The Brazilian Electricity Market: Achievements and Challenges Celso Zanatto Jr. Superintendence of Market Studies mensagem da palestra: com a regulamentação do livre acesso aos sistemas de transmissão e de distribuição ficam estabelecidas todas as condições para a realização da livre contratação de energia pelo mercado Colombia October 2003 8th APEx Annual Conference

Outline The Brazilian Power Industry Historical View ANEEL – Institucional Roles The Brazilian Electricity Market General and Regulatory Features Achievements Challenges Closing Remarks

The Brazilian Power Industry Originally vertically integrated Limited resources for expansion Lack of incentives towards efficiency Extra-large hydro units Large thermal units Small hydro units Green energy Interconnected system Long transmission links Hydro domination Plants in cascade High demand growth rate Long-term hydro regularization Public utilities Independent power producers Self-producers Co-generation Merchants

Historical Overview Law 8,631: Fix Tariff levels; extinguish the regime of guaranteed revenue ANEEL is operational Law 9,074: Concession of electricity services Federal Constitution (art. 175) Law 9,478: CNPE and ANP ... ... 1988 1993 1995 1996 1997 ... J F M A M J J A S O N ............... D ... J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D Law 8,987: Concession of public services Law 9,427: ANEEL Decree 2,335: ANEEL Law 10,433 MAE regulated by ANEEL ANEEL set rules Market Convention Law 9,648 creates market operator and system operator Long period of MAE malfunctioning  scrutinized 1998 1999 2000 2001 2002 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D Market Agreement Law 10,438 Partial clearing (50%) of accumulated 25 months of trade Decree 2,655: Market operator; System operator Initial Rules MAE self-regulated Agents set rules ANEEL ratify rules

ANEEL - Institutional Roles Policies and Directives: National Congress; National Energy Policy Council – CNPE; Ministry of Mines and Energy – MME. Planning and warranty of the supply and delivery balance: Regulatory body and granting power delegate: Brazilian Electricity Regulatory Agency – ANEEL; Supervision, control and operation of the system : National System Operator – ONS Accountability and settlement: Wholesale Energy Market – MAE Execution and sevice delivery: Agents G, T, D and C

ANEEL Principles and Competences Rule-making where necessary – under legal authority REGULATE Guide and Advise – enforce penalties when essential AUDIT Dispute settlement MEDIATE GRANT PERMIT AUTHORIZE Granting Power Delegation Concessions and authorizations auctions

Guarantee Consumers Rights and the Improvement in Q o S ANEEL Actions Stable Rules, Compliance with Contracts and Proper Service Remuneration Guarantee Consumers Rights and the Improvement in Q o S Balance Public Interest

Brazilian Electricity Federal Government Policy and guidelines Strategic expansion planning Guarantee of supply ANEEL Regulation Concessions Inspections Mediation Brazilian Electricity market ONS System supervision, control and operation Centralized Cost-based Scheduling and dispatch Chain of optimization models MAE Market operation Ex-ante market prices Accounting and clearing Surplus/deficit to compensate/charge agents

The Brazilian Sub-markets

General Features Bilateral contracts are registered in MAE (only MWh): DISCOS have to bilaterally contract at least 95 % of their market share DISCOS can contract from GENCOS and from traders Spot prices (PMAE) calculated by optimization models Energy Reallocation Mechanism – ERM Mitigate hydrological risks Metered generation  allocated generation Mismatches contracted/allocated energy cleared via MAE Contracts are cleared bilaterally

Regulatory Features Market rules and procedures Agents or MAE can propose new rules and procedures ANEEL approves and issues new rules Transparency: Public hearing Arbitrate Chamber Disputes between agents

Achievements Up-to-date Accounting and Clearing Clearing of remaining of accumulated 25 months of trade Auditing of accountability system Mediation Rules and regulations for energy auctions Initial Contracts reduced by 25% early from January 2003 Initial Contracts replaced with bilateral contracts or renewed Public GENCOS can only contract via public auctions DISCOS can only contract via public auctions Different type of auctions

Challenges New rules for cap and minimum spot prices Public hearing undergoing Financial Guarantees For market clearing Market adjustments Instructed by the Federal Government Regulations for renewing Initial Contracts Reduce the difference between commercial (Market Operator) and operational dispatch (System Operator)

Closing Remarks The Brazilian electricity market is facing emerging challenges that, once overcome, will considerable improve the market framework ANEEL has a crucial role in the development of the Brazilian electricity market

http://www.aneel.gov.br Telefone: 0800-61-2010 Fax: (61) 426-5705 Zanatto@aneel.gov.br http://www.aneel.gov.br Telefone: 0800-61-2010 Fax: (61) 426-5705 institucional@aneel.gov.br