Policies for creating new markets for new fuels: the case of LPG and ethanol in

Brazil

Prof. Gilberto M Jannuzzi

University of Campinas, São Paulo, Brazil and International Energy Initiative

Objectives of the presentation

Present an overview of the context and articulation of public policies and private interests in creating a sustainable market for new fuels;

Present the main factors that may explain the chosen success cases

Discussion: how can public policies today have similar impacts?

Structure of this presentation Creating the market for LPG and ethanol

• National infra-structure

• Production

• Distribution

• Retail market

• Affordability to final consumers

• The private sector: the “Usineiros”, car manufacturers, LPG distributors

Ultimate objective: self-sustainable business (market) Social objectives (energy as public good) and strategic objectives (security of supply as a public good)

Public sector component

The strategy Identification of the public good: rationale for a public policy (and

public funds)• LPG: energy as a social need (mid 60’s)

• Alcohol: energy as a “national security” issue (late 70’s) Strong governmental role in the economy:

• State company Petrobras • LPG: production and imports

• Alcohol: purchase from private producers, distribution

• Institutional and regulatory stability

• Ability to introduce subsidies and incentives, pricing controls Strong participation of the private sector since the start-up:

• LPG: Distribution and retail market

• Alcohol: production, automobile industry

The creation of na LPG market: initial conditions (1960- mid1990)

Strong governmental presence in the economy; LPG production and imports: Petrobras (State company)

monopoly; Uniform pricing to final consumers across the entire

country (including rural areas); Distribution: private companies (receive LPG from

Petrobras and bottle it in canisters); Retailers: private companies (sell the canisters to

households); The government was able to guarantee a profit margin to

D&R, by subsidizing production costs.

Distributers and Retailers Initially were given regional franchises, later

production quotas were given; Gradually competition was introduced (specially

for retailers) Safety standards were introduced and

enhanced over time With greater competition services were

improved and brand became important. Several companies sought to obtain quality certificates (ISO)

LPG production, distribution and commercialization chain

The saturation levels of LPG (% total HH)

0

20

40

60

80

100

1960 1970 1980 1990 2000

Structure of Residential Energy Demand

Evolution of LPG demand: total and average percapita consumption (1990=100)

0

20

40

60

80

100

120

140

1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Total LPG consumption

Percapita LPG consumption

Oil sector de-regulation

Ends LPG uniform pricing, subsidies and government control (partial and gradual)

LPG price de-regulation

24.19

29.05

32.85

35.86

20

25

30

35

40

45

50

Vendor price Consumer price

R$/

13kg

bot

tle

Source: ANP July/2004

SP

SP

AP

AP

Country’s highest price

Lowest price

Regional average prices

LPG subsidies

0

0,2

0,4

0,6

0,8

1

29/7

/199

8

29/1

0/19

98

29/1

/199

9

29/4

/199

9

29/7

/199

9

29/1

0/19

99

29/1

/200

0

29/4

/200

0

29/7

/200

0

29/1

0/20

00

29/1

/200

1

29/4

/200

1

29/7

/200

1

29/1

0/20

01

Pri

ce R

$/kg

-30

-10

10

30

50

70

Per

cen

tag

e (%

)

Production Cost (R$/kg)Ex-factory price (R$/kg)

Percentage of subsidy (%)

Changes in the LPG subsidy policy

Table 1: Price structures after for a 13 kg bottled LPG before and after liberalization in December 2001 and January 2002 (in R$).

75%027%Subsidy (as % of production costs and tributes)

16.2423,7422.30Final retail price

-7.50 (gas voucher)

0-3,47 (PPE)Subsidy

13.7113.7113.02Distribution and profit margins

3.363.363.76Tributes (federal and state taxes)

6.676.679.00Production costs

Low income classAverage

January 2002December 2001Price components

Source: ANP/Petrobras (2002).

LPG Supply characteristics today: some failures of the exit strategy Petrobrás: virtual monopoly – produces 65% of LPG sold and

imports 35% 3 other companies were created since the end of nineties to

foster competition. Today they respond for about 10% of LPG supply

Unless the structure of demand for oil products changes it is not feasible to simply expand the domestic production of LPG. It is estimated that to avoid imports, domestic refinery capacity has to increase by 60%.

Distribution: total of 20 companies but 6 respond to about 95% of sales; danger of formation of cartel;

Retailers: more 15 thousand; Annual sales of US$ 4 billions, about 200 thous. jobs (direct

and indirect)

Conclusions: LPG Strong governmental presence

• LPG supply (Petrobras)

• Subsidies

• Price controls

• Regulating distributors, retailers Strong and important private sector participation as part of the supply

chain but supported by the government (guaranteed revenues) De-regulation (nineties)

• Increases in LPG prices, competition with natural gas

• Decrease in LPG consumption (lower income classes)

• Changes in the subsidy scheme

• Market established: good distribution system, delivery mechanisms, quality controls, need continuous and more aggressive overlook by the Regulator (reported formation of cartels in several parts of the country)

Ethanol strategy Large incentives to producers 1979-85

• Subsidies to new distilleries, retrofits, upgrades, etc• Government purchased all production at given price

Final subsidies to ethanol consumers, national fixed pricing, country-wide distribution

Blends with gasoline and introduction of 100% ethanol fuelled cars

Incentives (tax cuts) for ethanol cars (private fleet), specially taxis and government fleets

Gasoline taxed heavily (1979-85) After 1985: lack of clear policies, higher sugar prices Private sector (sugar industry) became interested in increased

productivitiy

National automobile production (1979-2003)

0

200.000

400.000

600.000

800.000

1.000.000

1.200.000

1.400.000

1.600.000

1.800.000

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

tota

l veh

icle

s

0102030405060708090100

% a

lco

ho

l

Note: includes diesel, gasoline and alcohol vehicles Source: ÚNICA, 2004

Ethanol production learning curve

Ethanol and gasoline prices

Ethanol production (1970-2002)

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

1000

m3

Anhydrous

Hydrated

Source: National Energy Balances

Conclusions: Ethanol Strong governmental presence

• Supply: governmental purchased total production from private sector• Petrobras (government) responsible for country-wide distribution• Subsidies, incentives, tax cuts• Price controls

Strong and important private sector participation as part of the supply chain (and demand sector) but supported by the government (guaranteed revenues and buffer to sugar prices fluctuation), automobile industry

De-regulation (mid-eighties)• Program too expensive to Petrobras• Discussion about purchase prices from producers • Producers from the Southeast decided to invest in productivity gains• Quality controls now under the Petroleum agency (ANP)• Producers can sell directly to pump stations• Prices set by the market, with ANP oversight• Introduction of bi-fuel cars since year 2002

Concluding remarks These markets were created fundamentally as

part of strong and long-term public policies and heavily funded;

Societal costs were high and probably impossible to quantify accurately

A sustained continuation and evolution of these markets are possible now as the private sector became na interested party since the beginning

The evolution is not smooth and the learning path is still in process