1. 26/3/2004 International Seminar on Electricity Market Reform 1 A Southern Perspective on the Technological Dimension of Electricity Market Reform João Lizardo R. H. de Araújo, CEPEL

2. 26/3/2004 International Seminar on Electricity Market Reform 2 Traditional Paradigm Electricity Supply Industry was built on –Large economies of integration, density and co- ordination –Favorable financial conditions This led to –Coordinated, vertically integrated industry –Centralized decision-making and cooperation –Ability to cope with fast-growing demand –Slowly-changing technology

3. 26/3/2004 International Seminar on Electricity Market Reform 3 Changing Paradigms In recent years, the ESI has faced upheavals in structure and operation –Decentralized decision-making –Competitive pressures Economic and financial contexts have also changed markedly –But there exist large differences between North and South

4. 26/3/2004 International Seminar on Electricity Market Reform 4 Common features of new contexts Larger risks and uncertainties Worsened financial conditions As a consequence, Investment/Revenues ratios have fallen Reliability and security have suffered Research and Development activities have been particularly affected, since they require continued efforts over the long term to give results, although they represent only a small fraction of all investments

5. 26/3/2004 International Seminar on Electricity Market Reform 5 Electricity share has increased in relation to energy consumption Between 1970 and 2002, in Brazil –Total energy intensity has fallen 12% –Electricity intensity has increased 75%! Between 1970 and 2002, in the USA –Total energy intensity has fallen 47%! –Electricity intensity has remained constant In addition, electricity pervades all activities and products

6. 26/3/2004 International Seminar on Electricity Market Reform 6 Source: EPRI (In the USA) … But investment has fallen

7. 26/3/2004 International Seminar on Electricity Market Reform 7 And reliability has fallen In the USA, between 1991-1995 and 1996-2000 (EPRI, 2003) –Outages affecting 50,000 or more consumers increased 41% –In average, 15% more consumers were affected –Outages losing more than 100 MW increased 15% –Average lost load increased 34%

8. 26/3/2004 International Seminar on Electricity Market Reform 8 Context for the South is particularly damaging Financial conditions are more unfavorable than in the North Immature systems still offer significant gains of integration and coordination, They also have less slack to ensure effective competition There is a high potential for demand growth In consequence, systems are more strained and prospects are worse

9. 26/3/2004 International Seminar on Electricity Market Reform 9 Investment/Consumption in Brazilian ESI Source: Araujo 2002, BEN

10. 26/3/2004 International Seminar on Electricity Market Reform 10 The R&D Gap in the Power Industry Worldwide R&D is a long-term endeavor, with significant gains from networking and cooperation Paradigm and context changes have hurt R&D activities, just when they are most needed: –New challenges cannot be faced by merely increasing investment in expansion, duplication and maintenance of facilities –Issues are common to all power companies, which are seldom if ever able to do R&D on their own –But the new context has made it more difficult for companies to cooperate with one another In consequence, the ESI faces huge challenges

11. 26/3/2004 International Seminar on Electricity Market Reform 11 Can power companies behave as Schumpeterian entrepreneurs? In monopolistic competition, R&D has a role for disputing market shares between industry leaders and competitors This assumes that individual companies have scale to develop R&D and can appropriate returns, and that opportunities for expansion exist, as well as effective competition Power companies have formed their culture in a non-competitive environment. Their scale and operations are not easily transferable to a global scale, in contrast to other sectors Research facilities are large in comparison to company sizes, and many results (T&D) benefit the system – these are not easily internalized The electricity market has not the dynamism of IT, or the global reach of the oil industry This makes it unlikely that the ESI will follow a Schumpeterian path in the near future Thus, dynamic EE R&D needs coordination and cooperation

12. 26/3/2004 International Seminar on Electricity Market Reform 12 Challenges ahead Safety, reliability and security are increasingly crucial in an interdependent system with multiple agents and multiple threats, where failures have much graver economic and social impact than in the past because of the growing importance of electricity to the economy –Technological answers have their own dangers: an “energy internet” is a necessary ingredient but will have to deal with potential cyber attacks Quality of electricity supply must be equal to the needs of a digital economy, where information technology devices tend to be ubiquitous System must develop and accommodate a variety of distributed resources, with distinct features and implications Industry must reduce environmental damage, with a view at a self-sustaining technological trajectory

13. 26/3/2004 International Seminar on Electricity Market Reform 13 Brazilian Issues Dominance of hydropower means quick power response but has issues of –Energy reserves –Dam safety Immature system needs fast expansion to enhance reliability with cost effective, capital saving solutions Social and regional inequality needs specific technological solutions to complement social and economic policies Country has technical expertise, but lack of coordinated support has endangered existing research institutions and facilities

14. 26/3/2004 International Seminar on Electricity Market Reform 14 Need for a Technological Roadmap Challenges to be faced require consistent research programs spanning decades This implies a coordinated, long-range policy with clearly defined issues, goals and responsibilities – a technological roadmap Such an endeavor is much more than a prospective study to identify research priorities, as it must contain –Strategic definitions –Planning activities –Articulated network of R&D institutions, both national and international TR initiatives have been developed over the last few years in several countries

15. 26/3/2004 International Seminar on Electricity Market Reform 15 In conclusion Technological issues in the power industry require that Government act as articulator of policy, as well as facilitator Policy definition will have to take into account corporate strategies of power companies, both public and private Existing expertise and facilities should be strengthened and enhanced within a network based on coordination and complementarity Use should be made of internationally available knowledge base