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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 Public sector
• Distribution component
• 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)
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)

100

80

60

40

20

0
1960 1970 1980 1990 2000
Structure of Residential Energy
Demand
Evolution of LPG demand: total and
average percapita consumption
(1990=100)

140

Total LPG consumption

120

100 Ends LPG uniform


pricing, subsidies and
government control
80 (partial and gradual)
Percapita LPG consumption

60

40

20
Oil sector de-regulation

0
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
LPG price de-regulation
50
Country’s
45 highest price
Regional average prices
40
R$/13kg bottle

AP 35.86
35
AP 32.85
30 SP 29.05

25 SP 24.19
Lowest price
20
Vendor price Consumer price

Source: ANP July/2004


Price R$/kg

0
1

0,2
0,4
0,6
0,8
29/7/1998

29/10/1998

29/1/1999

29/4/1999

29/7/1999

29/10/1999
LPG subsidies

29/1/2000

29/4/2000

29/7/2000

29/10/2000

29/1/2001

29/4/2001

29/7/2001
Ex-factory price (R$/kg)
Production Cost (R$/kg)

Percentage of subsidy (%)

29/10/2001
10
30
50
70

-30
-10

Percentage (%)
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$).

December January 2002


Price components
2001 Average Low income class

Production costs 9.00 6.67 6.67

Tributes (federal and state taxes) 3.76 3.36 3.36

Distribution and profit margins 13.02 13.71 13.71

Subsidy -3,47 (PPE) 0 -7.50 (gas


voucher)
Final retail price 22.30 23,74 16.24
Subsidy (as % of production costs and 27% 0 75%
tributes)

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)
1.800.000 100
1.600.000 90
1.400.000 80
70
total vehicles

1.200.000

% alcohol
60
1.000.000
50
800.000
40
600.000 30
400.000 20
200.000 10
0 0
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Note: includes diesel, gasoline and alcohol
Source: ÚNICA, 2004
vehicles
Ethanol production learning
curve
Ethanol and gasoline prices
Ethanol production (1970-2002)
18000
16000
14000
12000
1000 m3

10000
8000 Hydrated

6000
4000
2000 Anhydrous

0
70

73

76

79

82

85

88

91

94

97

00
19

19

19

19

19

19

19

19

20
19

19

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

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