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2001 Power Crisis in Brazil

Transcript of Amcham Power Crisis2

  • 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