Regulatory Meeting - Rome 2003


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Energy Rationing: - A Market-Based Approach

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Regulatory Meeting - Rome 2003

  1. 1. Energy Rationing: A Market-Based Approach Luiz Maurer THE WORLD BANK - EWDEN Rome, October 6, 2003
  2. 2. No one likes to talk about power rationing   <ul><li>Most of the electric sector reforms omit this subject </li></ul><ul><li>Perhaps because no one believes it is going to occur if reform is implemented </li></ul><ul><li>Or perhaps because it is not perceived as “politically correct”, and may defeat the purpose of the entire reform </li></ul><ul><li>Not many countries have experience in implementing rationing measures </li></ul>
  3. 3. However, it is unavoidable - energy and/or capacity scarcity is becoming widespread <ul><li>Chile - 1998 </li></ul><ul><li>Ivory Coast, Ghana, Togo and Benin – 1998 </li></ul><ul><li>Tanzania, Kenya - 2000 </li></ul><ul><li>California – 2000 - 2001 </li></ul><ul><li>Yugoslavia – 2000-2001 </li></ul><ul><li>Norway – 2001, 2003 </li></ul><ul><li>New Zealand – 2001 </li></ul><ul><li>Russia – 2001 </li></ul><ul><li>Brazil – 2001-2002 </li></ul><ul><li>Dominican Republic – 2002-2003 </li></ul><ul><li>Venezuela - 2002 </li></ul><ul><li>Marahashtra - India – 2002 </li></ul>
  4. 4. Objective of this presentation – to discuss the case study of Brazil <ul><li>Present nature and extent of the energy crisis in 2001-2002 </li></ul><ul><li>Discuss how the government dealt with this crisis </li></ul><ul><li>Assess consumer response and achievement of the initially stated conservation goals </li></ul><ul><li>Evaluate other implications – economic, institutional, regulatory </li></ul><ul><li>Discuss lessons learned that may be applied to other countries </li></ul>
  5. 5. We will be focusing on one element of power system reliability RELIABILITY SECURITY (Public Good) ADEQUACY (Private Good) PROTECTION EQUIPMENT OPERATION PROCEDURES ANCILLARY SERVICES • Ability to withstand disturbances ENERGY CAPACITY RISK OF DEFICIT X COST OF DEFICIT LOLP X VOLL • Ability to meet aggregate power and energy requirements FOCUS OF THIS PRESENTATION (Source: Oren, 2000)
  7. 7. Nature and extent of the energy crisis in 2001 <ul><li>The most serious energy crisis in recent history </li></ul><ul><li>Affecting 80% of the electric system, including the heavily industrialized and populated Southeast region </li></ul><ul><li>Sector was “ energy constrained ” – hydro reservoirs were getting depleted at a very fast pace </li></ul><ul><li>Reservoirs would be completely depleted in 4-5 months at the prevailing rate of consumption </li></ul><ul><li>It was necessary to conserve 20-25% of historical energy consumption, at least for 8 months </li></ul><ul><li>Some experience in the past in dealing with similar situations – but not to this extent and magnitude </li></ul>
  8. 8. The crisis was not a surprise 2001 only a wake up call
  9. 9. First and most important decision –How to implement rationing? <ul><li>Proposal I – “Rolling Black-Outs” or “Apagão” </li></ul><ul><ul><li>Geographical regions disconnected on a rotating basis, according to a pre-agreed schedule </li></ul></ul><ul><ul><li>Priority loads preserved – e.g. hospitals, police, etc. </li></ul></ul><ul><ul><li>Apparent advantage – immediate implementation and 100% effectiveness </li></ul></ul><ul><li>Proposal II – “Quota System” </li></ul><ul><ul><li>Allocate “quotas” to customers, taking into account historical consumption, and define saving targets = “baseline consumption” </li></ul></ul><ul><ul><li>Enforcement for those who exceed the quota – financial penalty, threat of disconnection, or both </li></ul></ul><ul><ul><li>Apparent disadvantages – complex, subject to complaints, demand elasticity was unknown – possibly jeopardizing overall effectiveness </li></ul></ul>
  10. 10. Implementation of “rolling black-outs” would have been more complex than alleged <ul><li>Networks are inter-meshed - preserving “essential” customers would exclude part of the load from the rolling black-outs –up to 40% </li></ul><ul><li>Not a peak shaving issue - significant “intra-day” load shift </li></ul><ul><li>Those two factors would entail a disproportionate burden on some customers -- 10 to 16 hours/day !! </li></ul><ul><li>Due to the manual nature of disconnection operations, it would have been very difficult to follow a precise timetable </li></ul><ul><li>Lack of energy, even during short periods of time, would create social and economic chaos in certain areas </li></ul><ul><ul><ul><li>Traffic lights and crime rates in large cities </li></ul></ul></ul><ul><ul><ul><li>Hurting some manufacturing activities with continuous processes </li></ul></ul></ul>
  11. 11. Despite large number or supporters, “rolling black-outs” were overruled <ul><li>A “quota” was set for each customer, </li></ul><ul><ul><li>Based on a three-month average (or estimate) of 2000 consumption </li></ul></ul><ul><ul><li>Differentiated by customer group </li></ul></ul><ul><li>Financial penalties for those who exceeded the quotas </li></ul><ul><li>Bonuses for overachievers </li></ul><ul><li>Possibility given to large users to exchange quotas in the secondary market </li></ul><ul><li>Penalties linked to the energy price at wholesale level </li></ul><ul><li>Disconnection threat for those who did not meet targets </li></ul>
  12. 12. A quota system is not ideal – but it is certainly the best solution in a regulated world <ul><li>Quota itself sounds “interventionist” – and it is indeed </li></ul><ul><li>However, in a regulated world, prices are not allowed to fluctuate to convey the cost of scarcity </li></ul><ul><li>Which creates two distortions: </li></ul><ul><ul><li>Demand does not adjust itself when electricity becomes more scarce – otherwise mandatory rationing would not be necessary </li></ul></ul><ul><ul><li>Gives a misleading impression that demand for this commodity is “inelastic” – in reality, regulation has muted the price signal </li></ul></ul><ul><li>If rationing becomes necessary, a sensible solution is to force customers to “see” marginal price for the consumption above those individual reduction targets </li></ul>
  13. 13. A quota system is a sensible solution, from an economic, legal, and technical standpoint <ul><li>Economic </li></ul><ul><ul><li>Cutting “across the board” – a very inefficient way to allocate a scarce resource whose willingness to pay vary within a wide range – from US$ 100 to 6,000/MWh </li></ul></ul><ul><ul><li>With “quotas”, customers “see” the real cost of scarcity via prices, and make consumption and conservation decisions accordingly </li></ul></ul><ul><li>Legal </li></ul><ul><ul><li>By being based on real economics, price increases more defensible </li></ul></ul><ul><li>Technical </li></ul><ul><ul><li>No need to operate feeders, or reshuffle the network </li></ul></ul><ul><ul><li>Some additional effort to handle customer complaints, disconnections, and public lightning </li></ul></ul>
  14. 14. Load response was fast and effective – without black-outs or brown-outs MW Peak Consumption
  15. 15. Significant energy savings were achieved <ul><li>Total savings = 26 TWh, 13,000 MW peak </li></ul><ul><li>For a total national consumption of 284 TWh </li></ul><ul><li>Results of PROCEL = National Conservation Program (1994-2000) </li></ul><ul><ul><li>10.7 TWh </li></ul></ul><ul><ul><li>640 MW peak (2000) </li></ul></ul><ul><li>Savings continued after rationing measures ceased – overall 2002 consumption similar to 1998 levels </li></ul><ul><ul><li>Average residential = 1994 levels </li></ul></ul><ul><ul><li>Industrial consumption grew 3.4% vis-à-vis 2001 </li></ul></ul>
  16. 16. Residential – energy savings beyond Government targets
  17. 17. Residential customers have changed their habits, on a permanent basis <ul><li>91% of households changed consumption habits during rationing – from those 65% still maintain savings </li></ul><ul><li>Average consumption pre and post rationing </li></ul><ul><ul><li>SE – from 199 kWh/mo to 145 kWh/mo </li></ul></ul><ul><ul><li>NE – from 113 kWh/mo to 85 kWh/mo </li></ul></ul><ul><li>Energy efficiency is now part of the decision making process to buy appliances </li></ul><ul><ul><li>8% before crisis </li></ul></ul><ul><ul><li>58 % after crisis </li></ul></ul>
  19. 19. A rationing of this magnitude represents a significant cost shift <ul><li>Distribution companies experienced a significant reduction in revenues </li></ul><ul><li>Hydro generators were not able to to honor their contractual obligations </li></ul><ul><li>An existing “dry period relief” clause in the PPAs pushed some risk to distributors – however, physical delivery was still short of contractual commitments </li></ul><ul><li>Creating imbalances to be settled at prevailing spot price (close to US$ 300/MWh) </li></ul><ul><li>Strong pressure upon government to bail-out sector </li></ul>
  20. 20. A rationing of this magnitude is a real strain for any institutional model <ul><li>It is a combination of several factors, involving two supply and one demand shocks </li></ul><ul><li>However, someone has to be blamed for the demise </li></ul><ul><li>Such a visible and important event weakens institutions and their personnel, particularly those institutions in their infancy </li></ul><ul><li>After the smoke cleared, there seems to be consensus that a half-away restructuring process was a major factor determining the difficulties faced by the electric sector </li></ul>
  21. 21. Economic impact was mitigated <ul><li>A significant economic impact was expected </li></ul><ul><ul><li>GDP reduction </li></ul></ul><ul><ul><li>Unemployment </li></ul></ul><ul><ul><li>Price increases </li></ul></ul><ul><ul><li>Deterioration in the balance of trade </li></ul></ul><ul><li>Due to a well designed rationing scheme, none of these things materialized </li></ul><ul><ul><li>Quick and strong reaction from residential customers – more energy left for productive activities </li></ul></ul><ul><ul><li>Mechanism of trading quotas helped improve energy allocation amongst industrial customers </li></ul></ul><ul><ul><li>Some industries even benefited from rationing – e.g. capital goods, growing 13% </li></ul></ul><ul><ul><li>A lot of room for rationalization and efficient usage became evident </li></ul></ul><ul><li>A very conservative estimate – scheme saved 1% of GDP </li></ul>
  23. 23. Important lessons can be drawn from this case study … <ul><li>No excuses for Brazil getting into this situation </li></ul><ul><li>However, the country was able to implement a very effective rationing scheme </li></ul><ul><li>Relying on economic/market signals – as opposed to more popular “rolling black-outs” </li></ul><ul><li>With an dynamic coordination by the Civil House Minister throughout the entire process – a missing ingredient in some phases of the electric sector reform </li></ul><ul><li>And an honest perception of crisis being transmitted </li></ul><ul><li>Contrary to some initial expectations, society became an ally </li></ul><ul><li>Consumer behavior has changed on a permanent basis </li></ul>
  24. 24. Lessons may be applied, to varying degrees, to other countries and situations <ul><li>Brazil was an “energy constrained” case – in some aspects, easier to handle than “capacity constrained” sectors … </li></ul><ul><ul><li>Where market signals should be conveyed on a real time basis </li></ul></ul><ul><ul><li>And real time pricing/metering rarely exists </li></ul></ul><ul><li>Brazil leveraged on a few market driven institutions in place </li></ul><ul><ul><li>Wholesale market, albeit in its infancy </li></ul></ul><ul><ul><li>Vested contracts with built in incentives for Discos to engage </li></ul></ul><ul><ul><li>Some retail competition </li></ul></ul><ul><li>Some lessons need to be underscored </li></ul><ul><ul><li>Contrary to common wisdom, electricity was a commodity which rapidly responded to prices </li></ul></ul><ul><ul><li>Price signals were key to harness demand side opportunities </li></ul></ul><ul><li>Should the system be implemented on a permanent basis? – e.g. Fixed-Variable Tariffs for mass markets, creating some exposure? </li></ul><ul><li>Subject deserves further thinking and refinement </li></ul>
  25. 25. Quotas were differentiated by customer segment