Energy Contracting in Brazil Under the New Regulations: Challenges and Opportunities Track 3B, Nov 13th 2013, 9:30 to 11:30 Rafael Herzberg Rafael Herzberg

Energy contracting in Brazil Challenges & opportunities Rafael Herzberg

Rafael Herzberg Consulting partner @ Interact since 1991 Energy contracting Onsite power projects & energy efficiency projects Industrial, commercial energy users CEO @ ELTEC from 1987 to 1991 Started @ ELTEC in 1976 (electrical engineer) Rafael Herzberg

Agenda The Brazilian electrical power sector The Brazilian business environment Energy contracting & risks at stake Decision making & new challenges Where are the opportunities? Rafael Herzberg

Where is the money? 30% kW demand, wire fees 70% MWh commodity, energy 50% Taxes Rafael Herzberg

The electric energy supply chain Commodity (MWh) Wire (kW) Commodity (35%) Wire (15%) Taxes (50%) Total (100%) Private 20% (7%) 80% (12%) 19% State 80% (28%) 20% (3%) 100% (50%) 81% Rafael Herzberg

The challenges The State …  Gets most of the revenues  Controls the regulator (ANEEL)   The Global Competitiveness Index 2012-2013 Brazil’s Rank: 48 (out of 144 countries) Among the most expensive power prices in the world Rafael Herzberg

Worrying signals Industrial energy users relocating to  Paraguay  Mexico  Eastern Europe As opposed to locally producing, importing from  China  India Rafael Herzberg

Worrying signals Contractual demand increase  Energy users to pay for the associated investments Deteriorating energy quality  More than 20 h/year of unplanned interruptions  Voltage fluctuations   Hidden costs have become important Rafael Herzberg

Worrying signals The market value of the energy companies is sinking Rafael Herzberg

Worrying signals Rafael Herzberg

The SPOT (PLD) is not market driven Thermal power plants Weighted average [70% H, 30% T] Hydro power plants Rafael Herzberg

How to close a good price? 2013 prices  1,400 MWh/month Plastic Recycling R$ 110/MWh 2,800 MWh/month Packaging R$ 250/MWh 1,500 MWh/month Textile R$ 92/MWh Rafael Herzberg

How to make a difference? Is energy an account that gets corporate attention? Are CEOs and COOs committed? Is energy handled as if it were any other account of the same value? Rafael Herzberg

How to turn around? Upper management leading the contracting affairs Looking at the future and not at the rearview mirror Prospecting market prices well in advance of the current contract termination Having clarity about risks at stake and mitigation tools Rafael Herzberg

Important factors The take or pay nature of the contracts Required volume flexibility Changes  New technologies (products, production)  Make or buy  Strength of the economy Rafael Herzberg

Where are the opportunities Portfolio of energy contracts  Gas, power, biomass Onsite power projects  Generation, Cogeneration, HV connection Energy efficiency projects  ASD, EMS, TOU, thermal insulation, lighting Rafael Herzberg

It is about a structured process Technical  What makes sense for each site? Financial  Buying assets or contracting services/commodities? Management  In-house or outsourcing? Rafael Herzberg

Recommendations of your consultant Decisions  Board  Management Analyses  Alternatives  Risks  Mitigation tools Info  Energy uses  Scenarios  Energy sources Rafael Herzberg

Thanks. Rafael Herzberg rafael@interact-energia. com. br www Thanks! Rafael Herzberg rafael@interact-energia.com.br www.interact-energia.com.br Rafael Herzberg