Energy Crisis Management the Brazilian Successful Experiences Cyro

Energy Crisis Management: the Brazilian Successful Experiences Cyro Vicente Boccuzzi, CEO of ECOEE – Efficient Energy and Executive Director of Andrade & Canellas Consulting

OUTLINE • 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

Introduction to the Brazilian Electric Sector

Brief Brazilian Electric Sector Regulation History 1996 -1997 1998 -2000 RE-SEB Project Model Implementation startup 2001 Energy Supply Crisis 2002 2003 The Model “Revitalization” New Model conceptual Basis “Modelo Institucional do Setor Elétrico” 2004/2005 New Model Regulation Presidential Decrees

General Information Area: 8, 5 million km 2 Population: 184 million inhab. GDP: US$ 1, 368 Trillion GDP per capita: US$ 7, 227 Electricity Generation: 437. 6 TWh / year Electricity Consumption: 435. 6 TWh / year Consumption per capita: 2. 368 k. Wh / year Brasil

Electric Sector Characteristics

Electric Sector Characteristics § These features make the Brazilian system one of the world’s biggest inter-linked systems TE L IG ER OR N § There were 91 hydroelectric plants and more than 69, 000 Km of transmission lines (Dec. 2000) IN T § Generations in the different basins are linked through huge transmission lines, in some cases longer than 1, 000 km AÇ ÃO - SU L § Large capacity dams, in 7 basins with different hydrologic regimes

2001 Crisis Immediate cause: extremely unfavorable hydrology in 2001 – San Francisco river: worst year since 1930 – Grande River: 4 th 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 3. 000 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. • Energy Crisis Management Committee was created Consumption Reduction Emergency Program and Electric Energy Strategic Emergency Program were implemented Temporary Measures Resolutions Decrees

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

Action Plan 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

1) Emergency Program for the Energy Consumption Reduction 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

Rationing Law Basic Guidelines • 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 Voltage Medium and High Voltages < 2, 5 MW Medium and High Voltages > 2, 5 MW Consum. < Bonus goal Bonus k. Wh credit Consum. > Exceeding goal consumption by $ MAE – spot prices 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

Successful Rationing Implementation • 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

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 Front. Page everyday • Legal constraints were addressed and didn't impact implementation

Energy Rationing: Jun-Dec 2001 (average MW) NORTHEAST Load Reduction over Jul/Aug/Sep 2000 19. 0% Load Reduction over May/Jun/Jul 2000 16. 4% Load Reduction over same period 2000 18. 3% Load Reduction over same period 2000 20. 2% Load Reduction over initial forecast for 2001 24. 6% Load Reduction over initial forecast for 2001 24. 2% SOUTHEAST/MID-WEST Load Reduction over May/Jun/Jul 2000 18. 2% Load Reduction over same period 2000 21. 1% Load Reduction over initial forecast for 2001 25. 3%

Peak Load was also Significantly Reduced with Efficiency 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 !

Load Evolution (1994 -2001) Southeast/Mid-West Average MW 2001 25, 848 2000 1998 25, 560 23, 961 1999 23, 112 1997 1996 22, 086 23, 198 1995 21, 252 1994 20, 096

Rationing Program Residual Impact • 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

Action Plan 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

Structural program to increase the energy supply till 2003 SUPPLY Planned INCREASE of • 7700 MW in New Hydro power plants • 13300 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

Action Plan 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

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

Action Plan 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

Energy Efficiency § 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)

Action Plan 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

Sector Revitalization Committee § 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

Power Sector Model in Brazil (1 of 2) § 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 (2 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)

General Agreement § Signed on Dec. 18 th, 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

Revitalization objectives 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

New Electric Sector Institutional Model 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 Energy Ministry – MME Energetic Planning Enterprise - EPE Electric System Monitoring Committee - CMSE Ø Integrated Resources Planning Ø Supply evaluation Ø System Expansion Planning Ø Performance Monitoring Ø Technical and Economic Viability Studies Ø Expansion Construction Monitoring Ø Environment and Social Viability studies Ø Social and Environmental follow up

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

Contracting by Energy type The “new” and the “old” energy Contracting by Bids Existing Energy § 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)

Contracting by Energy type The “new” and the “old” energy Contracting by Bids New Energy Existing 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

ACL – MACRO Environment Free Market Growth 12000 Post-rationing excess Offer increase+ consumption reduction 10000 8000 6000 ACL Excess 4000 2000 0 se a e r Inc e e r f h n wit s e l a s mkt io ct u d e dr dez/99 dez/00 dez/01 dez/02 dez/03 mai/04 dez/05 jun/06 jun/07 What happened ? Offer and Demand unbalance and the free market responded quickly. Market Response: Price

Market Breakdown and Contracts Network GEN Ren SELF-G Public Auction DISTRIBUTOR Free Negotiation REGULATED CONSUMERS 71 % FREE CONSUMERS 28 % SPECIAL CONSUMERS 1%

Final Comments

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

Thank You !!! Contact Information Cyro Vicente Boccuzzi cyro. boccuzzi@ecoee. com. br 55 11 2125 -0420 55 11 9931 -1002 www. ecoee. com. br www. andradecanellas. com. br