Ed Power Sector Brazil

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Power Sector Reform in Brazil

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  • Thanks thank you for the opportunity address this important forum and initiate what I’m sure will be a very fruitful discussion today. Let me first thank the Brazilian government, Electrobras, and EDF and for convening this conference and bringing together policymakers, investors, and members of the donor community to address the critical issues surrounding the world power industry and specifically, financing needed investments in emerging markets.
  • Ed Power Sector Brazil

    1. 1. Washington, May 13, 2005 Power Sector Reform in Brazil Luiz Maurer Energy and Water The World Bank
    2. 2. Objectives of this presentation <ul><li>THIS SESSION HAS FIVE MAIN OBJECTIVES </li></ul><ul><li>Provide an overview of power sector reform in the world </li></ul><ul><li>Summarize the key points about power sector reform in Brazil </li></ul><ul><li>Discuss the good aspects and accomplishments </li></ul><ul><li>Discuss the not so good aspects and why reform fell short of expectations </li></ul><ul><li>Present challenges ahead – Is reform complete? </li></ul>
    3. 3. Overview of power sector reform in the world
    4. 4. Challenges in the power sector … <ul><li>Universal access </li></ul><ul><ul><li>1.6 billion people without access to modern energy </li></ul></ul><ul><ul><li>Undisputable linkage – access and poverty reduction </li></ul></ul><ul><li>Expansion – how to raise U$ 120 billion per year? </li></ul><ul><li>Private capital brought efficiency and investments </li></ul><ul><li>Many took advantage of the euphoria for private participation in the 1990s </li></ul><ul><ul><li>In Latin America – a mix of privatization and new generation </li></ul></ul><ul><ul><li>Some places in Asia – only new generation via IPPs </li></ul></ul><ul><li>Other countries literally “missed the boat” – and are now in worse off </li></ul><ul><ul><li>Africa </li></ul></ul><ul><ul><li>Middle East </li></ul></ul>
    5. 5. Challenges in the power sector – reliability and adequacy of power systems…
    6. 6. Challenges in the power sector – What about the future?
    7. 7. Challenges in the power sector … <ul><li>Sustainability </li></ul><ul><ul><li>Ability to live with its own means </li></ul></ul><ul><ul><li>If tariffs are not cost reflective – sooner or later problems will emerge, system will fall apart, or public debt escalate </li></ul></ul><ul><ul><li>How to provide services to those with low willingness to pay? </li></ul></ul><ul><ul><li>Subsidies for access and lifeline rates necessary, but others should be closely examined – e.g. subsidies that foster wasteful consumption </li></ul></ul><ul><ul><ul><li>Sooner or later will hamper affordability and quality </li></ul></ul></ul><ul><ul><ul><li>Poor will be the first to suffer consequences </li></ul></ul></ul><ul><ul><li>Subsidies in countries with low access – regressive taxation </li></ul></ul><ul><ul><li>Sustainability also encompasses consumption of natural resources and deterioration of the environment </li></ul></ul>
    8. 8. Major challenge – who will invest?
    9. 9. 20 years of power sector reform - what have we learned? Initial considerations <ul><li>First and foremost - the need for a baseline </li></ul><ul><ul><li>Greatest roadblock to evaluate the effectiveness of power sector reform and privatization </li></ul></ul><ul><ul><li>“ What would have happened if nothing had been done?” </li></ul></ul><ul><li>“ Tell me a place where reform has worked perfectly” </li></ul><ul><ul><li>Misstated question - where has regulation worked perfectly? </li></ul></ul><ul><ul><li>If regulations were flawless, why have reforms started? </li></ul></ul><ul><li>Failures get [a lot] more publicity </li></ul><ul><ul><li>All of us know about the failure in California. What about press coverage on other functioning pools? </li></ul></ul><ul><ul><li>Recent WB seminar on energy </li></ul></ul><ul><ul><ul><li>Crowded auditorium to see the movie “Power Trip” (Georgia) </li></ul></ul></ul><ul><ul><ul><li>A few interested in the Peruvian BOT successes in transmission </li></ul></ul></ul>
    10. 10. Failures get [a lot] more publicity with distorted cause-effect relationships <ul><li>California was not deregulation – a “botched deregulation” </li></ul><ul><li>How many know about the virtues of other pools in the USA, such as NEPOOL, NYISO, PJM and more recently Texas </li></ul><ul><li>And abroad such as Alberta, Nordel, Australia, New Zealand, Argentina, Chile, … </li></ul><ul><li>Black-out in the US was due to miscommunication and lack of control in the MISO “loose pool,” not a good example of deregulation - with geographical spillover effects </li></ul><ul><li>The most “liberals” advocate “security constrained, centralized, price bid, least cost dispatch,” with demand response – MISO is far away from what may be called a market </li></ul><ul><li>Black-outs in countries which embarked on reform are always in the headlines – but how many of us know the number of countries where black-outs are a fact of life or “business as usual” ? </li></ul>
    11. 11. Tinkering with reform and rules. Does is suffice? <ul><li>No. Well crafted rules are essential to get competition “in” and “for” the market, as well as operating and investment efficiencies </li></ul><ul><li>Despite its uniqueness, electricity has elements of a private good </li></ul><ul><ul><li>If I consume one MWh, my neighbors will have one less MWh </li></ul></ul><ul><ul><li>A very expensive good to produce – devours capital and environment </li></ul></ul><ul><ul><li>Give it for free – creates wasteful consumption and bankrupts providers </li></ul></ul><ul><li>Success of any reform – back to the basics in the cash register </li></ul><ul><ul><li>Energy has to be metered (always), billed and paid </li></ul></ul><ul><ul><li>Supply side orientation overshadowed the importance of those </li></ul></ul><ul><li>Governments have to “walk the talk” </li></ul><ul><ul><li>Pay their bills </li></ul></ul><ul><ul><li>Enforce contracts, treat theft as a crime </li></ul></ul><ul><li>Economic and financial sustainability </li></ul><ul><li>Not even touted single buyer model is “bullet proof” </li></ul>
    12. 12. Summarize the key points about power sector reform in Brazil
    13. 13. Power sector reform in Brazil – a long process <ul><li>Settlement of arrears in 1993 – taxpayer absorbing > U$ 30 billion as a result of the “old regime” </li></ul><ul><li>Concession Laws paving the road for reform and private capital participation (1995) </li></ul><ul><li>RE-SEB – first comprehensive effort to create a new institutional, commercial and regulatory model – ANEEL, ONS, MAE (1997-1998) – half-way implemented </li></ul><ul><li>Priority program of natural gas fired power plants (1999) </li></ul><ul><li>Rationing – challenge everything from scratch (2001) </li></ul><ul><li>Lula’s government – despite initial fears, new, good ideas - e.g. auctions for new energy, strict purchasing requirements, EPE </li></ul><ul><li>Never ending process – still a lot to be done </li></ul>
    14. 14. Complex and not always linear process – web of Laws, Decrees, Portarias, Regulations
    15. 15. Discuss the good aspects and accomplishments
    16. 16. Brazil was the country who took most advantage of the privatization euphoria
    17. 17. What about the criticism – resources were not invested in new assets?
    18. 18. Generation installed capacity – jumped from 1,100 MW to about 3,100 MW per year post 95
    19. 19. Ditto for transmission assets
    20. 20. Quality of service increased significantly
    21. 21. 20 years of power sector reform - “Assessment is in the eyes of the beholder” – the bright side of Brazil <ul><li>Brazil – Created a competitive business model for G </li></ul><ul><ul><li>10 GW MW of hydro concessions granted, 19 GW commissioned </li></ul></ul><ul><ul><li>Significant reduction in time and cost of construction </li></ul></ul><ul><li>Consolidated a business model for power system operation similar to the most advanced pools in the US – (cost bid, not price bid) </li></ul><ul><li>Created a new business model in transmission (BOO)– 12,600 km of HV and 23 GVA in sub-stations built, mostly by the private sector </li></ul><ul><li>Created a Wholesale Energy Market – now in full operation </li></ul><ul><li>Privatized 85% of D and 26% of G with significant improvements in quality, and electrified 400,000 rural households </li></ul><ul><li>Managed successfully a 20%, 8 month, country wide rationing program – market based, with no black-outs (an international best-practice) </li></ul><ul><li>End of 2002 – 8,500 MW of capacity available – during rationing, end-customer learned how to use energy effectively </li></ul><ul><li>Consolidate a competitive procurement process via energy auctions </li></ul>
    22. 22. Not so good aspects and why reform fell short of expectations
    23. 23. If everything so rosy, why rationing? <ul><li>Long term trend of depleting the reservoirs </li></ul><ul><ul><li>Independence of operator questioned </li></ul></ul><ul><ul><li>Culture of not giving “bad news first” </li></ul></ul><ul><li>Half way implementation of the power sector reform </li></ul><ul><li>Privatization of G interrupted – the “worse of the two worlds” </li></ul><ul><li>Lack of planning, particularly gas-electricity convergence </li></ul><ul><li>Spot exposure – not perceived as a credible bankruptcy threat by Gs or Ds – in the end, a “bail out” was necessary </li></ul><ul><ul><li>Gs – disregarded potential exposure of Annex V </li></ul></ul><ul><ul><li>Ds – “penny-wise” in discussing +- adjustments of VN with ANEEL </li></ul></ul><ul><li>For all those reasons </li></ul><ul><ul><li>Increase in G and T investments </li></ul></ul><ul><ul><li>But not sufficient </li></ul></ul><ul><li>Aggravated by bad weather – system is designed to have rationing one in every twenty years – but the scope and extent of 2001 beyond any expectations </li></ul>
    24. 24. New model more evolutionary than revolutionary
    25. 25. Present challenges ahead – Is reform complete?
    26. 26. Power sector reform is never complete <ul><li>Power sector reforms have to be predictable, but never a finished product </li></ul><ul><li>Current administration knows there is still a lot to be done </li></ul><ul><ul><li>Universalization </li></ul></ul><ul><ul><li>Better targeting of subsidies for the poor </li></ul></ul><ul><ul><li>Isolated systems and renewables </li></ul></ul><ul><ul><li>Assure expansion via new energy auctions </li></ul></ul><ul><ul><li>Untangle the “taxation web” – see next page </li></ul></ul>
    27. 27. The power sector became a tax collector
    28. 28. Other aspects for the government to consider <ul><li>If we want a market – we need strong price signals in time and space </li></ul><ul><ul><li>More on “dynamic pricing” and demand response – customer to perceive when the energy is scarce or abundant </li></ul></ul><ul><ul><li>Locational signals – current sub-market pricing scheme is flawed, auctions have to take into account where new plants are to be located </li></ul></ul><ul><li>Rationing was a tough experience – but we learned that price signals do work </li></ul><ul><ul><li>If properly designed are the best way to allocate scarce resources </li></ul></ul><ul><ul><li>Good design includes, inter alia, safety nets for the poor </li></ul></ul>
    29. 29. In a nutshell <ul><li>Power sector reform is a challenge everywhere </li></ul><ul><li>So far Brazil has developed so far a promising power sector model – we are now much better than when we started </li></ul><ul><li>Leveraging on international capital – which is still badly needed </li></ul><ul><li>A lot of criticism in the last years has been more a result of perception than reality – reform has been an evolutionary process </li></ul><ul><li>Current administration has commitment and important items in the agenda </li></ul><ul><li>We can always improve – other areas include </li></ul><ul><ul><li>Better targeting of subsidies </li></ul></ul><ul><ul><li>Simplification of taxation schemes </li></ul></ul><ul><ul><li>If we need a market, we need good prices in time and space </li></ul></ul><ul><ul><li>Demand response and energy conservation – still orphans </li></ul></ul>

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