Amcham Power Crisis2

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2001 Power Crisis in Brazil

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Amcham Power Crisis2

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

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