Energy Crisis Management: the Brazilian Successful Experiences Cyro Vicente Boccuzzi, CEO of ECOEE – Efficient Energy and Executive Director of Andrade

Energy Crisis Management: the Brazilian Successful Experiences

Cyro Vicente Boccuzzi, CEO of ECOEE – Efficient Energy

and Executive Director of Andrade & Canellas Consulting

• Introduction to the Brazilian Electric Sector

• The Energy Crisis Management in 2001

– Action Plan

• Electric Sector Model Revitalization

• New Model for the Electric Sector

• Final Comments

OUTLINE

Introduction to the Brazilian Electric Sector

1996-1997

RE-SEB Project1998-2000

Model Implementation

startup 2001

Energy Supply Crisis

2002

The Model “Revitalization” 2003

New Model conceptual

Basis2004/2005

New Model Regulation“Modelo Institucional

do Setor Elétrico”

Presidential Decrees

Brief Brazilian Electric Sector Regulation History

Area: 8,5 million km2

Population: 184 million inhab.

GDP: US$ 1,368 Trillion

GDP per capita: US$ 7,227

Electricity Generation: 437.6 TWh / year

Electricity Consumption: 435.6 TWh / year

Consumption per capita: 2.368 kWh / year

Brasil

General Information

Electric Sector Characteristics

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 were 91 hydroelectric plants and more than 69,000 Km of transmission lines (Dec.2000)

These features make the Brazilian system one of the world’s biggest inter-linked systems

I NT

ER

LIG

AÇ

ÃO

NO

RT

E-S

UL

Electric Sector Characteristics

2001 Crisis

Immediate cause: extremely unfavorable hydrology in 2001

– San Francisco river: worst year since 1930

– Grande River: 4th worst wet period since 1930

Other causes: pace of implementation of the new model,

regulatory issues, miscoordination

Growth Comparison: Consumption x Generation

Reservoirs LevelsSoutheast + Center West

7679

85 89 87 88 8476

6863 60

666969

7983 82 80

7668

6053

4843 46

575762

71 7065

6054

4537

26

18

45

59 5954

4740

32

222933,5 35,6 33,1 29,7

202929 32

2331

10%

31,1

0

10

20

30

40

50

60

70

80

90

jan fev mar abr mai jun jul ago set out nov dez jan1997 1998 1999 2000 2001

Energy Crisis Management

Energy Generation Situation By Then• Minimum requirement of more than 3.000 MW/year

• Hydro Plants were responsible for 95% of the overall generation.• Very low reservoirs levels.

• Thermal Expansion Plan not implemented due to weak market incentives.•Transmission Insufficient to handle all the needs – investments planned not

implemented in time.

Temporary Measures

Resolutions Decrees

• Energy Crisis Management Committee was created Consumption Reduction Emergency Program and Electric Energy Strategic Emergency

Program were implemented

The Electric Energy Crisis Management Committee

Action Plan

Action Plan

At the crisis onset, a presidential decision created a top level committee: The Electric Energy Crisis Management Committee (CGE)

This Committee proposed an Plan Action based on five points

1) Emergency Program for the Energy Consumption Reduction

2) Structural program to increase the energy supply

3) Emergency program to temporarily increase the energy supply

4) Energy Efficiency

5) Electric Sector Model Revitalization

Action Plan

Main Objectives

To avoid the imposition of unnecessary sacrifices on the population To maintain minimum safety levels in the reservoirs

These objectives were achieved due to extraordinary popular support for the plan

1) Emergency Program for the Energy Consumption Reduction

• Mandatory average consumption reduction for almost 40 million units connected in the Southeast and Northeast Regions, involving over 140 million people (80% of total country population)

• Goals for each consumer were established based on past 3 months consumption

• Reduction goals were about 20% and specific guidelines were defined for specific sectors and special situations

• The responsibility for reduction was transferred from the Utilities to the clients and this was implemented in such a way to promote more efficient energy usage habits

• New connections were suspended in the beginning of the Plan implementation

• Electric Companies improved their Energy Efficiency Programs (which were already obligation before the crisis) and started distributing electronic bulbs for low income houses, helping the families to meet the goals

Rationing Law Basic Guidelines

Low Voltage Medium and High Voltages < 2,5 MW

Medium and High Voltages > 2,5 MW

Consum. < goal

Bonus Bonus kWh credit

Consum. > goal

Exceeding consumption by $ MAE – spot prices



Compensation

Bilateral Trans. (same econ group / same prod proccess)

Bilateral Trans. Bilateral Trans. / auction certificates

Service Cut

1 day for each 3% above goal



Rationing Law Basic Guidelines

• The program started in June with no deadline to be suspended• The program was at the same time simple and complex, rigid

and flexible – as time passed, it managed to handle exceptions in a wise way, changing rules for specific situations – 70 resolutions plus 186 decisions

• The basis were simple and visible – limit consumption, teach how to reduce, give price signals

• The results were measured everyday by the system load and reservoirs levels

• If the plan had no effect, there were a Plan B that included holidays on Fridays or selective shifts load shedding

Successful Rationing Implementation

For the clients – a change of habits

• There was a positive side of the crisis: as each consumer were responsible for it's own usage reduction, common people learned about how to use better their appliances and followed up the bills and the numbers;

• People were surprised about how the monthly bills reflected the past inefficient use of electricity - reduction was kept after rationing;

• General Awareness about energy and water being increasingly

scarce and more expensive - awareness about related environment issues

Rationing Program Operational Impact for Dist Cos.

• New Rules issued everyday - must be immediately implemented

• Many Companies implemented call centers fully devoted to the Rationing Program

• Dramatic increase in Call Center and walk in facilities volume

• Increase in requests for new meter installations

• Large number of individual goals and bills revisions requests

• Disconnections and reconnections for those that exceed quota

• Large media coverage – Newspapers FrontPage everyday

• Legal constraints were addressed and didn't impact implementation

Energy Rationing: Jun-Dec 2001 (average MW)NORTH

Load Reduction overJul/Aug/Sep 2000

Load Reduction oversame period 2000

Load Reduction over initial forecast for 2001

19.0%

18.3%

24.6%

SOUTHEAST/MID-WEST

Load Reduction overMay/Jun/Jul 2000



21.1%

25.3%

18.2%

NORTHEAST

Load Reduction overMay/Jun/Jul 2000



16.4%

20.2%

24.2%

Total generation capacity of the inter-linked system in Feb 2002 was 74,000 MW, for an estimated peak demand of:

• before the crisis 56,000 MW • after the crisis 44,000 MW

So, Brazilian costumers in general succeeded to significantly improve the energy usage efficiency in a particular way !

Peak Load was also Significantly Reduced with Efficiency

Load Evolution (1994-2001)

17000

19000

21000

23000

25000

27000

29000

JAN FEV MAR ABR MAI JUN JUL AGO SET OUT NOV DEZ Méd.

2001

2000

1999

1998

1997

1996

1995

1994

23,198

25,848

25,560

23,961

23,112

22,086

21,252

20,096

Southeast/Mid-West Average MW

• Load and consumption reduction were taken back to 1997 patterns and just returned to 2001 levels in 2006;

• The crisis opened discussion for other renewable energy sources implementation like biomass, wind, self production, etc. and investments in distributed generation aiming at energy matrix diversification;

• The crisis opened the free negotiation market for large consumers

Rationing Program Residual Impact

1.Emergency Program for the energy consumption reduction

2.Structural program to increase the energy supply

3.Emergency program to temporarily increase the energy supply

4.Energy Efficiency

5.Electric Sector Model Revitalization

Action Plan

Structural program to increase the energy supply till 2003

SUPPLY Planned INCREASE of

• 7700 MW in New Hydro power plants• 13300 MW in thermal power plants• Almost 3000 MW in self production, biomass, wind, small hydro

power plants• 6200 km of new transmission lines• 5200 MVA in substations capacity• Investments around R$ 43,4 Billion, being 75% private and 25%

public

1)Emergency Program for the energy consumption reduction





Action Plan

EMERGENCY ELECTRIC ENERGY SUPPLY FOR 2002-2003

Estimateddemand for

2002/03 Structural Supply

Program 2001/03

Assumptionsfor hydrology Emergency

Supply Needs2002/03

Emergency Supply Guidelines

Additional energy supply, on a temporary basis, to work as an “insurance” for the consumer

A public energy trader (SPC) - (Brazilian Electric Energy Commercial Company-CBEE), was set up to:

• Buy energy from independent producers• Lease or buy generation equipment • Buy rights to consume from larger consumers

Contracting Emergency Generation

Implemented in 5 months 117 proposals received (>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






Action Plan

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)

Energy Efficiency






Action Plan

Created by a GCE Resolution

Mission:– Correct inadequacies and propose improvements in the

power sector model.– Preserve model's fundamentals:

• Competition in generation and retailing• Based on Private investments• Independent regulatory body to ensure adequate

balance between utilities and consumers and high quality of services

Sector Revitalization Committee

Prices in the spot market are based on a computational model hydro generators do not manage all of their own risk

MAE (wholesale market) functions are mostly administrative (accounting and settlement)

Prices in the spot market are very volatile due to hydrological conditions barrier to the entrance of merchant plants long-term bilateral contracts required load’s willingness to contract drives system expansion

Contracts require physical backing

the desired supply reliability is achieved only when 100% of load is contracted

Power Sector Model in Brazil (1 of 2)

There were (almost) no free consumer at that time

Regulatory Agency used to set limits (Normative Value - VN) on the pass-through of generation prices to captive consumers

Difficulties:

– no external price reference for VN in Brazil

– there were multiples VNs (implicit subsidies for specific types of energy)

Existence of public generation companies when Initial Contracts start to phase-out

potential for unbalanced competition (e.g. public companies could have taken an aggressive commercialization strategy by “mixing” new energy with existing hydro energy which has already been amortized)

Power Sector Model in Brazil (2 of 2)

Signed on Dec. 18th, 2001

Solved deadlock and avoided breaking of announced

investments

Contributed to prevent repetition of events in the near

future

Avoided financial hardship for generators and distributors alike

General Agreement

A. Resume market operation

B. Reinforce market-based mechanisms

C. Ensure adequate expansion of supply

D. Monitor supply reliability

E. Improve interface between free market and regulated

segments

F. Stimulate fair competition

G. Balance realistic tariffs and consumer benefits

H. Improve functioning of institutional agents

Revitalization objectives

G&D Agreement

MAE governance

Improve spot price calculation (dispatch model

parameters + risk aversion factor)

A. Resume Market Operation

Introduce price bids for short-term market

Prevent potential market power from government-owned

generation (discussed next)

Stimulate free consumers

B. Reinforce market-based mechanisms

Proposal for Government-owned generation

All energy belonging to these companies will be contracted 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

C. Ensure adequate supply expansion

Revise Assured Energies

Reinforce minimum bilateral contract requirements

Create generation reserve

Stimulate peaking capacity expansion

Stimulate energy conservation

Quicker environmental licensing procedures

D. Monitor supply reliability

Establish “early warning” procedures with clear

responsibilities

Ministry of Mining and Energy to supervise long-term

equilibrium between supply and demand

E. Improve market/regulated sector interface

Unify VN values

Improve transmission expansion planning methodology

Increase the signals embedded in transmission tariffs for different locations

F. Stimulate fair competition

Proceed with unbundling

Stricter limits for cross-ownership and self-dealing

Separate tariffs for distribution (“wires business”)

Improve tariff revision procedures

G. Realistic tariffs and consumer benefits

Universal access for electricity

Improve mechanisms for alternative energy sources funding

Subsidize gas transportation for PPT (Thermal Priority

Program) power plants

Eliminate cross subsidies

Special tariffs for low income consumers

H. Improve functioning of institutions

MME (Ministry of Mining and Energy) Reorganize

ONS (National System Operator) Governance of ONS Improve ONS Grid Procedures Complete ONS dispatch software

MAE (Whole Sale Market) Improve MAE rules Improve definition of sub-markets Improve Energy Reallocation Mechanism - MRE

General Consequences of theProposed Measures

Reinforcement of model’s fundamentals and market mechanisms

Higher government intervention at the regulatory level, not as entrepreneur Rights of private investors were preserved

Main Principles:• Supply Security• Lower Tariffs • Social Inclusion

Assumptions:• Minimize risks; • Preserve functions and institutions, improving governance;• Improve generation expansion and the integrated management, aiming at supply security increasing;• Diversify the energy matrix, considering the complimentary character of different sources;• Respect the existing contracts

New Electric Sector Institutional Model

Planning and Supply Monitoring

Integrated Resources Planning

System Expansion Planning

Technical and Economic Viability Studies

Environment and Social Viability studies

Energy Ministry – MMEEnergy Ministry – MME

Supply evaluation

Performance Monitoring

Expansion Construction Monitoring

Social and Environmental follow up

Energetic Planning Enterprise - EPE

Electric System Monitoring Committee - CMSE


Freely negotiated or bid prices

Generation(competitive market)

Regulated Market(ACR)

Free Market (ACL)

Prices resulting from Bids

Distribution Co´sFree Clients

Brokers

Two Energy Contracting Markets:• Regulated Market (ACR) – Distribution Companies• Free Market (ACL) – Free Clients and self- producers

““Efficiency Metabolism”Efficiency Metabolism”

Self-producers


Contracting by Energy typeThe “new” and the “old” energy

Existing Energy

Contracting by Bids

Periodic Bid at CCEE for 3 to 15 years contracts

Initial contracts – 8 years

Deliver in the following year (A-1)

Large auction in Dec 2004 – many (A-1)

Existing Energy

Contracting by Bids

New Energy

Price Cap (R$/MWh) for plants listed by EPE

Winner will be the lower price offer for each project

Winning Hydro Generator Gerador receives the tarrif offered and follows competing with the other energy offers for the auction

15 to 35 years contracts – usual 30 years for hidros and 15 for thermal

3 and 5 years ahead delivery

“botox”(under delayed construction)energy projects were acepted till 2007

The hydro concession is offered to the ACR winners

Contracting by Energy typeThe “new” and the “old” energy

ACL – MACRO Environment Free Market Growth

What happened ? Offer and Demand unbalance and the free market responded quickly. Market Response: Price

0

2000

4000

6000

8000

10000

12000

dez/99 dez/00 dez/01 dez/02 dez/03 mai/04 dez/04 dez/05 jun/06

ACL

Excess

Post-rationing excessOffer increase+ consumption reduction

Post-rationing excessOffer increase+ consumption reduction

jun/07Increased reduction with free mkt sales

Market Breakdown and Contracts Network

REGULATEDCONSUMERS

GEN Ren SELF-G

DISTRIBUTORDISTRIBUTOR

FREE CONSUMERS SPECIAL CONSUMERS

71 % 28 % 1 %

Public Auction

Free Negotiation

Final Comments

Government took immediate responsibility

for the energy crisis

Smart Program for consumption reduction involving all

society – simple and complex, rigid and flexible, effective !!

Extremely positive reaction of society

Macroeconomic impact has been mild

All the objectives have been achieved

Final Comments

Crisis vs. Opportunity:

• Overall understanding about the need to conserve – residual effect

• Electric energy is a top level issue

• Investments signals must be clear

• Holistic revision and reinforcement of the sector model

Society can provide significant contribution

Final Comments

Thank You !!!

Contact Information

Cyro Vicente [email protected] 11 2125-042055 11 9931-1002www.ecoee.com.brwww.andradecanellas.com.br

mailto:[email protected]

http://www.ecoee.com.br/

http://www.andradecanellas.com.br/

Documents

Energy Crisis Management: the Brazilian Successful Experiences Cyro Vicente Boccuzzi, CEO of ECOEE – Efficient Energy and Executive Director of Andrade