26/3/2004 International Seminar on Electricity Market Reform 1 A Southern Perspective on the...

26/3/2004

International Seminar on Electricity Market Reform 1

A Southern Perspective on the Technological Dimension of Electricity Market Reform

João Lizardo R. H. de Araújo, CEPEL

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Traditional Paradigm

• Electricity Supply Industry was built on– Large economies of integration, density and co-

ordination– Favorable financial conditions

• This led to – Coordinated, vertically integrated industry– Centralized decision-making and cooperation– Ability to cope with fast-growing demand– Slowly-changing technology

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Changing Paradigms

• In recent years, the ESI has faced upheavals in structure and operation– Decentralized decision-making– Competitive pressures

• Economic and financial contexts have also changed markedly– But there exist large differences between

North and South

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Common features of new contexts

• Larger risks and uncertainties• Worsened financial conditions• As a consequence, Investment/Revenues

ratios have fallen• Reliability and security have suffered• Research and Development activities have

been particularly affected, since they require continued efforts over the long term to give results, although they represent only a small fraction of all investments

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Electricity share has increased in relation to energy consumption

• Between 1970 and 2002, in Brazil – Total energy intensity has fallen 12%– Electricity intensity has increased 75%!

• Between 1970 and 2002, in the USA– Total energy intensity has fallen 47%!– Electricity intensity has remained constant

• In addition, electricity pervades all activities and products

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International Seminar on Electricity Market Reform 6Source: EPRI

(In the USA)

… But investment has fallen

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And reliability has fallen

• In the USA, between 1991-1995 and 1996-2000 (EPRI, 2003)

– Outages affecting 50,000 or more consumers increased 41%

– In average, 15% more consumers were affected

– Outages losing more than 100 MW increased 15%

– Average lost load increased 34%

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Context for the South is particularly damaging

• Financial conditions are more unfavorable than in the North

• Immature systems still offer significant gains of integration and coordination,

• They also have less slack to ensure effective competition

• There is a high potential for demand growth• In consequence, systems are more strained

and prospects are worse

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Investment/Consumption in Brazilian ESI(constant 2000 R$)

0

0,05

0,1

0,15

0,2

0,25

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

year

MR

$/G

Wh

Source: Araujo 2002, BEN

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The R&D Gap in the Power Industry Worldwide

• R&D is a long-term endeavor, with significant gains from networking and cooperation

• Paradigm and context changes have hurt R&D activities, just when they are most needed:– New challenges cannot be faced by merely increasing

investment in expansion, duplication and maintenance of facilities

– Issues are common to all power companies, which are seldom if ever able to do R&D on their own

– But the new context has made it more difficult for companies to cooperate with one another

• In consequence, the ESI faces huge challenges

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Can power companies behave as Schumpeterian entrepreneurs?

• In monopolistic competition, R&D has a role for disputing market shares between industry leaders and competitors

• This assumes that individual companies have scale to develop R&D and can appropriate returns, and that opportunities for expansion exist, as well as effective competition

• Power companies have formed their culture in a non-competitive environment. Their scale and operations are not easily transferable to a global scale, in contrast to other sectors

• Research facilities are large in comparison to company sizes, and many results (T&D) benefit the system – these are not easily internalized

• The electricity market has not the dynamism of IT, or the global reach of the oil industry

• This makes it unlikely that the ESI will follow a Schumpeterian path in the near future

• Thus, dynamic EE R&D needs coordination and cooperation

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Challenges ahead

• Safety, reliability and security are increasingly crucial in an interdependent system with multiple agents and multiple threats, where failures have much graver economic and social impact than in the past because of the growing importance of electricity to the economy– Technological answers have their own dangers: an “energy

internet” is a necessary ingredient but will have to deal with potential cyber attacks

• Quality of electricity supply must be equal to the needs of a digital economy, where information technology devices tend to be ubiquitous

• System must develop and accommodate a variety of distributed resources, with distinct features and implications

• Industry must reduce environmental damage, with a view at a self-sustaining technological trajectory

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Brazilian Issues

• Dominance of hydropower means quick power response but has issues of– Energy reserves– Dam safety

• Immature system needs fast expansion to enhance reliability with cost effective, capital saving solutions

• Social and regional inequality needs specific technological solutions to complement social and economic policies

• Country has technical expertise, but lack of coordinated support has endangered existing research institutions and facilities

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Need for a Technological Roadmap• Challenges to be faced require consistent research

programs spanning decades• This implies a coordinated, long-range policy with

clearly defined issues, goals and responsibilities – a technological roadmap

• Such an endeavor is much more than a prospective study to identify research priorities, as it must contain– Strategic definitions– Planning activities– Articulated network of R&D institutions, both national and

international• TR initiatives have been developed over the last few

years in several countries

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In conclusion

• Technological issues in the power industry require that Government act as articulator of policy, as well as facilitator

• Policy definition will have to take into account corporate strategies of power companies, both public and private

• Existing expertise and facilities should be strengthened and enhanced within a network based on coordination and complementarity

• Use should be made of internationally available knowledge base

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