Fall 2009 Minerva Program

Luiz Maurer

The World BankWashington – November 13, 2009

V3.0

Brazil's energy capacity and future needs

This presentation will address the following topics

Power system in BrazilThe reform process – roller coaster? Investments, competition, quality of serviceSustainability issuesHydro licensingDemand responseFinal remarks

Brazil has a large power system, heavily dependent on hydroelectricity

110 GW400 TWh85% HydroEstimated potential of 260 GWExtensive network, four areas

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SIS TE M A INTERLIG A D ON O R TE

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V. C O N D E

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INTERLIG AÇÃONO RTE-SUL

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345 kV

440 kV

550 kV

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LEGENDA

Argentina1.000 MW

Starting in late 90’s, power sector has seen major institutional and regulatory reforms

Competition in generation and retail, with all concessions granted competitivelyEnergy auctions mandatory to captive marketsMost D assets privatizedMost new G and T assets built by private sectorCost-recovery tariffs, via a structured review processAttraction of private capital, the investor by default – domestic and foreign

Over almost 15 years – roller-coaster or bumpy road?

Certainly the latterSuccess of the reform due, inter alia, to a mechanism of adjustments, sometimes by trial and errorWith some hiccups

FCH – Lei das Concessoes and new (now old) model in 1998Second term of FHC – reforms stalledApagao in 2001 – but it never happenedLula’s plan announcing radical changes and scaring investorsFollowed by pragmatism and continuous improvements – not by ideology

What makes us feel confident?Has Brazil been able to increase investments?And attract private capital?Has the quality of service improved?Has competition contributed to reduce costs?Is the model sustainable?Are lights still on?What are the areas for improvement?

Investments in generation and transmission increased in response to the first wave of reforms

Quality of service exhibited remarkable improvement

Brazil - able to attract largest share of private resources among developing countries

For several years Brazil got the largest share of the pie …

Ranking of the Largest Private Capital Recipients in the Electric + Gas Distribution Sectors

Country/Year

Brazil 3 4 3 8 2 1 1 1 1 1 1 2 2 1 2 3 3India 1 9 7 9 8 10 9 3 5 10 9 1 9 1 2 1China 2 2 4 6 10 3 2 3 2 8 5 4 1 3 3 5 6Russian Federation 5 10 3 1 2Argentina 1 1 2 3 5 5 2 4 4 6 4Philippines 3 2 4 5 4 2 7 8 7 6 10 8 8 4 7Indonesia 5 7 1 1 6 10 5 9 5Thailand 10 9 6 4 7 7 7 4 4 6Malaysia 3 6 1 8 2 3 4 5Turkey 2 5 2 4 5 4Chile 1 1 6 8 9 9 5 5 9 10Mexico 8 8 3 2 5 6 6Morocco 3 3 6 8Pakistan 10 3 4 6 7 10Colombia 9 7 10 4Peru 10 10 9 8 10

Yearly Top 5 Recipients

A perceived a good investment climate

BOO in Transmission – a success

Energy Auctions – a robust procurement mechanism

Resulting in competitive prices

148

135 134

83

73

146 144

138

69

81

9497

109

60

70

80

90

100

110

120

130

140

150

160

2005 2006 2007 2008 2009 2010 2011 2012 2013

R$/

MW

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Alternative Energy New Energy Existing Energy Sto Antônio Jirau

Sustainability checklistAbility to live with its own meansIf tariffs are not cost reflective – sooner or later problems will emerge, system will fall apart, or public debt escalateHow to provide services to those with low ability to pay?Subsidies for access and lifeline rates necessary, but others should be closely examined – e.g. subsidies that foster wasteful consumption • Sooner or later will hamper affordability and quality• Poor will be the first to suffer consequences

Subsidies in countries with low access – regressive taxationSustainability also encompasses consumption of natural resources and deterioration of the environment

Wake up call – it has not been easy to tap into the cheap hydro potential

Clear manifestation - getting licenses for new hydro plants has become a “nightmare”

Long delays – averaging one year, but may be much longerUncertainty and subjective Constraining hydro generation options for expansion

Gap has been bridged by expensive, polluting thermal

generation – e.g. profile in the first energy auctions

A recent World Bank study has revealed multiple layers of complexity

Inventory studies not up-to-dateConfusing institutional roles between players, states, Federal government agenciesCumbersome, lengthy evaluation process by IBAMA - oftentimes biased by extremismExcessive power from Public Prosecutor’s OfficeLack of policy trade-offs between environmental concerns and need for energyDifficult to address in the absence of an efficient allocation process, grounded on economics Projects examined individually – not strategically

And recommended an integrated approach to enhance power sector planning

Identifying clear opportunities to a more effective planning process

The absolute cost of compliance is not a major hurdle – but uncertainty may scare investors in generation

Total Costs (US$ 130/kW)Mitigation Costs (US$18/kW)

Flora

Fauna

Degraded Areas

Water Quality

Reservoir Cleaning

Others

Property

Resettlement

Management

Social

Mitigation

A particular challenge is to develop hydro resources in the Amazon region

There is a baggage on poor developments in the region

Projects implemented without due concern for environmental aspects – e.g. Balbina Hydro (serving the city of Manaus)Old project design only to maximize generation (e.g. Kararao, in the Xingu River)

Starting in the 80’s enhanced concerns, democratic process and sector capacity (Eletrobras) to deal with environmental and social issuesThere are “good and bad projects” – a change in mindset has enabled the country to find (and improve) good ones

6 GW on Madeira River recently granted, very friendlyProject in the Xingu river completely revisited, much more friendlyTrade-offs between output and impact mastered by the private sector in the Uruguay river (Ita & Machadinho)

What about the demand side? an oftentimes neglected part of the equation

We refer specifically to the use of energy efficiency and demand side management to make the system more …

Affordable – cheaper to bridge the supply demand gapReliable – helping the ONS build virtual reserves and deal with contingencies

This is an area where Brazil could do more – ongoing discussions by Aneel under the umbrella of smart grid, smart metering

Demand side should be seen as a seamless part of the effort to bridge the supply demand gap

The 2001 Power Rationing – a rich experience

The 2001 Power Rationing is a best practice on the use of demand response

Final remarks … Brazil is blessed with hydro resources

Cheap, competitive, can be exploited in an environmentally friendly wayOne of the few countries where the power sector is not one to blame for CO2 emissions

Reforms in the power sector have been successfulAchieved major goalsContinuous improvementsHas worked toward a healthy, contract sanctity environmentCapital, quality of service, competitiveness

What Brazil has achieved so far seems to be sustainable Areas for improvement

Continuous examination of the pillars of sustainability, including commercial disciplineCost reflective tariffs, as much as possibleBetter alignment between environmental, social and energy policy goals, to unveil the hydro potentialCount (and use) the demand side of the equation to make energy more reliable and affordable

And the Black Out – shall we change this presentation? No