Sugar rush - Strategies

Anticipating today's power crunch in Brazil, processor Santa Elisa became energy self-sufficient years ago. Now it's supplying power to the national grid, and looking to develop its energy sideline into a sustainable and profitable venture.

WHILE MANY BRAZILIAN businesses are calculating how energy rationing will sour this year's profits, Companhia Energetica Santa Elisa executives think they've found a sweet spot.

During the past 50 years, the company has been producing its own energy by burning bagasse, the debris leftover after juices are extracted from sugarcane stalks. With a recent injection of capital from Brazil's development bank, BNDES, Santa Elisa is gearing up to expand its energy production - and increase the profits it earns providing energy to the local power grid.

The new line of business couldn't have come at a better time. Several years of below-normal rainfall have created a debilitating energy shortfall for Brazil, which is largely dependent on hydroelectric power. At the same time, prospects for sugar exports have risen in tandem with a collapse in value of the real. The combination, says CEO Maurilio Biagi Filho, means that Santa Elsa can satisfy the world's sweet tooth while powering the homes--and even cars--of Brazilians. "At the current rate of exchange, Brazil should be exporting everything, even ideas," says Biagi.

Power supplied by sugar is a notion that most associate with the buzz resulting from its personal over-consumption. But sugar producers in Brazil are seeing its broader potential for both co-generation of electric energy and its proven ability to fuel automobiles in the form of cane-based ethanol. "Generation of energy should become the third facet of most sugar producers. I have no doubt that it will skyrocket in the next five years," says Ricardo Esparta, the director of Ecolnvest, an investment advisory firm that specializes in socially conscious businesses. Biagi believes the new business lines could boost the Sertaozinho, Sao Paulo-based company's US$100 million in annual revenues by as much as 10 percent.

Although Biagi is in the spotlight now, his business hasn't always been an attention grabber. It took a national energy crisis for the company's co-generation program to gain public notoriety and, more importantly government funding.

Back in 1989, the Brazilian Association of Industry and Infrastructure, which Biagi heads, ran full-page advertisements in all of Brazil's major daily newspapers warning of the nation's impending energy shortfall. At the time, nobody took the warning seriously Biagi recalls. Taking matters into his own hands, he ordered Santa Elisa to increase its energy generation capacity By 1994, the company began selling its excess energy back to the local power distributor, Companhia Paulista de Forca e Luz (CPFL). At that time, Santa Elisa signed a 10-year contract to sell its surplus power to CPFL for the then-lucrative rate of US$41 per megawatt hour.

Today Santa Elisa provides the grid with roughly 9 megawatts per hour - enough to power a city with more than 100,000 people - and has plans to triple its energy output by the next cane harvest. At its current output, the company earns more than US$3.2 million a year from these sales. Biagi says his strategy is to sign long-term contracts that guarantee returns, rather than sell energy on the wholesale market, where rates can slide below US$10 a megawatt hour.

"The energy crisis won't last forever. It might not end next year, as predicted by the government, but eventually it will rain," says Biagi, referring to Brazil's dependence on hydroelectric power. "I'd rather have a long-term contract than sell for a high price on the wholesale market today and have no buyer next year." Biagi expects to extend its current contract with CPFL while pushing for new business at current wholesale market prices, which have skyrocketed to a national average of US$121 a megawatt hour and are as high as US$210 in those areas most affected by drought.

Echoing the predictions of eco-energy proponents, Biagi believes that if all Brazilian sugar producers generate energy using bagasse, within two years another 12,000 megawatts could be added to the grid per hour. That would be enough to supply Brazil's most populous regions - the south and southeast - and more than enough to stem the current energy crisis.

While most sugar mills have some co-generation program the majority of them are highly inefficient. EcoInvest's Esparta says that "in the past, one of the goals of co-generation was to rid the companies of as much bagasse as possible, so the mills purposefully ran their turbines inefficiently" Economic incentives may push the mills to increase efficiency. However, installing new or updated turbines could cost an estimated US$600,000 per megawatt hour of capacity at the mills, according to a plan elaborated by Biagi.

He is quick to point out that Santa Elisa's main business is not energy generation; it is sugar and alcohol production, including distilling the local firewater, known as cachaca. The company produces three types of ethanol - neutral, which is used in cosmetics; anhydrous, which is added to gasoline; and hydrous alcohol, which is used by Brazil's fleet of alcohol-fueled cars. Brazil increased production of ethanol and ethanol-fueled vehicles during the oil crisis of the 1970s and many are still in use, though their numbers have dwindled. Biagi and his family have been using alcohol. to fuel their cars for 40 years. "I have the only alcohol-fueled BMW in the world," he brags.

According to the Sugar Cane Industry Union (Unica), about 55 percent of the sugarcane harvested in Brazil is converted into alcohol, and the rest is refined into sugar. Recent talks between Brazil and the European Union indicate that the EU may increase its Brazilian sugar imports soon. Moreover, high oil prices and environmental concerns have increased interest from both Europe and the United States, which are studying Brazil's alcohol fuel program. Currently, Japan, Mexico and South Korea import Brazilian ethanol, and Biagi has received trade representatives from Thailand and the Philippines who are also interested in the fuel. If the Bush administration moves ahead with plans to promote further use of ethanol as a fuel additive, US demand could increase to 2.2 billion liters a year, according to industry experts. Currently the California Energy Commission is studying the possibility of importing Brazilian ethanol alcohol to ease that state's own energy crisis. In the event of the ratification of a comprehe nsive global environmental treaty, additional revenues could be generated for sugar mills through certified emissions reduction (CER) credits.

One barrier that has kept Brazil's sugar industry from expanding is the punitive tariffs that keep the price of sugar artificially low in many parts of the world. The US in particular has been singled out by critics of its sugar tariffs and government subsidies to domestic sugar growers, which Biagi describes as "an insult to Brazilian producers." For fuel alcohol, the scenario is even more complicated, he adds, explaining that municipal, state and federal laws often work in concert to restrict the import of alcohol into the US. "There is no room for protectionism in the modern world," Biagi says, adding that he is eager for the Free Trade Area of the Americas (FTAA) to become reality: "Brazil's sugar industry has been ready for years."

COPYRIGHT 2001 Americas Publishing Group
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