RENEWABLE ENERGY: A FRAMEWORK TO MODEL A
BRAZILIAN CASE OF SUCCESS (PART I
Joaquim Rocha dos Santos, M.Eng.
Escola Politécnica da Universidade de Sao Paulo
jrsantos@usp.br
+(55)(11) 3091-5350
Marcelo Ramos Martins, PhD.
Escola Politécnica da Universidade de Sao Paulo
mrmartin@usp.br
+(55)(11) 3091-5350
Abraham Sin Oih Yu, PhD.
Faculdade de Economia e Administrac¢ao da Universidade de Sao Paulo
abraoyu@ipt.br
+(55)(11) 3091-5925
Paulo Tromboni Nascimento, PhD.
Faculdade de Economia e Administrac¢ao da Universidade de Sao Paulo
tromboni@usp.br
+(55)(11) 3091-5837
ABSTRACT
In 1973, the first oil crisis leaded most countries to experience economic problems due to
sudden unbalance in their trade balance. This leads to reactions, limited at the beginning due
to short term inelasticity of petroleum demand, but relevant in long term. Brazil started the
Proalcool program, which extended from 1979 to 1990, with the use of ethanol cars (E-100).
In 1990 this program was ended, due to economic problems. A decline in international
petroleum prices and an increase in international sugar prices, leaded to shortage of ethanol.
This shortage made the users confidence to decline. From that point on, ethanol cars
acquisitions almost dropped to zero. In 2003 a technological innovation, the flex-fuel
electronic injection, was launched and was a huge success. In approximately three years,
about 85% of all cars sold in Brazil were using this technology. It caused a boom in ethanol
industry which competes in terms of resources with sugar industry. This paper presents a
framework to simulate the first period of the overall program which lasts from 1970 to 2003.
1 Iytropuction
In late 1973, the oil price suddenly changed from an average of US$ 2.50 to about US$
11.50 per barrel; this was the trigger to the first oil crisis. This change was a terrible surprise to
many countries that dependent on petroleum imports from the Organization of the Petroleum
Exporting Countries (OPEC). Due to the consequent brake on the trade balance, these countries
faced severe energy and economic problems, which resulted in depression and inflation. Due to
the relative low elasticity of demand in the short term, most countries could reduce only the
discretionary oil demand and had to change their macroeconomic policies so as to achieve
monetary, fiscal and trade balance.
The effects of this crisis in Brazil were relevant. Some short term actions were carried
out, with little effect. In the long term, two successful actions were taken: the first was the
investment in petroleum exploration and production, which would eventually made Brazil self
sufficient in Petroleum; the other was the Proalcool program. This program was conceived with
two main threads: the first was the development of ethanol, derived from sugarcane, as fuel for
cars; the second was the in-country development of motor engines 100% ethanol powered.
In mid 1980’s, a decrease in international petroleum prices combined with an increase
in international sugarcane prices reduced attractiveness of Proalcool program. As a
consequence, the percentage o ethanol usage in Brazilian cars fleet reduced from 50% in 1988
to 40% in 1994. In parallel, there was a shortage of ethanol supply which decreased the
confidence of end users. In early 1990 Proalcool program was deactivated.
In 2003 a technological innovation, the flex-fuel electronic injection, was launched in
Brazil became do dominant design with a huge success. Bosch developed this technology in the
USA with two sensors: one in the feed line to evaluate the percentage of ethanol and gasoline
in the moisture; and the other in the exhaust line to evaluate the proportion between fuel and
air, so as to optimize the combustion in the engine. This technology was not suitable to be
applied in Brazil due to use of hydrated ethanol. Magnetti-Marelli changes the flex-fuel
electronic injection, changing its software, so as not to have to use the feed line sensor. Flex-
fuel electronic injection in Brazil uses only one sensor and the calculation of the moisture
proportion is performed by software.
This reduction in the number of sensors and the adaptation for Brazilian conditions
made this technology attractive for Brazilian cars manufacturers. In 2003 Volkswagen do
Brazil launched its first flex-fuel car. In six years almost 100% of cars sold in Brazil are flex-
fuel. The end user may use either ethanol or gasoline in any proportion and this is decision
takes place at the gas station, no longer when he was deciding to buy a car. In other words the
decision of using either gasoline or ethanol has effect in the short term, no longer in the long-
term.
The introduction of this technology coupled some industries: petroleum; sugarcane;
food; land and others. Figure 1 shows the high level integration of these industries. An early
study of the consequences of this coupling can be of interest to public policies which could
optimize the interests of several stakeholders, such as: the Government; environmentalists; the
different stakeholders in those industries; the population and others.
An additional and relevant aspect of this early analysis is that the Brazilian agricultural
frontier is still far from its edge; this would allow a long-term analysis which could be used for
other countries developing biomass fuels.
This paper presents the contextualization of this study. It presents a subsystem diagram
and two causal-loops diagrams of these markets. This paper is organized in five sections:
section one is this brief introduction; section two tells the history of the Proalcool program an
Flex-fuel technology in some more detail; section three shows the subsystem diagram for the
simulation, as it is perceived now; section four shows the Dynamic Hypothesis, through a set of
causal loops diagrams; section five shows some conclusions and suggestions for further studies.
Environmen
7
Sugar
cane Our Focus Petroleum
Industry
Industry
SY Land
Availabilit
i
|
Food
Industry
Figure 1 - Focus of this paper
2 Historica, Context
From 1950 to 1973 the oil world demand had grown steadily at a pace of 9.5% per year.
Petroleum costs were very stable and used to vary from two to three US dollars per barrel. In
1973, the Organization of the Petroleum Exporting Countries (OPEC), established a new
production level and costs policy which raised the barrel price to 11.65 US dollars. This change
in prices cause an economic and energetic crisis in those countries which were highly
dependent of petroleum imports from OPEC countries. This period is known as the first oil
crisis.
Combined with the relative short-term inelasticity in oil demand, this increase in prices
caused a serious unbalance in trade balance of most developed countries. This unbalance
caused stagnations and inflation. The Organization for Economic Co-operation and
Development (OECD) countries reacted by decreasing discretionary oil consumption, reducing
its relative importance in their energy matrix, and changing macroeconomic policies (fiscal and
monetary) trying to oppose both, the economic and energetic crisis. Some of these actions have
long delays and were not effective at that time.
In Brazil, the systematic use of ethanol', from the sugarcane, as an alternative fuel
started in 1934. From 1934 to 1975 the anhydrous ethanol was added to petrol with the purpose
to elevate its octane. In 1975, Brazil started its Alcohol Program, so called Proalcool. Its first
goal was a modest replacement of petrol with anhydrous ethanol. In 1980 the goal became
more ambitious. With this new policy a relevant percentage of petrol was replaced by ethanol.
In 1971 only 1% of gasoline was replaced by anhydrous ethanol; in 1985 this percentage
achieved 41%, an increase of 40% in 14 years. (LEITE, 2007)
' The term used in Brazil is alcohol instead of ethanol. Both terms are used indistinctly in this paper.
Cars sold in Brazil from 1975 to 2007
2.500.000
2 a
2.000.000 Gasoline
3 Flex
$ 1.500.000
2
3
3
3% 1.000.000
3 Ethanol
6
500.000
Co)
LOR Eroaams Mer mnonams ner wenonams ner
RERRLRSSVSBBwawnnanannnnnssosesss
BALIRARATAA AAA AAA AANA AO eee
Figure 2 - Car sales in Brazil - from 1975 to 2007
Proalcool program had several projects. One was the in-country development of E-100?
cars. In 1978, an agreement between the Brazilian Government and the National Association of
Motor Vehicle Manufactures’ (Anfavea) established the beginning of E-100 development. In
1979, only one year later, the first E-100 was in the market. Considering the design and
manufacture issues as well the logistics of fuel, this can be considered a remarkable
achievement.
In 1988-1989, Proalcool was de-activated due to economic pressures: high inflation and
low product growth for more than fifteen years. The total ethanol consumption dropped from
50% of total amount of fuel consumed in 1988 to 40% in 1994. During the 1980’s 70% of
vehicles sold in Brazil where E-100. The ethanol fleet was relevant and it would take a decade
to be deactivated (LEITE, 2007).
In the early 1990’s with the end of Proalcool, the rise in international sugar price and
the decrease in the international oil prices there was a shortage of ethanol. This shortage
generated a lack of confidence in consumers, which would charge its price later. Consumers no
longer bought ethanol powered cars and the E-100 sales dropped down almost to zero, from
1990 to 2003. The remainder ethanol cars still sold were results of the sugarcane sector
pressure for government incentives and the so called “green fleet”, part of the Government cars
fleets should be E-100.
A technological innovation, the flex-fuel electronic injection, was already available in
the US. Bosch started to study this solution in 1988, in California, USA. Due to the technology
adopted, Bosch solution was expensive for Brazilian patterns costs and Brazilian motor vehicle
manufactures refused to use it. Moreover, dual sensor* technology was not suitable for Brazil
due to the presence of hydrated ethanol.
? E-100 cars are full (100%) ethanol powered.
+ Associagao Nacional dos Fabricantes de Veiculos Automotores.
In 2003, Martin Marietta launched its new flex-fuel electronic injection technology
which uses only one sensor to control the oxygen proportion in the exhausted gases; the
function of sensor lambda was replaced by software intelligence. Bosch and Delphi launched
their own versions of this flex-fuel electronic injection some months later.
The flex-fuel electronic injection was a success, see Figure 2. In 2006, two millions of
cars sold in Brazil used flex-fuel injection technology. Why?
Using marketing terms, the acquisition of a new car in Brazil can be considered an
acquisition of high involvement. A gasoline and ethanol (E-100) cars have no significant
differences in 1980. So brand loyalty, as well as fuel loyalty, was relevant in decision process.
With the ethanol shortage in early 1990’s and the consequent lack of consumer confidence,
ethanol cars were no longer a good option.
Since the flex-fuel technology lowered the level of involvement, the consumer behavior
change, and the consumer behavior theory states that in these situations experiments could be
done. Flex-fuel technology allows the customer to postpone its decision concerning the use of
ethanol or petrol until the gas station.
The ethanol and gasoline demand in Brazil is now much more volatile and the long-
term decision of buying a gasoline car or an ethanol car is no longer necessary. One can decide
what to use in minutes. Another particular characteristic of flex-fuel technology is that it
strongly coupled oil and sugarcane industry, as well as other industries, such as food, land,
plastic and others.
Two controversial issues remain from the Proalcool program: the first concerns its
economic success; the other is what will happen in the future. The discussions concerning the
first issue are not clear and have no conclusion. Since it is not a mono-criterion evaluation, it
would be interesting to analyze its impacts in terms of energy source independence,
environmental issues and employment.
Goldemberg et al. (2004) addressed some issues on this discussion. He discussed the
learning curve of Proalcool program, comparing the subsidies given to sugarcane industry with
other countries subsidies and how the sugarcane industry increased its productivity in 25 years.
Figure 3 shows the behavior over time of some sugarcane industry parameters. On the
left, it can be seen that Productivity has increased from 46.8 ton/ha (1975) to 76.6 ton/ha
(2007); it represents an increase in productivity of 63.6%. On the right hand side, it can be seen
that Production has increased from 88.2 (1975) to 514.1 (2007); this represents an increase in
production of 483%, almost five times in 30 years.
Productivity (t/ha) Prodution (milhdes/t)
o 0
2
00
»
ss i gl
4
ma 20
” 0
2
‘eo
° o
(0 67S tomo 18S 9D SND aS ZOHO 1s70 1975 10 1oe5 99D OD ANE 2H
* Dual sensor flex fuel electronic injection technology uses two sensors: one is known as lambda, its function is
to detect the ethanol/petrol ratio and is used to set up the injection; the other sensor is used to detect proportion
of oxygen in burst gases, so as to feedback the software to adjust the moisture air/fuel.
Figure 3 - Sugarcane Production and Productivity
The second point, what is to happen in the future? It can be analyzed using some
scenarios. Some relevant issues can be studied; some examples are:
a)
b)
c)
Others energy sources are being studied all over the world, hydrogen is accepted in
car industry to be the successor of petrol. If it happens, what will it be its effect on
Brazilian sugarcane industry?
Developed countries have shown some resistance to use ethanol to replace petrol,
will this resistance remain or will it be overlapped? What are the consequences of
each scenario?
Conflicts between land usages have arisen worldwide and would be of interest; will
the use of land (in Brazil) for sugarcane affect in a relevant way the production of
food? When will the agricultural frontier achieve its edge?
3 Sussystem DiAGRAM
Figure 4 shows the Subsystem Diagram with five major subsystems identified so far in
this project. The subsystems are: Government (GOV); Sugarcane Industry (SCI); Oil Industry
(OD; Car Owners (CO); and Cars Fleet (CF). Three exogenous variables have been identified:
International Sugar Price, International Petroleum Price and Cars Demand.
International
Sugar Price
Sugarcane Industry (SCI)
Government (GOV) Maximum Capacity
Taxes Sugar Production
Subsidies
Ethanol Production
Sugar Price
Ethanol Price
Investment in National
Petroleum Production
Trade Balance
Oil Industry (Ol)
Home production
Oil Imports Car owners (CO)
Gasoline price Buy Ethanol Car?
Buy Gasoline Car?
Cars Fleet (CF)
Ethanol Demand
Gasoline Demand
Cars
Demand
Intemational
Petroleum Price
Figure 4 - Subsystem Diagram
Table 1 shows how subsystems affect each other. First column shows the origin; second
column shows the word “affects”; third column shows the variable affected; fourth column
shows the word “with”; and fifth column shows how the first variable affects the second.
Letters representing subsystem as in subsystem diagram.
Table 1 - Who affects who and how?
WHO | AFFECTS | WHO WITH HOW
GOV affects SCI with Subsidies
GOV affects co with Taxes and Subsidies
GOV affects Ol with Taxes and Investment
ol affects GOV with Petroleum Importation Costs
Ol affects co with Gasoline Price
SCI affects co with Ethanol Price
SCI affects co with Ethanol Production
CF affects SCI with Ethanol Demand
CF affects Ol with Gasoline Demand
(ee) affects CF with Buying either Ethanol or Gasoline Cars
Subsystem diagram shows the interactions between subsystems identified at this stage.
Next item will present some causal loop diagrams that show the original Dynamic Hypothesis.
4 Dynamic Hyporuesis
The renewable fuel problem we are addressing can be separated out in periods. Osiris
and Fischetti (2008) suggest divide in three: the first would last from 1975 to 1989 —
introduction and high sales in production and demand achieving its peak in 1985/1986; the
second period would last from 1990 to 2002 — with the decrease of interest; and the third, from
2003 to today with the introduction of flex-fuel. The dynamic hypothesis developed so far
encompasses only the first and second periods. The third period and its potentials consequences
will be developed in other studies.
Figure 6 shows the causal loop diagram which is perceived to describe the dynamics of
these periods. Fundamentally, the basic structure follows the SI model, see Sterman (2000,
Chapter 9). Marketing and Word of Mouth loops were omitted for simplicity.
Gasoline Adopters, which were 100% until 1979, and Car Demand increase lead to an
increase in Petroleum Imports. Figure 5 shows how Cars Demand and Gasoline Adopters
increase Petroleum Imports.
Cars
Demand eae 3 Ey Ee
Gasoline Petrol Petroleum
Fleet Demand Imports
Gasoline eas
Adopters
Figure 5 - Increase in Petroleum Imports
Increases in Petroleum Imports and in International Petroleum Prices, which took place
in late 1973, increased Petroleum Import Costs. To react to this increase, the Brazilian
Government took two actions: the first was to stimulate the use of Ethanol (E100) cars (Loops
B1 and B2); and invest in national petroleum production (Loop B3).
Loop B1 shows the restrictions to buy gasoline cars. To stimulate the adoption of
Ethanol (E-100) cars, the government reduced ethanol cars taxes and increased gasoline cars
taxes. This policy increased the price of gasoline cars and reduced the price of ethanol cars.
This policy led to an increase in Gasoline over Ethanol Car Price Ratio, which increased
ethanol attractiveness, which increased Ethanol Adoption Rate, which decreased the Gasoline
Adopters.
Loop B2 shows the restrictions to use gasoline as fuel. Gasoline was over taxed so as to
subsidized ethanol production costs; this led to an increase in Gasoline over Ethanol Fuel Price
Ratio, increasing Ethanol Attractiveness, which increased Ethanol Adoption Rate, which
decreased Gasoline Adopters.
Loop B3 shows the investment in national petroleum production, which captures a long
delay response. Since Petroleum Imports Costs had risen, Government Incentives to National
Petroleum Production raised; this led to an increase of National Petroleum Production, after a
delay of about a decade, which led to a reduction in Petroleum Imports.
Internation! International
Petroleum Prices - Sugar Price
. i
Government Incentives + G , _-—_ > Attractiveness to
i = overnment Produce Etha age
to Nagonet Hero Incentives tp roduce Ethano
+ Ethanol > Ethanol Fuel
= oe a Supply
anol Supp!
. Imports Costs Incentive
National Petroleum = + +
Production Ethanol C:
Gasoline/Ethanol Car 2 Fuel — Gasoline/Ethanol Ethanol Cars
National Petroleum Price Ration Restriction Fuel Price Ratio . .
a Shortage
- Fagor
= woke her) + ” 1 4—— Gonlidence “ae
2 impo! ‘thano
Gasoline Cars Attractiveness * en Pil
++ Restrictions
RI
Ethanol
Ethanol Adoption Shortage Fuel
Cars Demand Denia
Gasoline Ethanol | ere
Adopters Ethanol Adoption Adopters
Rate
Figure 6 — Causal Loop Diagram (From 1975 to 2003)
11
The reduction of Petroleum Imports reduced the Petroleum Import Costs, the greatest
Government problem. Since the Petroleum Imports Costs reduction decreases the Government
interest in Proalcool, this will lead to a reduction of interest in the program.
The reinforcing loop R1 shows the Ethanol Adoption process. Assuming that initial
marketing actions have been carried out (omitted in the diagram) there will be an initial
increase in Ethanol Adoption Rate. This will lead to an increase in Ethanol Adopters and will
lead to an increase in Confidence on Ethanol, which in turn will increase Ethanol
Attractiveness, increasing Ethanol Adoption Rate further more.
Shortage of ethanol fuel dynamics is captured in Loop B4. When Ethanol Adopters
increase, Ethanol Fuel Demand increases. Figure 7 shows how increase in Cars Demand and
Ethanol Adopters will lead an increase in Ethanol Fuel Demand. An increase in Ethanol Fuel
Demand will lead to an increase in Shortage Factor (Ethanol Fuel Demand over Ethanol Fuel
Supply); an increase in Shortage Factor will decrease Confidence on Ethanol. This decrease in
Confidence on Ethanol will lead to a decrease in Ethanol Attractiveness.
Loop BS5 captures dynamics of Ethanol Supply Incentive. Government Incentives to
Ethanol increases the Attractiveness to Produce Ethanol. This will lead to an increase in
Ethanol Fuel Supply, which will decrease the Shortage Factor, compensating the increase in
Ethanol Fuel Demand. It is relevant to observe that Attractiveness to Produce Ethanol
decreases when International Sugar Price increases.
Cars Demand
- +
Ethanol Fleet Ethanol Fuel
Demand
a
Ethanol
Adopters
Figure 7 - Growth of Ethanol Demand due to Ethanol Adopters
Figure 8 shows the perceived dynamics of Sugarcane Industry. Since both commodities,
ethanol and sugar, use the same raw material, sugarcane, there is a competition for common a
resource. Senge (1994) explains what could happen in such a situation:
The “Tragedy of the Commons” always opens with people benefiting individually by sharing a
common resource — a brand-new freeway, for example. But at some point, the amount of
activity grows too large for the “commons” to support. In many cases, the commons seems
immeasurably large and bountiful at first, but it is either nonrenewable or takes a great deal of
time and effort to replenish. The commons might be natural resources, open space, human
effort, financial capital, production capacity, or market size — anything which groups of
individuals depend upon in common.
Loop B11 introduces the International Sugar Demand. An increase in International
Sugar Demand will increase the International Sugar Price; an increase in International Sugar
Price decreases International Sugar Demand. This will lead to a balancing loop B11,
International Sugar Demand.
12
The Sugar Production loop B12 shows how production reacts to demand. As
International Sugar Price rises, Sugar Revenue will rise. Sugar Profits will rise when Sugar
Revenues rises and decrease when Sugar Production Costs rises. An increase in Sugar Profits
will lead to an increase in Desired Sugar Production; an increase in Desired Sugar Production
will increase Sugar Actual Production; and an increase in Sugar Actual Production will
decrease the International Sugar Price. Since Brazil has a great sugar (from cane) production, it
is likely to be able to interfere in international sugar prices. Loop B12, Sugar Production,
shows the balancing side of supply. These loops (B11 and B12) show the supply and demand
behavior for the sugar market.
+ Bll a
. International
Sugar an ame International Sugar Demand
jugar Price
Revenue Sugar Demand
Sugar 3 .
Production oe
Costs B12 Sugar Actual <Desired Sugar
3 Production:
+ Sugar Production
- Sugar Production *
Profits
+ Desired Sugar
Production + Sugarcane
+ Maxi Ss Production
Government + ADIEU SU SAP
Capacity
Subsidies ae Production
Sugar/Ethanol i 4
Profits Ratio —__, Maximum Ethanol
Ethanol he Production ="
Natural + P +
Price “~~, Ethanol) ————™ Desired Ethanol Desired Ethanol
Profits Production Production>
- +
ia Ril \ +
Ethanol Actual
Ethanol .
Production Ethanol Learning Curve Production
Costs
ig os Ethanol
Cumulative “4.
Production
Figure 8 - Sugarcane Industry - Tragedy of Commons
The “commons” dynamics, as perceived now, are shown in the central part of diagram.
Sugar over Ethanol Profits Ratio is a function of Sugar Profits and Ethanol Profits, which will
be discussed later. An increase in Sugar over Ethanol Profits Ratio leads to an increase in
Maximum Sugar Production and a decrease in Maximum Ethanol Production, since Sugarcane
13
Production Capacity is limited. At this stage a single criterion utility function of profits will be
assumed. Note that Maximum Sugar Production summed with Maximum Ethanol Production
should not be greater than Sugarcane Production Capacity (“commons” restriction).
Two loops close on Sugarcane Production Capacity. Those loops are omitted for clarity
but the shadow variables show the causation. When Desired Sugar Production increases,
Sugarcane Production Capacity increases through a delay (perhaps of one year). When Desired
Ethanol Production increases, Sugarcane Production Capacity increases as well, also through a
delay. The ethanol production capacity dynamics was omitted in the diagram, but it is an aspect
that is to be included in the model, since there is a delay in capacity acquisition which can be
relevant to show the sector dynamics.
Loop R11, Ethanol Learning Curve, is considered relevant to the second part of the
research. This loop show how learning curve decreases ethanol production costs; in long term
this will allow the ethanol industry to compete in price with petrol, even without Government
subsidies. Starting from Ethanol Profits, when it increases, Desired Ethanol Production will
also increase. An increase in Desired Ethanol Production will lead to an increase in Ethanol
Actual Production. An increase in Ethanol Actual Production will increase Ethanol Cumulative
Production. An increase in Ethanol Cumulative Production will decrease Ethanol Production
Costs which will eventually lead to an increase in Ethanol Profits.
14
5 CONCLUSIONS AND FURTHER STUDIES
The first conclusion was that the system which emerged from the flex-fuel electronic
injection technological innovation is very complex. Sterman (2000, p. 22) shows a set of causes
that leads dynamic complexity to arise. In order to demonstrate that, Table 2 presents our
perception of how this applies to the system studied.
Table 2 - Complexity of these Systems
Sterman’s Criteria
System characteristics or example
Figure 9 shows the behavior over time of adoption in ethanol, gasoline
Dynamic and flex-fuel cars. This dynamics e adoption of a specific king of fuel
showed, as well as its dynamics of change.
Tichtl led All subsystems interact between them, as well with other industries
tently couple which will be included in other works
Governed by feedbacks As shown in the Dynamics Hypothesis, there are several feedbacks
loops which affect the system behavior.
“ There are several relationships between system elements with non-
Nonlinear
linear behavior.
History-dependent
Most of the actions taken in this process are not reversible, some
particular paths have been road and it is irreversible.
Dynamics between actors arise spontaneously; although, there was an
Self-Organizin; .
ganizing external petroleum shock, that excited the system.
Capabilities and decisions change over time, an example was the
Adaptive decision of Brazilian Government to change its priorities due to a
P' change in international petroleum price and the increase of in-country
petroleum production.
Counterintuitive Tragedy of commons is one example of this system which can be
counterintuitive.
Policy resistance
End users decreased their confidence on ethanol supply due to a
shortage and did not recover it, even after a long time.
Characterized by trade-
offs
There are some examples of trade-off in this system: one is the
Brazilian Government decision to tax the oil industry so as to
incentive the ethanol production; and, in spite of an economic crisis,
the Brazilian Government decided to invest in national oil industry,
with remarkable results twenty years late.
15
Provided the positive consequences of the introduction of the flex-fuel electronic
injection it can be concluded that Brazilian Government should have taken a policy to stimulate
the development of this technology earlier. Perhaps this would allow a shorter delay between
the first flex-fuel electronic injection available in the US in 1985 and 2003, year of first
Brazilian flex-fuel car.
Another conclusion is that this study is, at least, 30 years later. The changes in loop
dominance could have been planned and understood in-advance. Not as consequences of local
decisions and shot-term vision. With this preliminary analysis, it is possible to understand the
shift in loops dominance and why they happened.
In terms of innovation, it can be concluded that flex-fuel technology became a dominant
design. Preliminary, it can be understood that it success was due to a change in consumer level
of commitment of adopting ethanol or gasoline. This decision on using either ethanol or
gasoline was postponed from the moment of buying a new car to the moment of refueling at the
gas station.
In spite of being officially deactivated, Pro-alcohol program is now self sufficient and
no longer need any subsidies. Since it will last for a long period with potential use of common
resources with other industries, it can be concluded that these long-term effects should be
studied in advance.
The next steps of this paper will be to build a simulation model so as to confirm (or
reject) our dynamic hypothesis and to explore some scenarios and expand the boundaries of the
model so as to include other relevant issues, such as land, food and environmental aspects.
Nee Sees
a Alcool a Gasolina
Figure 9 - Evolution of flex-fuel sales in Brazil (%)
Source: ANFAVEA, 2007
16
6 REFERENCES
Goldemberg, José; Coelho, Suani T.; Nastari, Plinio M.; Lucon, Osvaldo. Ethanol learning
curve—the Brazilian experience. Available on Internet: www.sciencedirect.com
Leite, Antonio D. A energia no Brasil. Rio de Janeiro: Elsevier Editora Ltda, 2007.
Pinto Jr., Helder Q. Economia da Energia: Fundamentos Econémicos, Evolugao Historica e
Organizagao Industrial. Rio de Janeiro: Elsevier Editora Ltda., 2007.
Senge, Peter, ... [et al.]. The fifth discipline fieldbook: strategies and tools for building a
learning organization. New York: Doubleday, 1994.
Silva, Osiris; Fischetti, Decio. Etanol: a revolugaéo verde e amarela. Sao Paulo: Bizz
Comunicagao e Produgées, 2008.
Sterman, John D. Business Dynamics: system thinking and modeling for a complex world.
Boston: McGraw-Hill, 2000.
17
f System
| Dynamics J}
Society
Sao Paulo University
System Dynamics Society
27th International Conference
Renewable Energy: A Framework to
Model a Brazilian Case of Success
(Part I)
System
Dynamics
Society
Joaquim Rocha dos Santos (M.Eng.) - EPUSP
Marcelo Ramos Martins (PhD) - EPUSP
Abraham Sin Oih Yu (PhD) - FEA-USP
Paulo Tromboni Nascimento (PhD) - FEA-USP
System
Dynamics
Society
Agenda
Tell the story
* Graph the Variables
¢ Making the System Visible
— Subsystem Diagram
— Causal Loops Diagrams
Identify the lessons
yams Tell the Story
Society
What is this?
yams Tell the Story
Society
What is this?
A flex-fuel engine with its flex-fuel
electronic injection system
yams Tell the Story
Society
What is this?
j siete a a
WHY IS IT IMPORTANT?
A flex-fuel engine with its flex-fuel
electronic injection system
yams Tell the Story
Society
What is this?
Petroleum
Industry
Sugar Cane
Industry
A flex-fuel engine with its flex-fuel
electronic injection system
System
Dynamics
Society
Environment
Sugar Cane
Industry
oN Land
Avaliability
Food
Industry
Tell the Story
Petroleum
Industry
System
Dynamics
Society
Environment
Tell the Story
Sugar Cane Our Focus
Industry
(Today)
Petroleum
Industry
NG Land
Avaliable
Food
Industry
System
Dynamics
Society
Tell the story
System
Dynamics
Society
Tell the story
From 1950 to 1973
¢ World oil demand increased steadily at a rate of 9.5%/year
¢ Petroleum Costs stable around 2.5 US dollars per barrel
System
Dynamics
Society
Tell the story
First Oil Crisis (1973)
¢ The Organization of the Petroleum Exporting Countries (OPEC),
established a new production level and costs policy
¢ Barrel price increased to 11.65 US dollars.
1970 1980 1990 2000 2010
System
Dynamics
Society
Tell the story
First Oil Crisis (1973)
¢ The Organization of the Petroleum Exporting Countries (OPEC),
established a new production level and costs policy
¢ Barrel price increased to 11.65 US dollars.
30 7
aa Choques de precos
| am Y
1970 q
15 +
10 +
Fim da Segunda Guerra
5+ . ty
0 + + + + + + + + + + + + + + + + +
coe Nn mt oS Yo Nea ew tT oD eNO XT Sw A
i=] S ban) co N ise) ise} t + wo axe) o S i I a a o
a a a a a a a a a a a a a a a a a i}
ao Fa aaa aaa aaa A A a A AR
Figura 1 - Producao de petréleo no século XX, em bilh6es de barris/ano.
System
Dynamics
Society
Tell the story
First Oil Crisis (1973)
* The Organization of the Petroleum Exporting Countries (OPEC),
established a new production level and costs policy
¢ Barrel price increased to 11.65 US dollars.
ea
1970
1970
1973
1976 +
1979 +
1982 +
1985 +
1988 +
1991 +
1994 +
1997 7
2000 7
2003 +
2006*+
System
Dynamics
Society
Tell the story
Effects of First Oil Crisis (1973)
Relative short term demand inelasticity
Many countries faced a serious economic situation
Decreased discretionary oil consumption, reducing its relative
importance in their energy matrix
Changes in macroeconomic policies, both fiscal and monetary
1970
Time
System
Dynamics
Society
Effects of First Oil Crisis (1973) - Brazil
¢ Systematic use of sugarcane ethanol as an alternative fuel started
in 1934.
¢ From 1934 to 1975 anhydrous ethanol was added to petrol.
¢ In 1975, Brazil started its Alcohol Program, so called Proalcool.
¢ At the beginning, the aim of the program was a modest
replacement of petrol with anhydrous ethanol.
¢ In 1980 the goal became more ambitious. This new policy
achieved a relevant percentage of petrol replacement: from 1% in
1971 to 41% in 1985. (Leite, 2007).
* Investment in Petrobras (Brazilian Petroleum Company)
Tell the story
rime
System
Dynamics
Society
Late 1970’s - Proalcool Program
Tell the story
System
Dynamics
Society
Tell the story
Late 1970’s - Proalcool Program
* In country development of E-100 cars.
¢ In 1978, an agreement between the Brazilian Government
and the National Association of Motor Vehicle Manufactures
(Anfavea) established the beginning of E-100 development.
¢ In 1979 the E-100 was in the streets.
>
Soe
Oo
~~
(Tp)
cD)
——
ar)
Xo)
—
120 4o----------neeneee eee eee cence
Late 1970’s - Proalcool Program
1970
System
Dynamics
Society
System
Dynamics
Society
Tell the story
1985 - 1990 - Economic Crisis
System
Dynamic $
Society
Tell the story
1985 - 1990 - Economic Crisis
¢ Political changes
* Economic pressures:
* High inflation
¢* Low GDP for more than fifteen years.
* Cut of subsidies
¢ The total ethanol fractional usage reduced from
50% (1988) to 40% (1994).
* During the 1980's 70% of vehicles sold in Brazil
where E-100. The ethanol fleet was relevant and it
would take a decade to be deactivated.
System
Dynamics
Society
Tell the story
\ * Cut of subsidies
1985 - 1990 - Economic Crisis
¢ Political changes
* Economic pressures:
* High inflation
¢* Low GDP for more than fifteen years.
—e— Alcool anidro
na gasolina
Alcool hidratado
no total
O- - ++ +—+—++
—®— Alcool total 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94
Figura 17 — Proporgao de alcool no consumo do combustivel automotivo.
| fractional usage reduced from
D% (1994).
's 70% of vehicles sold in Brazil
le ethanol fleet was relevant and it
tade to be deactivated.
System
Dynamics
Society
Tell the story
1985 - 1990 - Economic Crisis
¢ Political changes
* Economic pressures:
40
80 fe)
(i. oo,
a Gasolina.
ben years.
je reduced from
s sold in Brazil
vas relevant and it
ivated.
System
Dynamics
Society
Tell the story
Early 1990's
System
Dynamics
Society
Tell the story
Early 1990's
/
End of Proalcool
Rise in international raw sugar cane prices
SHORTAGE OF ETHANOL.
2
!
1990 2000 2010 Time
System
Dynamics
Society
Tell the story
Early 1990's
/
¢ End of Proalcool
¢ Rise in international raw sugar cane prices
| | | | * SHORTAGE OF ETHANOL.
l
1970 1980 1990 2000 2010 Time
Lost of consumer confidence
¢ This would charge its price later.
* From 1986 to 2003, consumers no longer bought ethanol E-100 cars.
¢ The remainder ethanol cars still sold were results of the sugarcane
sector pressure for government incentives and the so called “green
fleet”, part of the Government cars fleets should be E-100.
>
System
Dynamics
Society
Early 1990's
/
International Raw Sugar Cane Price
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1960
1965197019751980198519901995200020052010
Tell the story
Time
2010
>
Soe
Oo
~~
(Tp)
oO
——
ar)
Xo)
—
Early 1990's
t
a Gasolina.
Dynamics
Society
System
System
Dynamics
Society
Tell the story
2003 - Flex Fuel Electronic Injection
Technological Inovation
System
Dynamics
Society
Tell the story
2003 - Flex Fuel Electronic Injection
|
¢ A technological innovation, the flex fuel electronic injection, was
already available in the US. Bosch started to study this solution in
1988, in California, USA.
* Due to the technology adopted, Bosch solution was expensive
for Brazilian patterns costs and Brazilian motor vehicle me
manufactures refused to use it.
¢ Moreover, dual sensor technology was not suitable for Brazil due
to the presence of hydrated ethanol.
1970
System
Dynamics
Society
Tell the story
2003 - Flex Fuel Electronic Injection
|
¢ A technological innovation, the flex fuel electronic injection, was
already available in the US. Bosch started to study this solution in
1988, in California, USA.
—>
* Due to the technology adopted, Bosch solution was expensive
1970 for Brazilian natterns costs and Brazilian motor vehicle me
* Magnetti Mareli launched the flex fuel electronic
. . . jdue
injection system with only one sensor.
* Volkswagen do Brasil launches its first flex car in
2003
System
Dynamics
Society
Graph the Variables
Cars sold in Brazil
Figura 31 — Venda de automéveis no mercado interno, por tipo de combustivel, em %.
Fonte: Anfavea, 2007.
System
Dynamics
Society
Taxes
Subsidies
Trade Balance
Government (GOV)
*® = Investment in National
Petroleum Production
Making the System Visible
Internstional
@ Oil Imports
Oil Industry (Ol)
® Home production
Gasoline price
Cars Fleet (CF)
Sugarcane Industry (SCI)
International
Petroleum Price
Ethanol Demand
Gasoline Demand
Subsytem Diagram
Maximum Capacity
Suger Production
Ethanol Production
Sugsr Price
Ethanol Price
Car owners (CO)
Buy Ethanol Car?
Buy Gssoline Car?
System
Dynamics
Society
Making the System Visible
Causal loop Diagram
International
Internation!
nema Sugar Price
Petroleum Prices
Government Incentives +.
+ Government
toN ee Petroleum Incentivesto me
Production r peer Ethanol 4 Ethanol Fuel
Supph
Petroleum BS mpry
Import Costs Ethanol Supply
N nC, Petroleum € B2 +"
Production =
Gasoline/Ethanol Car Gasoline Fuel Gasoline/Ethano! Ethanol Cars .
National Petroleum Price Ration Restriction Fuel Price Ratio I Shortage
a vA Factor
+
i <
Petroleum Confidence fi
: Imports Ethanol ~~ oon Ethanol
A! Cars Attractiveness *
Restrictions G) "Gy
. Ethanol Fuel
Ethanol Adoption Shortage Demand
Cars Demand +
Gasoline > Ethanol |
Adopters Ethanol Adoption Adopters
Rate
System
Dynamics
Society
Identify the Lessons
¢ This paper is 35 years late!!!
¢ With this preliminary analysis, it is possible to
understand the shift in loops dominance and
why they happened
° Flex fuel technology became a dominant design
and changed the consumer behavior
* Pro-alcohol program is now self sufficient and its
long term effects must be studied in advance.
System
Dynamics
Society
Next Step
¢ Build a simulation model to explore some
scenarios
* Expand the model so as to include other
relevant issues (land, food and environmental
aspects)
System
Dynamics
Society
Thank you very much!
Questions ...?
