I always say that the 19th century was the century of coal, the 20th century was the century of oil and gas and the 21st, 22nd and 23rd centuries have to be of electric energy.
When we talk that they are the centuries of electric energy, what we will find is a strong need for investment in the sector, which has to be allocated in expansion, generation, transmission, modernization and digitalization of our distribution grids. The role of the distribution of the future will be much more active. We will generate a much more integrated utility from the point of view of energy management. Transmission is also an important need at the moment. We can only do large volume transmission with larger or less cable grids, so we can switch from continuous to alternating current. Those are the great technologies that are advancing.
The organization of batteries will reduce the need for transmission, but will generate other investment needs. When we see the investment numbers that Brazil puts for the next ten years, we are talking about the order of R$ 220 billion to R$ 250 billion, which we have to capture from a financial market and where the cost of this money and the perception of risk in the sector will be very relevant from the point of view of getting to pass all this governance that we have created for years for the consumer. The development of the financial market can bring capital from abroad to cope with the currency difference. It is very important to advance on this agenda to get the volume that the sector's equation will need and I believe that the sector is facing a gigantic challenge.
The post-covid world will have differences. I believe it will be a much more digital world, much faster. Our innovation challenge has to have exactly the same speed as the migration from working in the company to working in home office. In one week, we managed to put 5,000 people in home office, with functioning systems and data security preserved. This innovation challenge is what we have to bring to our employees. The historical and stable electric sector will have to migrate very quickly to a more agile space, to a more dynamic, much more interactive sector.
Luiz Barroso: How do you see the opportunities to participate in the auction of CEEE (Companhia Estadual de Energia Elétrica) and CEB (Companhia Energética de Brasília)?
Mário Ruiz-Tagle: Today the group has 14 million customers and a very focused investment plan within our concession areas. We have the responsibility, as managers, to create value for our shareholders and those are interesting assets. They have synergy potential from the point of view of our operations and serve a new market for Neoenergia. We look for opportunities that create value and we are attentive, but always respecting a very responsible capital allocation policy, because this is what generates investor confidence and ensures that we succeed in our expansion plans. There is no point in making exaggeratedly risky bids to increase the volume of customers and territory served, it has to be an economic, financial and operative reasoning that does not take us out of our focus. We have a plan of R$ 20 billion of investments in generation of renewables, in wind parks that we are building, and in transmission lines. This is the great plan we have for the coming years, but we will be open to these opportunities that can create value for our shareholders, not only in the world of distribution, also of transmission and generation.