The Brazilian Energy MarketThe Brazilian Energy Market

ANEEL/FERC/MoPSC/UtahPSC WorkshopBrasília, August 9th, 2005

ANEEL/FERC/MoPSC/UtahPSC WorkshopBrasília, August 9th, 2005

Edvaldo A. SantanaSuperintendent of Market Studies

Edvaldo A. SantanaSuperintendent of Market Studies

USEA / USAID / ANEELEnergy Partnership Program

USEA / USAID / ANEELEnergy Partnership Program

Regulatory Framework Regulatory Framework

Expansion Planning and Energy Auctions Expansion Planning and Energy Auctions

The Energy Market The Energy Market

OutlineOutline

The Brazilian Power Industry The Brazilian Power Industry

Trading Arrangements Trading Arrangements

Emerging Challenges Emerging Challenges22

The Brazilian IndustryThe Brazilian Industry

Long transmission linksHydro dominationPlants in cascadeHigh demand growth rateLong-term hydro

regularization

Long transmission linksHydro dominationPlants in cascadeHigh demand growth rateLong-term hydro

regularization

Public utilitiesIndependent power producersSelf-producersCo-generationMerchants

Public utilitiesIndependent power producersSelf-producersCo-generationMerchants

Extra-large hydro unitsLarge thermal unitsSmall hydro unitsGreen energy

Extra-large hydro unitsLarge thermal unitsSmall hydro unitsGreen energy

Originally vertically integrated

Limited resources for expansion

Lack of incentives towards efficiency

Originally vertically integrated

Limited resources for expansion

Lack of incentives towards efficiency

33

Hydro

70,884 MWSmall hydro (< 30 MW)

1,421 MWThermal

18,806 MWNuclear

2,007 MWWind

31 MWPartial

93,149 MW Import (excl. Itaipu)

8,170 MWEmergency thermal

2,050 MWTOTAL

103,369 MW

Hydro

70,884 MWSmall hydro (< 30 MW)

1,421 MWThermal

18,806 MWNuclear

2,007 MWWind

31 MWPartial

93,149 MW Import (excl. Itaipu)

8,170 MWEmergency thermal

2,050 MWTOTAL

103,369 MW

StatisticsStatistics

Annual Consumption 350 TWhConsumers 51.2 millionsGrowth rate ~ 4.5% yearAverage tariff (2004) R$ 0.1975 / kWhAnnual revenue ~ R$ 70 billionsTransmission > 138 kV ~ 173,000 kmNetwork > 230 kV ~ 70,000 km

Annual Consumption 350 TWhConsumers 51.2 millionsGrowth rate ~ 4.5% yearAverage tariff (2004) R$ 0.1975 / kWhAnnual revenue ~ R$ 70 billionsTransmission > 138 kV ~ 173,000 kmNetwork > 230 kV ~ 70,000 km

The Brazilian Power SystemsThe Brazilian Power Systems

Interconnected Systeminstalled capacity: 92,389 MW

Isolated Systemsinstalled capacity: 2,810 MW

55

Import8,170 MW

The Brazilian Sub-systemsThe Brazilian Sub-systems

North

NortheastCap: 15,646 MW

Load: 6,531 MW avg

South

Southeast/MidwestCap: 53,163 MW

Load: 28,502 MW avg

66

Cap: 17,144 MWLoad: 7,465 MW avg

Cap: 6,466 MWLoad: 3,131 MW avg

International ExchangesInternational Exchanges

Uruguay

Argentina

Venezuela

Paraguay

72 MW

2,200 MW

70 MW

200 MW

Unlike the NordPool the energy markets are not integrated

Unlike the NordPool the energy markets are not integrated

77

The Energy MarketThe Energy Market

Market of Differences

DISCOs have get into long-term PPAs for 100% of their demand requirements

GENCOs have to demonstrate “selling capacity”

PPAs are registered by the market operator (quantity only)

PPAs are cleared bilaterally @ contracted prices

System operator dispatches generation resources

Market operator calculates spot prices

Generation and consumption mismatches are cleared within the market operator environment @ spot prices

Market of Differences

DISCOs have get into long-term PPAs for 100% of their demand requirements

GENCOs have to demonstrate “selling capacity”

PPAs are registered by the market operator (quantity only)

PPAs are cleared bilaterally @ contracted prices

System operator dispatches generation resources

Market operator calculates spot prices

Generation and consumption mismatches are cleared within the market operator environment @ spot prices

88

RegulationRegulation

Why Regulate ?Why Regulate ?

Fundamentally a political-economic conceptFundamentally a political-economic concept

Regulation @ ANEELRegulation @ ANEEL

MonitoringMonitoring

Inspection and AuditingInspection and Auditing MediationMediation

RulingRuling

Prevent market failures(Monopoly power; Asymmetry of Information; Externalities)

Prevent market failures(Monopoly power; Asymmetry of Information; Externalities)

99

Generation – SRG Optimisation models for dispatch and pricing; assured

energy

Generation – SRG Optimisation models for dispatch and pricing; assured

energy

Regulation at ANEELRegulation at ANEEL

Transmission – SRT Transmission tariffs; transmission standards

Transmission – SRT Transmission tariffs; transmission standards

Distribution – SRD Network distribution tariffs; reliability and quality indexes

Distribution – SRD Network distribution tariffs; reliability and quality indexes

Market – SEM Rules for spot transactions; auctions; market monitoring

Market – SEM Rules for spot transactions; auctions; market monitoring

Retail trade – SRC Free consumers; captive x DISCOs affairs; universal access

Retail trade – SRC Free consumers; captive x DISCOs affairs; universal access

Economic – SRE Energy tariffs; system fees

Economic – SRE Energy tariffs; system fees 1010

Regulatory FrameworkRegulatory Framework

Market rules and proceduresAgents or CCEE can propose new rules and proceduresANEEL approves and issues new rulesTransparency reached by public hearings

Market rules and proceduresAgents or CCEE can propose new rules and proceduresANEEL approves and issues new rulesTransparency reached by public hearings

Arbitrate ChamberSolves disputes between agentsANEEL can mediate disputes

Arbitrate ChamberSolves disputes between agentsANEEL can mediate disputes

1111

Trading ArrangementsLong-term marketTrading ArrangementsLong-term market

1212

Regulated

TariffsMarket prices

Regulated Pool Auctions

Single-buyer model

GENCO

CaptiveConsumers

CaptiveConsumers

FreeConsumers

FreeConsumers

GENCO IPP IPP

DISCO DISCO Traders

Free Market

Trading ArrangementsSpot MarketTrading ArrangementsSpot MarketBilateral contracts (PPAs)

DISCOs have to contract bilaterally for 100% of their market requirements

PPAs have to be registered/approved by ANEEL PPAs are registered in CCEE (only quantity) PPAs are cleared bilaterally ANEEL oversees “selling capacity” CAP value to pass on to regulated supply tariffs

Bilateral contracts (PPAs) DISCOs have to contract bilaterally for 100% of their market

requirements PPAs have to be registered/approved by ANEEL PPAs are registered in CCEE (only quantity) PPAs are cleared bilaterally ANEEL oversees “selling capacity” CAP value to pass on to regulated supply tariffs

Spot market Energy mismatches (contracted vs. measured) are cleared

in the spot market GENCOs can sell up to 100% of their capacity (merchants) Traders can buy or sell

Spot market Energy mismatches (contracted vs. measured) are cleared

in the spot market GENCOs can sell up to 100% of their capacity (merchants) Traders can buy or sell

1313

Products:• Blocks of 1 MW avg;• 8-year PPA (starting supply

on 2005, 2006 and 2007)

Products:• Blocks of 1 MW avg;• 8-year PPA (starting supply

on 2005, 2006 and 2007)

17 GENCOs Selling to 34 DISCOs17 GENCOs Selling to 34 DISCOs

~ 900 PPAs~ 900 PPAs1414

Existing-energy AuctionsDecember 2004Existing-energy AuctionsDecember 2004

Results:• 1,325 blocks• 17,008 MW avg• Prices (R$/MWh): 57.51(2005)

67.33 (2006)75.46 (2007)

Results:• 1,325 blocks• 17,008 MW avg• Prices (R$/MWh): 57.51(2005)

67.33 (2006)75.46 (2007)

Products:Blocks of 1 MW avg;8-year PPA (starting

supply on 2008)

Products:Blocks of 1 MW avg;8-year PPA (starting

supply on 2008)

1 GENCO450 MW avg1 GENCO

450 MW avg

34 DISCOs0.43 – 57.24 MW avg

34 DISCOs0.43 – 57.24 MW avg

34 PPAs for each GENCO34 PPAs for each GENCO 1515

Existing-energy AuctionsApril 2005Existing-energy AuctionsApril 2005

Results:1,325 blocks92,920 GWh

R$ 88.13 / MWh R$ 7.7 Billions (8 years)

Results:1,325 blocks92,920 GWh

R$ 88.13 / MWh R$ 7.7 Billions (8 years)

Spot Market EvolutionSpot Market Evolution

2002

J J JMMF A A SO N D

Market OperatorMarket Operator(regulated by ANEEL)(regulated by ANEEL)

Partial (50%) clearing Partial (50%) clearing of 25 monthsof 25 months

J F M A M J J A S O N D

2005

New model for the New model for the energy sectorenergy sector

J F M A M J J A S O N D

2003

J F M A M J J A S O N D

2004

Final (50%) clearing Final (50%) clearing of 25 monthsof 25 months

Market Operator: monthly Market Operator: monthly clearing – less then 1% defaultsclearing – less then 1% defaults

Market OperatorMarket Operator(self-regulated)(self-regulated)

D

1996

J F M A M J J A S O N D

1997

J F M A M J J A S O N D

1998

ANEEL ANEEL regulationregulation

ANEELANEELinitial operationinitial operation

Market Operator Market Operator regulationregulation

J F M A M J J A S O N D

1999

Market Market AgreementAgreement

Market RulesMarket RulesANEEL ANEEL creationcreation

Market operator: long period of Market operator: long period of mis-operation (no clearing)mis-operation (no clearing)

J F M A M J J A S O N D

2000 2001 2002

J FM A JJ JM MFSO N DA

1616

Average Spot PricesSoutheast / MidwestAverage Spot PricesSoutheast / Midwest

0,00

5,00

10,00

15,00

20,00

25,00

30,00

35,00

40,00

45,00

fev/0

2

abr/0

2

jun/0

2

ago/

02

out/0

2

dez/0

2

fev/0

3

abr/0

3

jun/0

3

ago/

03

out/0

3

dez/0

3

fev/0

4

abr/0

4

jun/0

4

ago/

04

out/0

4

dez/0

4

fev/0

5

abr/0

5

jun/0

5

R$/

MW

h

1717

Free ConsumersFree Consumers

Consumers ChoiceConsumers Choice

June 2003:

292 GWh per month

June 2003:

292 GWh per month

June 2005:

6,935 GWh per month

June 2005:

6,935 GWh per month

1818

GovernmentEnsure generation and transmission expansionGuarantee the reliability and quality of supplyEnvironmental licensing

GovernmentEnsure generation and transmission expansionGuarantee the reliability and quality of supplyEnvironmental licensing

Emerging ChallengesEmerging Challenges

ANEELRules and regulations for new-energy auctions Increase transparency and credibility to attract

investmentsFinancial guarantees for project finance (investment

in new capacity)Market monitoringTariffs review

ANEELRules and regulations for new-energy auctions Increase transparency and credibility to attract

investmentsFinancial guarantees for project finance (investment

in new capacity)Market monitoringTariffs review 1919

New-energy AuctionsNew-energy Auctions

Supply adequacy in the long term

Generation Expansion Planning

2020

Emerging Challenges (cont.)Emerging Challenges (cont.)

New-Energy AuctionsNew-Energy Auctions

Single-buyer-like modelDISCOs inform demand requirementsSystem demand result from aggregating DISCOs´ needsEPE propose list of candidate projectsLeast-cost-based procurementWinner of the auction will be awarded concessions (or

authorization) and PPAs

Single-buyer-like modelDISCOs inform demand requirementsSystem demand result from aggregating DISCOs´ needsEPE propose list of candidate projectsLeast-cost-based procurementWinner of the auction will be awarded concessions (or

authorization) and PPAs

Complimentary to the generation expansion planning

Complimentary to the generation expansion planning

2121

Scheduled to happen late December 2005Scheduled to happen late December 2005

http://www.aneel.gov.br

Telefone: 0800 727 2010

Fax: (61) 3426 5705

institucional@aneel.gov.br

http://www.aneel.gov.br

Telefone: 0800 727 2010

Fax: (61) 3426 5705

institucional@aneel.gov.br

2222