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Looking Beyond the Energy Crisis:
Scenarios for a Renewed Brazilian
Electric Power Sector
Washington, March 2002
Pedro ParenteMinister of the Presidency
Acting Minister of Mines and EnergyHead of the Energy Crisis Committee
OUTLINE
The Brazilian electric sector
Introduction
The electric sector model
2001 crisis - Origins and management
Revitalization of the model for the electric sector Crucial questions
Were the lessons learned?
Introduction to the Brazilian Electric Sector
Large capacity dams, in 7 basins with Large capacity dams, in 7 basins with different hydrologic regimesdifferent hydrologic regimes
Generations in the differentGenerations in the different basins are linked through huge basins are linked through huge transmission lines, in sometransmission lines, in some cases longer than 1,000 kmcases longer than 1,000 km
There are 91 hydroelectric plants and There are 91 hydroelectric plants and more than 69,000 Km of transmission more than 69,000 Km of transmission lineslines One of the world’s largest inter-linked One of the world’s largest inter-linked systemssystems
Electric sector characteristics
I NT
ER
LIG
AÇ
ÃO
NO
RT
E-S
UL
HIGH DEPENDENCE ON HYDROLOGY
Assured Energy (2001)*: 364,000,000 MWh
Current total generation capacity of the inter-linked system is 74,000 MW, for an demand at the peaks of:
before during after rationing rationing rationing
56,000 MW 44,000 MW 48,000 MW
Total Generation Capacity
Hydroelectric
Conventional thermal
Nuclear thermal
Wind/Small hydros
Total Capacity
Itaipu (Paraguay)
Imports
Total Supply
Inter-linked system - Installed capacity (MW)
61,555
6,944
1,966
2,345
72,810
5,500
1,150
79,460
82
9
3
3
92
7
1
100
69,448
17,024*
1,966
5,645
94,083
6,200
3,438
103,721
67
17
2
5
91
6
3
100
2001 (%) 2004(e) (%)
* Including emergency thermals (e)=estimate
69,510
67,048
63,97163,110
61,57162,487
3.54%
4.59%
1.47%
1.35%0.99%
56,000
58,000
60,000
62,000
64,000
66,000
68,000
70,000
72,000
1995 1996 1997 1998 1999 2000
YEAR
TR
AN
SM
ISS
ION
SY
ST
EM
EX
TE
NS
ION
(K
m)
ENERGY TRANSMISSION SYSTEM Total extension (Km) and annual increase (%)
48
108
AVERAGE TARIFFS
Generation
Distribution
20.5 20.5
57.657.6
R$/MWh US$/MWh
Brazilian Electric SectorModel
BRAZILIAN ELECTRIC SECTOR MODEL
BEFORE 1996
• Totally public owned
• Generators owned by the Federal Government
• Distributors owned by State Governments
• Model failed in the beginning of the 90’s
BRAZILIAN ELECTRIC SECTOR MODEL
THE NEW MODEL
• Competition in Generation and retailing
• Regulation in transmission and distribution
• Based on Private investments
• Independent regulatory body to ensure adequate balance between utilities and consumers and high quality of services
Prices in the spot market are based on a computational model: agents don’t make price offers
Prices in the spot market are very volatile There is almost no free consumers No external price references for price caps for
captive consumers
BRAZILIAN ELECTRIC SECTOR MODEL
CURRENT INADEQUACIES (1 OF 2)
Wholesale market not working properly Calculation of assured energy needs to be
revised Implicit subsidies Public utilities still account for a large portion of
the market
BRAZILIAN ELECTRIC SECTOR MODEL
CURRENT INADEQUACIES (2 OF 2)
Evolution of the wholesale market pricesSoutheast/South system
66
0
10
20
30
40
50
60
70
80
90
100
jan-93 jul-93 jan-94 jul-94 jan-95 jul-95 jan-96 jul-96 jan-97 jul-97
Marginal Operation Costs in the SE/S system from January 1993 to August 1997
US$/MWh.
In Brazil, prices in the spot market are not
the driver for new supply
Long term contracts (PPA’s) are the driver
for new supply
AS A RESULT:
BRAZILIAN ELECTRIC SECTOR MODEL
Origins and management of
2001 crisis
• Below average hydrology
• Delays in investments in plants and transmission lines
• The model inadequacies
• Delays in the implementation of the model
• An ill-suited administrative structure within the government to manage the new model in a totally different environment
2001 CRISIS
ORIGINS
• Federal Government took immediate responsibility for the crisis. There was no finger pointing within levels of government and/or agencies
• A “crisis cabinet” was created at the highest government level, with powers commensurate to
the task
2001 CRISIS
MANAGEMENT
• Decisions taken in this cabinet were, in general, final, i.e., did not depend upon other government instances
• All the lines in the plan of action were implemented.
Two out of five were concluded, and the remaining are fully under way
2001 CRISIS
MANAGEMENT
1) Program for the reduction of demand
2) Structural program to increase the energy supply
3) Emergency program to increase the energy supply
4) Conservation
5) Revitalization of the model for the electric sector
PLAN OF ACTION
Total demand reduction (Rationing period= Jun/2001 to Feb/2002)
* For the Northern region, the basis period was not May/Jun/Jul 2000
Northregion
North-eastregion
South-eastregion
Load reduction in relationto May/Jun/Jul 2000 (*) 15.7% 15.6%
Load reduction in relationto the same base-period2000/01
18.3% 19.5% 19.8%
Load reduction in relationto the initial estimates for2001/02
24.6% 20.7% 21.2%
North: 782,000 MWh (equivalent to Pará (*) state)
Northeast: 4,700,000 MWh (equivalent to Bahia state)
Southeast and Mid-west: 20,500,000 MWh (equivalent to Minas Gerais state)
The load reduction in households was on average 24.4% during the rationing period
(*) except electrointensive industry
Total energy saved : 26,000,000 MWh
Total Saved Energy During Rationing
Load Evolution (1994-2001)
17000
19000
21000
23000
25000
27000
29000
JAN FEV MAR ABR MAI JUN JUL AGO SET OUT NOV DEZ Méd.
2001
2000
1999
1998
1997
1996
1995
1994
23,198
25,848
25,560
23,961
23,112
22,086
21,252
20,096
Southeast/Mid-West
averageMW
• In 2001, the load equalled that of 1997. Cumulative GDP growth from 1997 to 2001 was 11.2%. Still, GDP grew 1.5% in 2001.
1) Program for the reduction of demand
2) Program to increase the energy supply
3) Emergency program to increase the energy supply
4) Conservation
5) Revitalization of the model for the electric sector
PLAN OF ACTION
POWER PLANTS IN THE STRUCTURAL PROGRAM (MW)
2001* 2002 2003 Total
HYDROELECTRIC (24) 1,397 3,050 2,421 9,990
THERMAL (38)** 1,354 2,530 3,928 11,434
COGENERATION 125 83 500 708
WIND 2 261 394 1,050
IMPORTS (5) 98 1,088 400 2,386
TOTAL (MW) 3,042 9,299 7,762 28,040
TRANSMISSION LINES (18) - Km 505 1,371 4,350 9,250
SUBSTATIONS (8) - MVA
4,347
6,297
INCREASE IN SUPPLY
TYPE OF INVESTMENT
SMALL HYDROELECTRIC (SHPs) 66 134 119 319
900* Actual.** Considering a non-performance of 20% in the program.
2004
3,122
3,622
-
393
800
7,937
3,024
-
1,050
EMERGENCY THERMAL (58) - 2,153 - 2,153-
ESTIMATED INVESTMENTS (2001 - 2004)
Private Public Total
HYDROELECTRIC (24) 7,883 3,356 11,239
THERMAL (38) 12,395 4,371 (*) 16,776
IMPORTS (5) 1,317 - 1,317
TRANSMISSION LINES 3,770 1,167 4,937
OTHER SOURCES (**) 5,715 480 6,195
TOTAL
%
34,054
78,4
9,374
21,6
43,438
100
TYPE OF INVESTMENT
(R$ Million)
(*) Mostly PETROBRAS in association with private firms.
EMERGENCY THERMAL (58) 2,974 - 2,974
(**) Other sources: Cogeneration, eolic, photoelectric and SHPs.
Scheduled bids (2002/2003)*
Transmission lines: 6,250 KmTransmission lines: 6,250 Km
Feb. through Dec. 2002Feb. through Dec. 2002
Estimated investments: R$ 2.8 billionEstimated investments: R$ 2.8 billion
Hydroelectric Power Plants: 10,978 MWHydroelectric Power Plants: 10,978 MW
Estimated investments: R$ 16.5 billionEstimated investments: R$ 16.5 billion
* Source: ANEEL
28
Source: IIRSASource: IIRSA
SOUTH AMERICA
Infrastructure
Interconnections
BRAZILHighways
Navigation
Power: Itaipu
Guri (Venezuela)
Bolivia-Brazil pipeline
Argentina
1) Program for the reduction of demand
2) Program to increase the energy supply
3) Emergency program to increase the energy supply
4) Conservation
5) Revitalization of the model for the electric sector
PLAN OF ACTION
DEFINITION OF THE ELECTRIC ENERGYEMERGENCY SUPPLY FOR 2002-2003
Estimateddemand for
2002/03Structural Supply
Program 2001/03
Assumptionsfor hydrology
EmergencySupply Needs
2002/03
EMERGENCY SUPPLY
Guidelines
Additional energy supply, on a temporary basis,
to work as an “insurance” for the consumer
A public energy trader (SPC) was set up to buy
energy from independent producers
Contracting Emergency Generation: Results
117 proposals (> 4,000 MW)
2,100 MW selected
1,500 MW NE 600 MW SE
average price: 290 R$/MWh
100 R$/MWh fixed price 190 R$/MWh variable price
1) Program for the reduction of demand
2) Program to increase the energy supply
3) Emergency program to increase the energy supply
4) Conservation
5) Revitalization of the model for the electric sector
PLAN OF ACTION
Approval of Law Nº 10,295, on the National Policy for Approval of Law Nº 10,295, on the National Policy for
Rational Energy Use and Conservation Rational Energy Use and Conservation
Assistance Program for Micro-, Small and Medium Assistance Program for Micro-, Small and Medium
CompaniesCompanies
Regulatory Decree: Creation of Managing Committee Regulatory Decree: Creation of Managing Committee
for Indicators and Levels of Energy Efficiency (CGIEE)for Indicators and Levels of Energy Efficiency (CGIEE)
Conservation
1) Program for the reduction of demand
2) Program to increase the energy supply
3) Emergency program to increase the energy supply
4) Conservation
5) Revitalization of the model for the electric sector
PLAN OF ACTION
Revitalization of the model
for the electric sector
Created within the Crisis CabinetCreated within the Crisis Cabinet
Mission:Mission: To correct inadequacies and propose To correct inadequacies and propose
improvements to the power sector model.improvements to the power sector model. To preserve the model’s fundamentalsTo preserve the model’s fundamentals
Revitalization Committee
General Agreement of
the Sector
Implementation of measures
from 33 proposed
themes
• Resumption of private investments.
• Free competition in the sector (generation and retail).
• Proper market functioning.
• Assurance of reliable energy supply, with mitigated tariff impact
Revitalization Committee
Solved deadlock and avoided paralyzation of
announced investments
Avoided financial hardship for generators and
distributors alike
Solved controversies related to non-manageable costs
(e.g. price of gas)
Mitigated impact on tariffs
Contributed to prevent repetition of events in the future
General Agreement (Dec.2001)
Schedule for implementation of measuresfrom the 33 proposed themes
Report with details on the 33 themes released
February 1st, 2002
Discussion with agents (1-2 months)
Releasing of each detailed measure for final
public discussion (1 month)
Implementation (1-2 months)
Total time frame: February to July 2002
A. Resume market operationA. Resume market operation
B. Reinforce market-based mechanismsB. Reinforce market-based mechanisms
C. Ensure adequate expansion of supplyC. Ensure adequate expansion of supply
D. Monitor supply reliabilityD. Monitor supply reliability
E. Improve interface between market and regulated E. Improve interface between market and regulated
segmentssegments
F. Stimulate fair competitionF. Stimulate fair competition
G. Realistic tariffs and consumer benefitsG. Realistic tariffs and consumer benefits
H. Improve functioning of institutional agentsH. Improve functioning of institutional agents
33 themes divided in 8 areas
Some of the priority measures
Assess the possibility of introducing price offers
by agents in the spot market
Improve the price cap (VN) system
Regulate the government-owned generation
trading
Establish a system to review the assured energy
granted to each hydro plant
Stimulate consumers to become free
Some of the priority measures
Review the distributors limits to self-generation
Proceed with unbundling
Introduce a system of early warnings
Increase the minimum level of long-term
contracts by distributors
Improve the economic signals embedded in the
tariff structure
40%
51%
19%
22%
33%
10%
31/Dez/01 31-jan 28-fev 31-mar 30-abr 31-mai 30-jun 31-jul 31-ago 30-set 31-out 30-nov 31-dez 31-jan 28-fev 31-mar 30-abr 31-mai 30-jun 31-jul 31-ago 30-set 31-out 30-nov 31-dez
% E
arm
ax 2002 2003
Safety Curve (2002-2003): Southeast/Mid-West
• Average hydrology for the 4th worst two-year periods of the historical time series, equivalent to 68% MLT in 2002 and 67% MLT in 2003
• Deliver 100% of demand in two years
Proposal for Government-owned generation
All energy belonging to these companies will be traded through public auctions Additional dividends earned by the Federal Government will be used to finance emergency plants, natural gas subsidy, etc.
Transparency
Interests of shareholders (both Government and
minority shareholders) and consumers are protected
General Consequences of theProposed Measures
Reinforcement of the model’s fundamentals
and market mechanisms Higher government intervention at the
regulatory level, not as entrepreneur Rights of private investors preserved
Stability, transparency and predictability
of rules
CRUCIAL QUESTIONS
CRUCIAL QUESTIONS
Given the special properties of electricity, how
to ensure in the long term the right balance
between supply and demand? Would a full free
market be able to do so?
Will it be possible for Brazil to fully eliminate the
bottlenecks in the transmission system? Will it
be worthwhile?
CRUCIAL QUESTIONS
Will it be possible in Brazil to introduce a system of
price offers by market agents, keeping at the same time
the centralized dispatch system?
What is the right balance between market freedom and
regulation?
Regardless of the freedom enjoyed by the sector, what
level of direct or indirect intervention power should be
granted to the government?
WERE THE LESSONS LEARNED?
In a special report as of Sept. 17, 2001, the Wall Street
Journal stated that the Californian Crisis “has taught a
lot about the do’s and don’ts of deregulation”. Let’s
use it to compare to what we have been doing in
Brazil. Here the lessons by the WSJ:
“Electricity is no ordinary commodity”
“Don’t leave utilities hanging on in the spot market”
WERE THE LESSONS LEARNED?
“Let consumers feel the pain - or pleasure”
“Be ready for surprises”
“Make sure consumers have choices”
“Have enough generating capacity ...”
“... But not too much capacity”
“You have to deliver” (it refers to the need of having a
good transmission grid)
“Regulators have to keep up”
Wall Street Journal
WERE THE LESSONS LEARNED?
Washington, March 2002
Pedro ParenteMinister of the Presidency
Acting Minister of Mines and EnergyHead of the Energy Crisis Committee
Looking Beyond the Energy Crisis:
Scenarios for a Renewed Brazilian
Electric Power Sector