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2001 Power Crisis in Brazil

2001 Power Crisis in Brazil

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Amcham Power Crisis2 Amcham Power Crisis2 Presentation Transcript

  • Special Presentation The Energy Crisis in Brazil American Chamber Business Affairs Committee São Paulo, April 25, 2001
  • AGENDA
    • I - What is happening?
    • II - How did we get to this point?
    • III - What is the impact of expected crisis?
    • IV - What are the proposed solutions?
  • I - What is happening?
  • What is happening? In sum: chaos
    • Imminent electric energy rationing
    • Now “officially” accepted - issue is how to do it: when, quotas, rolling blackouts, how deep, for how long?
    • Doubts being cast on the open, competitive energy model chosen by Brazil in 95
    • California crisis adding injury to insult
      • Is deregulation a failed experiment?
      • Should we go back to the old, state controlled model as suggested by Mr. Gray Davis (and certainly other to second him in Brazil)
    • More recently, alarming headlines: “ANEEL has intervened in the Wholesale Market (MAE)”
  • II - How did we get to this point?
  • Physiology of a crisis
    • Usually, a complex interaction of many factors - the “perfect storm” effect
    • Leading to an absolute lack of control
    • But society and politics need to find a scapegoat, preferably one single factor to blame on
    • In California, “blame it on deregulation” -
    • This presentation is not meant to be naïve
      • There are indeed many issues and a web of events
      • The current situation is Brazil is a mixture of the “old” and the “new” models - Therefore, whose to blame?
      • We can only address a few, key aspects in this limited timeframe
  • Facts, not ideas
    • Rationing is a real issue, not a buzzword or a cliché , oftentimes used by contractors and equipment vendors in the past
    • Reservoirs levels in Brazil have never been so low in the past - to make things worse, at the very end of the rainy season
    • If nothing is done reservoirs will run dry soon - at some point between September and December
    • Rationing measures in the past more “niche” based - now most of the system is in dire conditions (South as a exception?)
    • This is not a result of one single bad season - on the contrary
      • Secular trend - we have been constantly depleting our reservoirs over the last 3-4 years
      • An “hoping for the best” - but not “planning for the worse”
  • Is this surprising?
    • Not for those who have been playing in the electric sector in Brazil in the last few years
    • Furthermore, the electric system is designed this way
      • Hydro plants not able to “deliver” 5% of the time
      • And Brazil proudly saying it is predominantly hydro
    • However, government has not publicly admitted any chance of rationing before - for “legitimate” reasons, not to scare investors or hamper the economy
    • ONS, who was designed to be “independent” never “translated” the situation in such a way to be understood by society - reality always buried in complex graphs/charts
    • Besides, probability and “odds” always lead to different interpretations, expectations and levels of “praying”
  • All of this is happening in the midst of a significant process of restructuring of the energy sectors in Brazil
    • Brazil has embarked since mid 90’s on a significant effort to restructure its energy sector
      • Hydrocarbons: end of Petrobrás’ monopoly, natural gas as a new supply source
      • Electric: privatization, competition and deregulation (G/C)
    • Vision was modern, design detailed - but implementation has been plagued by politics and procrastination
      • Privatization of G assets virtually stopped - no political support
      • Inconsistent messages from “democrats” and “republicans”
      • Implementation of MAE falling behind schedule
    • Perception of lack of direction and government leadership - some qualifying as “samba do criolo doido” - investors really confused
  • Why hasn’t anything being done before?
    • Not a fair statement
    • Since 95 - move towards a private, open model has increased investments, e.g. doubled in generation - 2,500 MW year, but still not enough
    • In late 99, an ambitious plan was launched by the Federal Government
      • To expand generating capacity - mostly gas fired plants, between 2000 and 2003
      • 49 Plants - 15,000 MW - supply would catch up demand growth
    • It was called the “emergency plan” - implying that a crisis was a likely outcome
    • The plan had its merits
      • To diversify the energy matrix - before, too much hydro and therefore high risk of rationing
      • To serve as an “anchor” to the Bolivian gas supply TOP contracts
      • Thermal plants much faster to build than hydro
      • Meant to leverage on private resources/capital
  • Has the Emergency Plan failed?
    • It depends on how we define success/failure
    • In terms of meeting deadlines and avoiding crisis
      • Yes, it is a partial failure
      • Only a few plants to be commissioned in late 2001 - basically on a “merchant” basis, due to the lack of incentives to long term contracting
      • Those plants are key to alleviate the crisis - but are not enough
    • In terms of a long term solution to our problems? No
      • Program is here to stay
      • Gas fired plants are a cheap solution - hydro very capital intensive, capital is an imported commodity
      • Diversification - 15,000 MW not compromising ideal mix
  • Why has the Emergency Plan “failed”
    • Certainly easier to answer with the benefit of hindsight
    • First : continued restructuring of the sector and Emergency Plan should not have been perceived as mutually exclusive goals
      • Of course, there was an issue of priority
      • However, Plan was fundamentally built upon private capital participation- which requires clear rules and market signals
  • Why has the Emergency Plan “failed” (continued)
    • Second : mismatch between the electric and the gas sectors’ cultures - never spoke to each other
      • Electric - mature, moving towards competition
      • Gas - emerging, a de facto monopoly
      • Difficulties for mutual understanding of basic, technical problems - e.g. dispatch, nomination
      • Let alone agreeing on commercial issues
      • Lack of dialogue between ANEEL and ANP
      • Issues illustrated in Enron Informativo Regulatorio # 1
  • Why has the Emergency Plan “failed” (continued)
    • Third : macro-economic and regulatory issues
      • Gas industry is dollarized; electric tariffs in R$
      • Who is meant to bear the FX risk?
      • In the midst of a government policy to hold public prices to avoid an inflation crisis
      • A lot of second-guess and mistrust between government and investors
      • Cry-babies? Certainly not. Investors willing to take risks, but too much of a risk to fit within VN
      • Aggravated by the fact that D/Cs are collectively single buyers - free market still small, VN is essential
      • Statists on call - “Petrobrás and Eletrobrás will fix the problem” - now defeating the goals of the new model
    • III - What is the impact of expected crisis?
  • No one knows - a multi-billion dollar question
    • Brazil has had two major rationing programs in its recent history
      • South - 3 months in 1986, 20% load cut, via quotas
      • N/NE - 7 months in 1997, 15% load cut, via quotas
    • We do know how much revenues utilities failed to collect
    • However, no one has ever attempted to quantify the macro-economic impact of rationing
    • Our best guess for the upcoming rationing
      • 15% to 20% cut over 9 months (quota, not rolling blackouts)
      • 80% of the Brazilian market
      • Social cost: between US$ 10 and US$ 40 billion
    • Whose to blame? Deregulation? Social cost of procrastination? Benign neglect? Part of the democratic process? Lack of leadership? Will it help knowing?
  • IV - What are the proposed solutions?
  • For the time being, let’s try to minimize the impact of rationing - and trust on markets forces
    • Not enough time to fix the supply demand imbalance - neither to be wasted in finger pointing
    • Leverage (as opposed to destroying) the few market mechanisms already put in place
      • MAE, spot prices to signal scarcity
      • Put MAE to work - Enron supports ANEEL intervention
      • Honor commercial contracts
    • Market signals will help alleviate the crisis
      • Merchant, back up, self-generation plants - > 2000 MW in the short run
      • Signal for society to make smart decisions; i.e. - one more MW or more pollution on Billings
      • DSB and DSM - badly needed to create demand elasticity
      • Wake up call to a stubborn gas sector: please unbundle !!
  • Will this suffice? No
    • Electric sector still basically regulated
      • Ambitious government proposal for retail competition - 50 KW in 2003 and zeroing in 2005
      • However, now a negligible numbers of free customers, caused by a distorted rate structure, which doe not encourage switching
      • Regulated world not price responsive
    • Other actions necessary - most importantly
      • Quota system as a necessary evil
      • Has to be coupled with incentives/penalties for achieving quotas - e.g. average spot prices
      • Foster regulated demand side management - as part of the revenue formulae for D/Cs
    • Those actions try to mimic market forces into the regulated world
  • And after we pass the crisis? What should be done?
    • First and foremost - acknowledge that the energy sector is now “stuck in the middle” - neither state controlled nor market based ...
      • As a result of a half-way restructuring effort
      • Which lost momentum due to politics and lack of leadership
    • … And that represents the worse of the two worlds
      • Public sector not making the necessary investments
      • Private sector reluctant to invest - lack of market signals, unfair competition with state owned companies
  • Where should we move to? CERA has offered three options
    • Giant realized
      • Believe in markets
      • Continue the restructuring process - gas and electric
      • Create real competition at retail and wholesale levels
      • Unbundle gas industry , de-verticalize G/T, privatize Gs
    • Institutional oligopoly
      • Just a few players acting individually or in association with dominating SOEs
      • Defend markets - but only until one is part of game
    • Socialistic chaos
      • State playing a predominant role
      • Private players in minor positions - e.g. sellers to government entities
      • Abundance alternating with scarcity - no market signals at all