The Brazilian Energy Market Edvaldo A Santana Superintendent

The Brazilian Energy Market Edvaldo A. Santana Superintendent of Market Studies USEA / USAID / ANEEL Energy Partnership Program ANEEL/FERC/Mo. PSC/Utah. PSC Workshop Brasília, August 9 th, 2005

Outline Ø The Brazilian Power Industry Ø The Energy Market Ø Regulatory Framework Ø Trading Arrangements Ø Expansion Planning and Energy Auctions Ø Emerging Challenges 2

The Brazilian Industry üExtra-large hydro units üLarge thermal units üSmall hydro units üGreen energy üOriginally vertically integrated üLimited resources for expansion üLack of incentives towards efficiency üLong transmission üPublic utilities links üIndependent power producers üHydro domination üSelf-producers üPlants in cascade üCo-generation üHigh demand growth üMerchants rate 3

Statistics Hydro Small hydro (< 30 MW) Thermal Nuclear Wind Partial Import (excl. Itaipu) Emergency thermal TOTAL 70, 884 MW 1, 421 MW 18, 806 MW 2, 007 MW 31 MW 93, 149 MW 8, 170 MW 2, 050 MW 103, 369 MW Annual Consumption Consumers Growth rate Average tariff (2004) Annual revenue Transmission > 138 k. V Network > 230 k. V 350 TWh 51. 2 millions ~ 4. 5% year R$ 0. 1975 / k. Wh ~ R$ 70 billions ~ 173, 000 km ~ 70, 000 km

The Brazilian Power Systems Isolated Systems installed capacity: 2, 810 MW Interconnected System installed capacity: 92, 389 MW Import 8, 170 MW 5

The Brazilian Sub-systems North Cap: 6, 466 MW Load: 3, 131 MW avg Northeast Cap: 15, 646 MW Load: 6, 531 MW avg South Cap: 17, 144 MW Load: 7, 465 MW avg Southeast/ Midwest Cap: 53, 163 MW Load: 28, 502 MW avg 6

International Exchanges Venezuela 200 MW Paraguay Argentina Uruguay 70 MW 2, 200 MW 72 MW ü Unlike the Nord. Pool the energy markets are not integrated 7

The Energy Market ü Market of Differences Ø DISCOs have get into long-term PPAs for 100% of their demand requirements Ø GENCOs have to demonstrate “selling capacity” Ø PPAs are registered by the market operator (quantity only) Ø PPAs are cleared bilaterally @ contracted prices Ø System operator dispatches generation resources Ø Market operator calculates spot prices Ø Generation and consumption mismatches are cleared within the market operator environment @ spot prices 8

Regulation Fundamentally a political-economic concept Why Regulate ? Prevent market failures (Monopoly power; Asymmetry of Information; Externalities) Regulation @ ANEEL Ruling Inspection and Auditing Monitoring Mediation 9

Regulation at ANEEL üGeneration – SRG Ø Optimisation models for dispatch and pricing; assured energy üTransmission – SRT Ø Transmission tariffs; transmission standards üDistribution – SRD Ø Network distribution tariffs; reliability and quality indexes üMarket – SEM Ø Rules for spot transactions; auctions; market monitoring üRetail trade – SRC Ø Free consumers; captive x DISCOs affairs; universal access üEconomic – SRE Ø Energy tariffs; system fees 10

Regulatory Framework ü Market rules and procedures Ø Agents or CCEE can propose new rules and procedures Ø ANEEL approves and issues new rules Ø Transparency reached by public hearings ü Arbitrate Chamber Ø Solves disputes between agents Ø ANEEL can mediate disputes 11

Trading Arrangements Long-term market GENCO Regulated Pool Auctions Single-buyer model DISCO Regulated Tariffs Captive Consumers IPP Free Market Traders Market prices Free Consumers 12

Trading Arrangements Spot Market ü Bilateral contracts (PPAs) Ø DISCOs have to contract bilaterally for 100% of their market requirements Ø PPAs have to be registered/approved by ANEEL Ø PPAs are registered in CCEE (only quantity) Ø PPAs are cleared bilaterally Ø ANEEL oversees “selling capacity” Ø CAP value to pass on to regulated supply tariffs ü Spot market Ø Energy mismatches (contracted vs. measured) are cleared in the spot market Ø GENCOs can sell up to 100% of their capacity (merchants) Ø Traders can buy or sell 13

Existing-energy Auctions December 2004 Results: Products: • Blocks of 1 MW avg; • 8 -year PPA (starting supply on 2005, 2006 and 2007) • 1, 325 blocks • 17, 008 MW avg • Prices (R$/MWh): 57. 51(2005) 67. 33 (2006) 75. 46 (2007) 17 GENCOs Selling to 34 DISCOs ~ 900 PPAs 14

Existing-energy Auctions April 2005 Results: Products: Blocks of 1 MW avg; 8 -year PPA (starting supply on 2008) 1, 325 blocks 92, 920 GWh R$ 88. 13 / MWh R$ 7. 7 Billions (8 years) 34 DISCOs 0. 43 – 57. 24 MW avg 1 GENCO 450 MW avg 34 PPAs for each GENCO 15

Spot Market Evolution ANEEL initial operation 1996 Market Operator (self-regulated) 1998 1997 Market operator: long period of mis-operation (no clearing) Market Agreement 1999 2001 2000 2002 D J F M A M J J A S O N D J FM A M JJ A SO N D J F M ANEEL creation Market Operator regulation ANEEL regulation Market Operator (regulated by ANEEL) 2002 Market Rules Market Operator: monthly clearing – less then 1% defaults 2003 2004 2005 J F M AM J J A SO N D J F M A M J J A S O N D Partial (50%) clearing of 25 months Final (50%) clearing of 25 months New model for the energy sector 16

Average Spot Prices Southeast / Midwest 17

Consumers Choice Free Consumers June 2003: 292 GWh per month June 2005: 6, 935 GWh per month 18

Emerging Challenges ü Government ü Ensure generation and transmission expansion ü Guarantee the reliability and quality of supply ü Environmental licensing ü ANEEL ü Rules and regulations for new-energy auctions ü Increase transparency and credibility to attract investments ü Financial guarantees for project finance (investment in new capacity) ü Market monitoring ü Tariffs review 19

Emerging Challenges (cont. ) New-energy Auctions Generation Expansion Planning Supply adequacy in the long term 20

New-Energy Auctions ØComplimentary to the generation expansion planning ü Single-buyer-like model ü DISCOs inform demand requirements ü System demand result from aggregating DISCOs´ needs ü EPE propose list of candidate projects ü Least-cost-based procurement ü Winner of the auction will be awarded concessions (or authorization) and PPAs ØScheduled to happen late December 2005 21

http: //www. aneel. gov. br Telefone: 0800 727 2010 Fax: (61) 3426 5705 institucional@aneel. gov. br 22