Brazilian Energy Policy under Lula: What to Expect

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Left: Isac Nóbrega/PR / Flickr / CC-by-2.0; Right: Ricardo Stuckert / Agencia Brasil / CC-by-2.0

With the election of Luiz Inácio Lula da Silva to office for a third term, future climate and energy policy in Brazil will likely represent a stark departure from that of former president Jair Bolsonaro. To explore Lula’s plans for Brazil’s energy sector, the Inter-American Dialogue hosted the online event “Power in Brazil – Energy Policy Post-Election” on November 8, 2022. Daniela Stevens, program director and moderator of the event, gave opening remarks and then proceeded to introduce the panel of experts and inquire about the specifics of Lula’s fossil fuels, renewable energy, and climate policies.   

James Ellis, head of research for Latin America at BloombergNEF, analyzed what increased state involvement in the economy means for Brazil’s recently privatized power company, Electrobras, and the state oil company, Petrobras. Although Lula stood against Electrobras privatization, the deal includes provisions that make it very costly and legally challenging to reverse. In that regard, panelists agreed that Lula is very unlikely to attempt to reverse Electrobras privatization. While Bolsonaro hoped to privatize Petrobras as well, he only successfully divested from less lucrative assets such as refining. Ellis remarked that while Petrobras will continue to focus on its core business, Lula will reverse this trend of slimming down the company’s operations. Ellis underscored that the company’s current strict focus on pre-salt production is very profitable today, but it could leave the company exposed to sweeping changes in the global economy in coming decades. Décio Oddone, CEO of Enauta, agreed that, given a new CEO and change in direction under Lula, oil production in the pre-salt plate will continue, but the company could also turn to increasing refining capacity, renewables, and biofuels. Regardless, Oddone remarked, the role of oil and gas in the economy is set to continue increasing. At present, the country is producing four billion barrels per day (bpd), but that could increase to five or six bpd by the end of the decade, supporting fiscal stability in years to come. 

Roberto Ardenghy, CEO of Instituto Brasileiro de Petróleo e Gás, acknowledged that high fuel prices have been a contentious issue internationally this year, and they exercised considerable influence in Brazil’s elections as well. To ameliorate social tensions, earlier this year, the congress reduced value-added taxes for fuel to decrease prices. Since that policy lever has already been employed, Ardenghy sees few other options for keeping prices low, especially given that many states are financially reliant on fuel taxes. While Lula has tirelessly broadcast his plans to decouple national fuel prices from international fluctuations, according to Ardenghy, Brazil's market complexity and geographical diversity complicate the realization of this policy. In Brazil, gasoline and diesel are heavily mixed with ethanol and biodiesel; thus, implementing a price control policy is technically challenging from a top-down perspective. Moreover, certain regions import far more gasoline and diesel than others. For example, the north imports far more gasoline than the south, which is home to a high concentration of refining activity. Thus, price controls could create issues for importing regions. Regionalizing prices for fuel could be more feasible, which the Lula government has begun studying. 

Turning to renewables, Camila Ramos, founder and managing director of Clean Energy Latin America (CELA), highlighted the growing presence of non-conventional renewables in the country’s power matrix. While Brazil used to be very reliant on hydroelectric power, it has gradually declined from around 80 percent of the matrix to 52 percent today. Ramos foresees no prospects for continued hydroelectric growth in the future, primarily because most unexploited hydro potential lies in protected areas like the Amazon. In contrast, wind and solar additions have skyrocketed; in 2021, 77 percent of new power additions came from solar and wind. Although supply chain issues are increasing the capital expenditure of renewable projects, renewables remain the cheapest power source in Brazil. Under Lula, renewables could grow even faster if he raises Brazil’s nationally determined contributions (NDCs) or implements new incentives. In the medium term, gas will continue to play a role on the power grid as well, especially because the Electrobras privatization deal mandates 8 GW of gas power purchase agreements. 

Lastly, the panelists discussed prospects for climate policy under Lula. Climate diplomacy will play an important role in the Lula administration, and international actors have already begun to respond. For example, Germany and Norway immediately offered to reopen the Amazon Fund. However, facing congressional and agribusiness pushback and budgetary concerns, Ellis explained that it remains unclear if Lula will find funding for some of his climate ambitions. Regardless, Bolsonaro’s climate and environmental policy record set such a dire precedent, that even if Lula accomplishes only a fraction of his proposals, this will mark great change in the country’s climate trajectory.  

Looking ahead, panelists agreed that Lula is likely to take advantage of Brazil’s capacity to implement new technologies like offshore wind and green hydrogen. Ramos emphasized that Brazil has 600 GW of high-quality offshore wind potential; however, they still have 700 GW of unexploited onshore wind left to develop, making offshore less competitive in the short term. However, Ellis outlined that, in the long term, with the right regulatory framework, offshore wind could be highly competitive, and Petrobras could play a key role in its development given their offshore and deep-water experience. Ramos and Ellis both highlighted Brazil’s potential to export green hydrogen; according to Bloomberg modeling, Brazil has the potential to produce the cheapest green hydrogen in the world based on their onshore wind sources alone. Finally, Ardenghy added that oil and gas are here to stay in the years to come, so the next key climate challenge for the Lula administration is to reduce existing emissions in difficult to abate sectors, on top of continuing to deploy renewables.  

Watch the event recording here: