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Looking Beyond the Energy Crisis: Scenarios for a Renewed Brazilian Electric Power Sector

Looking Beyond the Energy Crisis: Scenarios for a Renewed Brazilian Electric Power Sector. Pedro Parente Minister of the Presidency Acting Minister of Mines and Energy Head of the Energy Crisis Committee. Washington, March 2002. OUTLINE. The Brazilian electric sector Introduction

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Looking Beyond the Energy Crisis: Scenarios for a Renewed Brazilian Electric Power Sector

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  1. Looking Beyond the Energy Crisis:Scenarios for a Renewed Brazilian Electric Power Sector Pedro Parente Minister of the Presidency Acting Minister of Mines and Energy Head of the Energy Crisis Committee Washington, March 2002

  2. 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?

  3. Introduction to the Brazilian Electric Sector

  4. Electric sector characteristics HIGH DEPENDENCE ON HYDROLOGY • Large capacity dams, in 7 basins with different hydrologic regimes • Generations in the different basins are linked through huge transmission lines, in some cases longer than 1,000 km • There are 91 hydroelectric plants and more than 69,000 Km of transmission lines • One of the world’s largest inter-linked systems O Ã L Ç U A S G - I E L T R R E O T N N I Assured Energy (2001)*: 364,000,000 MWh

  5. Total Generation Capacity • 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

  6. Inter-linked system - Installed capacity (MW) 67 17 2 5 91 6 3 100 Hydroelectric Conventional thermal Nuclear thermal Wind/Small hydros Total Capacity Itaipu (Paraguay) Imports Total Supply 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 2001 (%) 2004(e) (%) * Including emergency thermals (e)=estimate

  7. ENERGY TRANSMISSION SYSTEM Total extension (Km) and annual increase (%) 72,000 69,510 70,000 3.54% 68,000 67,048 TRANSMISSION SYSTEM EXTENSION (Km) 66,000 4.59% 63,971 63,110 64,000 62,487 1.35% 61,571 0.99% 62,000 1.47% 60,000 58,000 56,000 1995 1996 1997 1998 1999 2000 YEAR

  8. AVERAGE TARIFFS R$/MWh US$/MWh Generation Distribution 48 108 20.5 57.6

  9. Brazilian Electric SectorModel

  10. 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

  11. 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

  12. 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)

  13. 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)

  14. Evolution of the wholesale market prices Southeast/South system 100 90 80 70 60 50 40 30 20 10 0 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. 66

  15. In Brazil, prices in the spot market are not the driver for new supply BRAZILIAN ELECTRIC SECTOR MODEL AS A RESULT: Long term contracts (PPA’s) are the driver for new supply

  16. Origins and management of 2001 crisis

  17. 2001 CRISIS ORIGINS • 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

  18. 2001 CRISIS MANAGEMENT • 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

  19. 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

  20. PLAN OF ACTION 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

  21. Total demand reduction(Rationing period= Jun/2001 to Feb/2002) * For the Northern region, the basis period was not May/Jun/Jul 2000

  22. Total Saved Energy During Rationing Total energy saved : 26,000,000 MWh • 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

  23. 2001 25,848 25,560 2000 23,961 1998 23,112 1999 22,086 1997 23,198 1996 21,252 1995 1994 20,096 Load Evolution (1994-2001) Southeast/Mid-West • 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. averageMW

  24. PLAN OF ACTION 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

  25. POWER PLANTS IN THE STRUCTURAL PROGRAM (MW) INCREASE IN SUPPLY 2001* 2002 2003 2004 Total TYPE OF INVESTMENT HYDROELECTRIC (24) 1,397 3,050 2,421 3,122 9,990 11,434 THERMAL (38)** 1,354 2,530 3,928 3,622 EMERGENCY THERMAL (58) - 2,153 - - 2,153 IMPORTS (5) 98 1,088 400 800 2,386 SMALL HYDROELECTRIC (SHPs) 66 134 119 - 319 COGENERATION 125 83 500 - 708 WIND 2 261 394 393 1,050 TOTAL (MW) 3,042 9,299 7,762 7,937 28,040 TRANSMISSION LINES (18) - Km 505 1,371 4,350 3,024 9,250 SUBSTATIONS (8) - MVA 900 1,050 6,297 4,347 * Actual. ** Considering a non-performance of 20% in the program.

  26. ESTIMATED INVESTMENTS (2001 - 2004) (R$ Million) TYPE OF INVESTMENT Private Public Total HYDROELECTRIC (24) 7,883 3,356 11,239 THERMAL (38) 12,395 4,371 (*) 16,776 1,317 - 1,317 IMPORTS (5) 3,770 1,167 4,937 TRANSMISSION LINES 5,715 480 6,195 OTHER SOURCES (**) 2,974 EMERGENCY THERMAL (58) 2,974 - TOTAL % 34,054 78,4 9,374 21,6 43,438 100 (*) Mostly PETROBRAS in association with private firms. (**) Other sources: Cogeneration, eolic, photoelectric and SHPs.

  27. Scheduled bids (2002/2003)* • Transmission lines: 6,250 Km • Feb. through Dec. 2002 • Estimated investments: R$ 2.8 billion • Hydroelectric Power Plants: 10,978 MW • Estimated investments: R$ 16.5 billion * Source: ANEEL

  28. SOUTH AMERICA Infrastructure Interconnections BRAZIL Highways Navigation Power: Itaipu Guri (Venezuela) Bolivia-Brazil pipeline Argentina Source: IIRSA 28

  29. PLAN OF ACTION 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

  30. DEFINITION OF THE ELECTRIC ENERGY EMERGENCY SUPPLY FOR 2002-2003 Estimated demand for 2002/03 Structural Supply Program 2001/03 Assumptions for hydrology Emergency Supply Needs 2002/03

  31. EMERGENCY SUPPLYGuidelines • 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

  32. 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

  33. PLAN OF ACTION 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

  34. Conservation • Approval of Law Nº 10,295, on the National Policy for Rational Energy Use and Conservation • Assistance Program for Micro-, Small and Medium Companies • Regulatory Decree: Creation of Managing Committee for Indicators and Levels of Energy Efficiency (CGIEE)

  35. PLAN OF ACTION 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

  36. Revitalization of the model for the electric sector

  37. Created within the Crisis Cabinet Mission: To correct inadequacies and propose improvements to the power sector model. To preserve the model’s fundamentals Revitalization Committee

  38. Revitalization Committee • Resumption of private investments. • Free competition in the sector (generation and retail). • Proper market functioning. • Assurance of reliable energy supply, with mitigated tariff impact General Agreement of the Sector Implementation of measures from 33 proposed themes

  39. 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)

  40. Schedule for implementation of measures from 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

  41. A. Resume market operation B. Reinforce market-based mechanisms C. Ensure adequate expansion of supply D. Monitor supply reliability E. Improve interface between market and regulated segments F. Stimulate fair competition G. Realistic tariffs and consumer benefits H. Improve functioning of institutional agents 33 themes divided in 8 areas

  42. 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

  43. 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 Some of the priority measures

  44. 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

  45. 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

  46. General Consequences of the Proposed 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

  47. CRUCIAL QUESTIONS

  48. 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

  49. 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? CRUCIAL QUESTIONS

  50. WERE THE LESSONS LEARNED?

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