Amcham Power Crisis2
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- 1. Special Presentation The Energy Crisis in Brazil American Chamber Business Affairs Committee So Paulo, April 25, 2001
- I - What is happening?
- II - How did we get to this point?
- III - What is the impact of expected crisis?
- IV - What are the proposed solutions?
3. I - What is happening? 4. What is happening? In sum: chaos
- Imminent electric energy rationing
- Now officially accepted - issue is how to do it: when, quotas, rolling blackouts, how deep, for how long?
- Doubts being cast on the open, competitive energy model chosen by Brazil in 95
- California crisis adding injury to insult
- Is deregulation a failed experiment?
- Should we go back to the old, state controlled model as suggested by Mr. Gray Davis (and certainly other to second him in Brazil)
- More recently, alarming headlines: ANEEL has intervened in the Wholesale Market (MAE)
5. II - How did we get to this point? 6. Physiology of a crisis
- Usually, a complex interaction of many factors - the perfect storm effect
- Leading to an absolute lack of control
- But society and politics need to find a scapegoat, preferably one single factor to blame on
- In California, blame it on deregulation -
- This presentation is not meant to be nave
- There are indeed many issues and a web of events
- The current situation is Brazil is a mixture of the old and the new models - Therefore, whose to blame?
- We can only address a few, key aspects in this limited timeframe
7. Facts, not ideas
- Rationing is a real issue, not a buzzword or aclich , oftentimes used by contractors and equipment vendors in the past
- Reservoirs levels in Brazil have never been so low in the past - to make things worse, at the very end of the rainy season
- If nothing is done reservoirs will run dry soon - at some point between September and December
- Rationing measures in the past more niche based - now most of the system is in dire conditions (South as a exception?)
- This is not a result of one single bad season - on the contrary
- Secular trend - we have been constantly depleting our reservoirs over the last 3-4 years
- An hoping for the best - but not planning for the worse
8. Is this surprising?
- Not for those who have been playing in the electric sector in Brazil in the last few years
- Furthermore, the electric system is designed this way
- Hydro plants not able to deliver 5% of the time
- And Brazil proudly saying it is predominantly hydro
- However, government has not publicly admitted any chance of rationing before - for legitimate reasons, not to scare investors or hamper the economy
- ONS, who was designed to be independent never translated the situation in such a way to be understood by society - reality always buried in complex graphs/charts
- Besides, probability and odds always lead to different interpretations, expectations and levels ofpraying
9. All of this is happening in the midst of a significant process of restructuring of the energy sectors in Brazil
- Brazil has embarked since mid 90s on a significant effort to restructure its energy sector
- Hydrocarbons: end of Petrobrs monopoly, natural gas as a new supply source
- Electric: privatization, competition and deregulation (G/C)
- Vision was modern, design detailed - but implementation has been plagued by politics and procrastination
- Privatization of G assets virtually stopped - no political support
- Inconsistent messages from democrats and republicans
- Implementation of MAE falling behind schedule
- Perception of lack of direction and government leadership - some qualifying as samba do criolo doido - investors really confused
10. Why hasnt anything being done before?
- Not a fair statement
- Since 95 - move towards a private, open model has increased investments, e.g. doubled in generation - 2,500 MW year, but still not enough
- In late 99, an ambitious plan was launched by the Federal Government
- To expand generating capacity - mostly gas fired plants, between 2000 and 2003
- 49 Plants - 15,000 MW- supply would catch up demand growth
- It was called the emergency plan - implying that a crisis was a likely outcome
- The plan had its merits
- To diversify the energy matrix - before, too much hydro and therefore high risk of rationing
- To serve as an anchor to the Bolivian gas supply TOP contracts
- Thermal plants much faster to build than hydro
- Meant to leverage on private resources/capital
11. Has the Emergency Plan failed?
- It depends on how we define success/failure
- In terms of meeting deadlines and avoiding crisis
- Yes, it is a partial failure
- Only a few plants to be commissioned in late 2001 - basically ona merchant basis, due to the lack of incentives to long term contracting
- Those plants are key to alleviate the crisis - but are not enough
- In terms of a long term solution to our problems? No
- Program is here to stay
- Gas fired plants are a cheap solution - hydro very capital intensive, capital is an imported commodity
- Diversification - 15,000 MW not compromising ideal mix
12. Why has the Emergency Plan failed
- Certainly easier to answer with the benefit of hindsight
- First : continued restructuring of the sector and Emergency Plan should not have been perceived as mutually exclusive goals
- Of course, there was an issue of priority
- However, Plan was fundamentally built upon private capital participation- which requires clear rules and market signals
13. Why has the Emergency Plan failed (continued)
- Second : mismatch between the electric and the gas sectors cultures - never spoke to each other
- Electric - mature, moving towards competition
- Gas - emerging, ade factomonopoly
- Difficulties for mutual understanding of basic, technical problems - e.g. dispatch, nomination
- Let alone agreeing on commercial issues
- Lack of dialogue between ANEEL and ANP
- Issues illustrated in Enron Informativo Regulatorio # 1
14. Why has the Emergency Plan failed (continued)
- Third : macro-economic and regulatory issues
- Gas industry is dollarized; electric tariffs in R$
- Who is meant to bear the FX risk?
- In the midst of a government policy to hold public prices to avoid an inflation crisis
- A lot of second-guess and mistrust between government and investors
- Cry-babies? Certainly not. Investors willing to take risks, but too much of a risk to fit within VN
- Aggravated by the fact that D/Cs are collectively single buyers - free market still small, VN is essential
- Statists on call - Petrobrs and Eletrobrs will fix the problem - now defeating the goals of the new model
- III - What is the impact of expected crisis?
16. No one knows - a multi-billion dollar question
- Brazil has had two major rationing programs in its recent history
- South - 3 months in 1986, 20% load cut, via quotas
- N/NE - 7 months in 1997, 15% load cut, via quotas
- We do know how much revenues utilities failed to collect
- However, no one has ever attempted to quantify the macro-economic impact of rationing
- Our best guess for the upcoming rationing
- 15% to 20% cut over 9 months (quota, not rolling blackouts)
- 80% of the Brazilian market
- Social cost: between US$ 10 and US$ 40 billion
- Whose to blame? Deregulation? Social cost of procrastination? Benign neglect? Part of the democratic process? Lack of leadership?Will it help knowing?
17. IV - What are the proposed solutions? 18. For the time being, lets try to mi