Los desafíos regulatorios para lograr matrices

energéticas balanceadas en América Latina.

Experiencia de políticas aplicadas en Brasil

Luiz Barroso

luiz@psr-inc.com

Seminario “Retos y Desafíos para Desarrollo Energético de Chile”

Septiembre 2 de 2011

Santiago, Chile

► Provider of analytical tools, R&D and consulting services (economic,

environmental and financial studies) in electricity and gas since 1987

► Staff of 50 specialists in engineering, optimization, energy systems,

statistics, finance, regulation, environment and IT

► We work in more than 30 countries (Americas, Asia, Europe e Eurasia)

3

The Brazilian power system

► Brazil has one of the “cleanest” energy

matrices in the world, with about 45% of the

overall energy production coming from

renewable sources

The worldwide average is about 15%

► The power sector is even “greener” – more

precisely, “bluer” – with 80% of the country’s

120,000 MW installed capacity coming from

hydropower

Large plants in cascade over different basins

Large reservoirs

Hydropower is an essential resource for the country

• Hydro-thermal coordination allows economic and emissions savings to consumers

4

Current institutional structure

4

► National Council for Energy Policy (CNPE)

Cabinet-level advisory panel for energy policy decisions

► Ministry of Mines and Energy (MME):

Energy Research Corporation (EPE): Government-owned

company in charge of planning studies

Electric Sector Monitoring Committee (CMSE): monitors

security of supply

► National Regulatory Agency for Electricity (ANEEL)

Chamber for Electric Energy Trading (CCEE): wholesale market operation

(accounting and clearing)

National System Operator (ONS): responsible for centralized system

operation and hydrothermal coordination

There are other agencies for oil, gas and biofuels, environment, etc

5

Business dynamics

► Wholesale competition in generation with a mixed private-

public ownership

Private companies account for 15% of total energy production

Private companies account for 70% of total energy distributed

► Typical load growth: 5% - 6% per year

It is necessary to install 5,000 MW of new capacity per year

~43 TWh/year; 3,200 average MW of firm energy

5

6

Strategies for generation expansion

► Conventional hydro and gas as mainstream options

Hydro resources available in the North region

(Amazon): large and run-of-the river plants

Local gas resources available

• Thermal generation contributes to increase the hydro

system’s reliability

• It is a dispatchable resource (valuable attribute)

► Renewable (wind, biomass and small hydro): complementary options

Shorter construction time, hedge against load growth uncertainty

Smaller scale projects, increases the range of potential investors and

provide a hedge against any construction delay of large hydros

Easier environmental licensing & location close to the load centers

► Coal and nuclear are plan B

7

► All consumers (free and regulated) must be 100% contracted

Verified yearly ex-post, penalties if under contracted

Contracts are financial but must be “backed” by firm energy (MWh/y)

► Regulated users (70% of the market): contract energy through organized

contract auctions

Discos are responsible for load forecast; avoids government planners’

“optimism”

Energy contracts facilitates project financing and reduce the risks for investors

reduced prices

Energy price = energy + capacity

► Free consumers (30% of the market) freely negotiate their contracts with

generators/trading companies

How new capacity enter the system?

7

8

The organized contract auctions for new capacity

8

► Regular (yearly) auctions exclusive for new energy

Organized by the government to contract energy to supply distributor’s energy needs

Standardized long-term energy contracts offered 3 and 5 years ahead of delivery

All technologies compete but the government can interfere in the candidate projects:

• has been used to organize project-specific auctions (e.g. large hydros), to avoid oil- and coal-

fired generation as candidate supply and to foster renewable

Centralized procurement process (for economies of scale) from distributor’s energy

needs declaration

► “Reserve energy” auctions

Organized by the government to contract additional energy to increase the system's

security of supply

The government defines the volumes to contract, all consumers pay for the energy

The government can select the technologies that will participate, has been used to foster

renewable

9

Outlook of the new energy auctions (1 of 2)

► New hydro concessions prepared by the government (EPE) and are

auctioned in a step before the energy contract auction

► Investors are free to offer new (candidate) thermal projects

► Long-list of technical pre-requisites to register a project in the auction:

Prior environmental license required for all projects (government obtain the

license for new hydros)

Grid connection study required

Preliminary fuel supply agreement required for thermal plants

Historical record and certified production for wind

Water supply, right to use the land, etc

9

10

Outlook of the new energy auctions (2 of 2)

► Financial qualifications presented after the auction finishes and only for

winners

► Guarantees for new energy auctions: bid bond (1% of project’s estimated

investment cost) & project completion (5% of project’s estimated

investment cost)

► An auction committee is formed by staff from regulator, Ministry of

Energy, planning company and market operator and have several duties

define the auction mechanism & suggest price caps

define auction product & duration, prepare tender documents, etc

10

11

► Consumers take the “systemic” risks, difficult to be priced by investors:

Transmission congestion risk taken by the consumer

Contracts are indexed to inflation and fuel costs are indexed to international fuel prices

High-voltage transmission tariffs estimated before the auction based on a reference

transmission plan and pre-fixed for 10 years (tariff stability)

EPE plans an integration network with layers of shared collector stations at different

voltages to integrate renewable generators to the HV grid.

► Tailor-made long-term energy contracts offered for each technology

Reliability options for thermal plants, assigns benefits of hydrothermal

optimization/dispatch risk to the consumer

Specific contracts for wind with a multi-year accounting mechanism to manage quantity

risk and incentivize/penalize production above/below a given energy threshold.

11

Risk allocation between generators and consumers

12

Auction Results (1 of 3)

(regular auctions of new capacity)

12

40% of new energy contracted

since 2005 is fossil-fueled, 40%

conventional hydro & 20%

renewable (60% renewable in total)

Average price: ~ 80 US$/MWh

Source: PSR, from CCEE’s data. Graph shows energy contracted in each year for future delivery (from 2008 to 2016)

13

Auction results (2 of 3)

(Project-specific auctions)

13

► Large hydros contracted by specific

auctions

2007 and 2008 (Madeira river plants):

Santo Antonio (3,150 MW) & Jirau (3,300

MW), prices around 55 USD/MWh

2010: Belo Monte (11,233 MW): ~ 52 USD/MWh

► Winners: consortium of state-companies (50%), local private

constructors, private Gencos (e.g. Suez Energy) and investment

funds (e.g. Santander, Banif)

► Winners of the transmission auction:

► Madeira river (2500 km DC link): mix of private and public

players; Belo Monte transmission system being designed

14

Auction results:(3 of 3)

(Technology-specific auctions results – wind power)

14

PROINFA was the first RES support mechanism in the country and based on a feed-in tariff (administratively set)

* Wind competed against small hydro and biomass

** Wind competed against small hydro, biomass and gas-fired plants

Total of 5.8 GW of wind contracted in

auctions @ 82 US$/MWh

1.9 GW @ for 61 US$/MWh (2011)

15

Conclusions

► Brazil uses a combination of planning and competition to best deploy its energy resource

portfolio

Planning: develop networks and drive energy policy decisions

Competition: auctions select players to develop generation and transmission projects

• 46 generation auctions organized, including 24 auctions for new capacity (7 auctions for RES)

• Overall private participation in winning projects: 75%

► What have we learned?

Risk allocation is everything

• Long-term market reduce risks for investors and facilitates financing

• Centralized procurement process increases competition and creates economies of scale to contract larger

projects

State participation has played a role in large hydro developments (but limited to Eletrobras’

participation limit of 50%)

Auctions provide transparent and efficient outcomes that are unlikely to be challenged in the future

as the political and institutional scenarios change

15

16

For further reading*

1. Electricity Auctions: An Overview of Efficient Practices, by L.T. Maurer, L.A.Barroso, J. Chang, P.Benoit, D. Fields, B.Flach,

M. Herrera-Dappe and M.V. Pereira., Forthcoming, 2011.

2. C. Batlle, L.A.Barroso, Review Of Support Schemes For Renewable Energy Sources In South America - IAEE Energy

Forum, Fall issue, 2011

3. L.A. Barroso, H.Rudnick, F.Seinsuss and P. Linares Economic and market impacts of renewable integration in Europe and

Latin America –– IEEE Power & Energy Magazine, Vol.7, Issue 4 , September-October 2010, Page(s): 28 – 36

4. R. Moreno, L. A. Barroso,, B. Bezerra, S.Mocarquer, H.Rudnick, Auction Approaches of Long-Term Contracts to Ensure

Generation Investment in Electricity Markets: Lessons from the Brazilian and Chilean Experiences - Energy Policy, vol. 38,

Issue 10, 5578- 5589, 2010.

5. F. Porrua ; B. Bezerra; L.A. Barroso; P. Lino; F. Ralston; M.V. Pereira, ,”Wind Power Insertion through Energy Auctions in

Brazil” IEEE General Meeting, 25-29 July 2010, Minneapolis, Minnesota, US

6. S.Mocarquer, L.A. Barroso, H.Rudnick and B.Bezerra, Energy policy in Latin America: the need for a balanced approach,

IEEE Power & Energy Magazine, Vol.7, Issue 4 , September-October 2009, Page(s): 26 - 34.

7. L. A. Barroso, R. Moreno, B. Bezerra, S.Mocarquer, H.Rudnick , Auctioning Adequacy in South America Through Long-

Term Contracts and Options: From Classic Pay-as-Bid to Multi-Item Dynamic Auctions- IEEE PES General Meeting 2009,

Calgary, Canada

8. L.A.Barroso, P.Lino, F.Porrua, F.Ralston, B.Bezerra Cheap and Clean Energy: Can Brazil Get Away with that? - IEEE PES

General Meeting 2008, Pittsburg, USA

9. L.M. Thomé, L.A. Barroso, M.V.Pereira and F.Porrua, “Planning for big things in Brazil: Planning and Building Large-Scale

Transmission Networks in Competitive Hydrothermal Systems: Technical and Regulatory Challenges”, IEEE Power &

Energy Magazine, Vol. 5, Issue 2, September-October 2007.

10. L.A.Barroso, B.Bezerra, A.Guimarães, J.Rosenblatt, M.V.Pereira, Auctions of Contracts and Energy Call Options to

Ensure Supply Adequacy in the Second Stage of the Brazilian Power Sector Reform; - IEEE PES General Meeting 2006,

Montreal, Canada.

11. L.A. Barroso; H. Rudnick, S.Mocárquer, T.Castro The Challenge Of Conciliating Energy Development & Environmental

Constraints In South America; - IEEE Power and Energy Magazine, Vol 4, July-Aug 2006.

* available at www.psr-inc.com

16