AES TIETE: EXPANSION PLANT IN BRAZIL Harvard Case Solution & Analysis


Problem Diagnosis

             One of the subsidiaries of AES Corporation in Brazil, AES Tiete, was looking forward to invest in a thermal energy power plant. The total capital expenditure required for investing in this plant was about BRL 1.2 billion. One of the new managers in the leading position at AES Corporation has been assigned with the task of evaluating this investment project and provides the recommendations to the Global Valuation review team on the minimum bid possible for this kind of project which would be presented in the upcoming government auctions.

            This is his first big project and he has to analyze the project under different scenarios which are probable, optimistic the pessimistic scenarios for this 500 MW thermal power plant project. The valuation of this expansion project for energy generation in Brazil would be performed on the basis of certain assumptions. Moreover, the levers for improving the returns of the project and the risks associated with this project would also be analyzed and then a final recommendation would be made for the most appropriate bid price for this project.


             A detailed analysis of the energy matrix and the need for the gas fired power plants in Brazil has been performed before performing the valuation of this expansion project in Brazil as follows.

 Gas Fired Power Plants & Brazil’s Energy Matrix

             It was in the year 2001 that Brazil had experienced a drought and as a result, the government of the country had undergone a period of electricity rationing in the country. Therefore, in order to overcome the future shortages in the supply of the energy there were a range of policies which had been developed by the government of Brazil. These series of policies had been developed with regard to different sources of energy such as wind energy and solar energy.

            Thermal power was considered as the backup in the time of the shortage of electricity, if such time is faced by the country in future. The reason for this is clear that the access of the national operators to the thermal energy sources is quick and it is a cheap mean of alternative source of energy generation. The risks associated with the shortage of electricity in future years are the main reason for the government of Brazil to include the gas fired power plants in its energy matrix.

            The figure 1 presented in the case shows that after hydro power, the installed capacity of thermal power in the country was the highest of all other sources of energy between the periods of 2012 to 2022. The gas fired power plants complement the energy needs of Brazil as the country also has supply of many minerals and natural gas. Natural gas is an important component which is utilized in the generation of thermal power in the country. Moreover, the government of Brazil had devised the policy of holding auctions about 3 to 4 years ahead of time so that the energy which is required to be generated is contracted in advance.

 Strategic Challenges of AES Tiete

             There were a range of challenges which were being faced by AES Tiete in the year 2014. First of all, AES Tiete supplied the 100% capacity of its thermal power to AES Electroapulo at BRL 194/MWh however, this contract was set to expire in the year 2015 in December. Moreover, the financial overview of the company in figure 3 shows that after the expiration of this contract, the EBITDA and the net revenue of the company are estimated to decline and as a result, the company would be contracting and selling in the spot market...................

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