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

RE-SEB Project Model Implementation startup 2001 Energy Supply Crisis 2002 The Model “Revitalization” 2003 New Model conceptual Basis 2004/2005 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: TWh / year Electricity Consumption: TWh / year Consumption per capita: 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 N T E R L I G A Ç Ã O N O R T E - S U L 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 Levels Southeast + Center West

Energy Crisis Management Energy Generation Situation By Then Minimum requirement of more than 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 ResolutionsDecrees 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 VoltageMedium and High Voltages < 2,5 MW Medium and High Voltages > 2,5 MW Consum. < goal Bonus kWh credit Consum. > goal Exceeding consumption by $ MAE – spot prices Compensa tion Bilateral Trans. (same econ group / same prod proccess) 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 over Jul/Aug/Sep 2000 Load Reduction over same period 2000 Load Reduction over initial forecast for % 18.3% 24.6% SOUTHEAST/MID-WEST Load Reduction over May/Jun/Jul 2000 Load Reduction over same period 2000 Load Reduction over initial forecast for % 25.3% 18.2% NORTHEAST Load Reduction over May/Jun/Jul 2000 Load Reduction over same period 2000 Load Reduction over initial forecast for % 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 ( ) ,198 25,848 25,560 23,961 23,112 22,086 21,252 20,096 Southeast/Mid-WestAverage 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 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 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

EMERGENCY ELECTRIC ENERGY SUPPLY FOR Estimated demand for 2002/03 Structural Supply Program 2001/03 Assumptions for hydrology Emergency Supply Needs 2002/03

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

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

 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

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

 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 the Proposed 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 – MME Energy Ministry – MME  Supply evaluation  Performance Monitoring  Expansion Construction Monitoring  Social and Environmental follow up Energetic Planning Enterprise - EPE Electric System Monitoring Committee - CMSE New Electric Sector Institutional Model

Freely negotiated or bid prices Generation (competitive market) Regulated Market (ACR) Free Market (ACL) Prices resulting from Bids Distribution Co´s Free Clients Brokers Two Energy Contracting Markets: Regulated Market (ACR) – Distribution Companies Free Market (ACL) – Free Clients and self- producers “Efficiency Metabolism” Self-producers New Electric Sector Institutional Model

Contracting by Energy type The “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 type The “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 dez/99dez/00dez/01dez/02dez/03mai/04dez/04dez/05jun/06 ACL Excess Post-rationing excess Offer increase+ consumption reduction Post-rationing excess Offer increase+ consumption reduction jun/07 Increased reduction with free mkt sales

Market Breakdown and Contracts Network REGULATED CONSUMERS GEN Ren SELF-G DISTRIBUTOR DISTRIBUTOR 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 Boccuzzi