1 The Brazilian Electricity Model: An Overview of the Current Structure and Market Design Élbia Melo 1, Evelina Maria de Almeida Neves 2, Luiz Henrique Alves Pazzini 3 Câmara de Comercialização de Energia Elétrica CCEE, Brasil Abstract In the Brazilian electricity supply industry, the first market-oriented reform occurred from 1995 to 2003 ran into trouble, leading to insufficient investment in generation expansion and to higher consumer tariffs. In 2004 the new government revised the institutional model of the Brazilian electricity sector. This paper presents an overview of the current model with emphases in the analysis of both free and regulated contracting environments, and in the improvement opportunities to be overcome in the next stages. I. INTRODUCTION During the 1990s, the Brazilian electricity regulatory model started to be restructured with the aim to promote competition and attract investments to the sector. This first phase of the sector reform was marked by the implementation of the Project Restructuring of the Brazilian Electric Sector RESEB. The RESEB s basic aims were the introduction of competition in generation and retailing activities and build an efficient regulation to transmission and distribution activities. Although the government made structural reforms to create a market environment many problems occurred with the proposed model and the first market-oriented reform ran into trouble, leading to insufficient investment in generation expansion and higher consumer tariffs. As consequence, from June 2001 to February 2002, Brazil faced a supply crisis which culminated in an electric power rationing plan . In 2004 the Federal Government set a new model for the Brazilian Electricity Sector and defined the creation of two energy trading markets: a Regulated Contracting Environment (RCE) where a pool of distributors buys power from generators in public auctions and a Free Contracting Environment (FCE) where free consumers, traders and generators can freely negotiate their contracts. The Chamber of Electric Energy Commercialization (CCEE) was created under the Law 10,848, of March 2004 as a private and not-for profit institution with the responsibilities of administrating both regulated and free contracting environments under regulation and inspection of ANEEL, the regulatory agency. CCEE is responsible to promote the accounting of the agent s transactions in the short-term market by calculating the difference between what was produced or consumed and what was contracted. This difference is settled at a short-term price established by a mathematical model that takes account technical information received by the System National Operation (ONS). The objective of this paper is to describe the current 6-year implemented model, to make an overview of both regulated and free contracting environment, and to point out improvement necessities and the main challenges to be overcome in the next stages. Section 2 shows an overview of the Brazilian electricity sector. Section 3 describes the implementation of a new model proposed for the sector from 2004 to now. The section 4 presents an overview of the short term market. Section 5 presents an overview of RCE and some results obtained from the energy supply auctions. Section 6 presents an overview of FCE environment and analysis its evolution and potential problems. Section 7 presents the final remarks of this work and discusses the main challenges that should be overcome in the next stages. II. THE BRAZILIAN ELECTRIC SECTOR The Brazilian interconnected system which accounts for about 98% of the Brazilian electricity market has an installed capacity of near 111 GW, with the hydro system responsible for 72% of the total installed capacity. The Table I represents the main characteristics of the Brazilian interconnected System. TABLE I CHARACTERISTICS OF THE BRAZILIAN INTERCONNECTED SYSTEM IN 2010 Installed Total Thermal Generation Capacity Generation Generation Technology/ Averag Fuel MW % % % e MW Hydro 80, , Natural Gas 12, , Biomass 7, , Oil 6, Nuclear 2, , Coal 1,
2 Wind Total 111, , Sources: ANEEL and CCEE The interconnected system is based on km of transmission lines ranging from 230 kv to 750 kv, and two dc links connecting the binational Itaipu power plant (14 MW) to the grid. The Brazilian Transmission System is showed in the Figure 1. Fig. 2. Regulated Contracting Environment (RCE) and Free Contracting Environment (FCE) Fig. 1. Brazilian electric system (ONS) III. THE NEW MODEL FOR THE BRAZILIAN ELECTRIC SECTOR During the year of 2004, the Federal Government set the bases for a new model for the Brazilian Electric Sector, supported by Laws 10,847 and 10,848, dated of March 15, 2004, and by Decree 5,163, dated of July 30, Some mechanisms were inserted into the market to enhance security of supply, among which: a) a requirement that distribution companies contract for 100% of their forecast demand over a five-year horizon; b) build realistic estimates for guaranteed energy of plants; c) contracting hydropower and thermal plants in a mix that balances guarantee and cost; and d) permanent monitoring of the security of supply, in order to have early detection of imbalances between supply and demand. One of the main components of the new electricity model was the creation of two energy trading markets, as showed in the Figure 2: a Regulated Contracting Environment (RCE) where a pool of distributors buys power from generators in public auctions under set prices and a Free Contracting Environment (FCE), where free consumers and generators can freely negotiate their own bilateral contracts. In the pool system all sellers perform contracts with all distribution companies. The electrical energy contracting in the RCE is formalized by means of regulated bilateral agreements called CCEAR, between selling agents (generators, independent power producers or self-producers) and purchasing agents (distributors) which participate of electric power auctions. In the FCE, on the other hand, the negotiation among the generating agents, traders, free consumers, importers and exporters of electric power is freely accomplished through bilateral contracts. Generating agents (public generation concessionaires, independent power producers or self-producers) and traders are allowed to sell electric power within the two environments, maintaining their competitive nature of the generation. CCEE has the following main attributions: to keep records of the energy contracting and acquire on line measuring data of all Agents in the Brazilian interconnected electricity system, to conduct energy purchase auctions for distribution utilities under authorization of ANEEL and to determine the weekly prices and the monthly accounting and settlement of the short term market in FCE and RCE environments, based on a set of commercialization rules established by ANEEL. Between 2006 and October of 2010, the settlement activities involved financial amount of 6.2 billion. Besides the creation of CCEE, the new model created new institutions and determined new roles for the existing ones. ANEEL keeps its roles of regulation and monitoring the working of the electricity sector and ONS guarantee the centralized physical dispatching but may undergo some governing changes. Above these bodies, there is also the interministerial CNPE and the Power Sector Monitoring Committee (CMSE) that monitors services conditions for purposes of ensuring continuous energy supply. The MME formulates energy policies and take the previous ANEEL s role of granting hydropower and transmission line concessions. The Energy Research Company (EPE) is a new entity created to elaborate the energy sector long term planning in coordination with the MME. The Figure 3 presents a diagram of the institutions that are active in the Brazilian Electric Sector.
3 In addition to the dispatch schedule for plants, this model establishes the produces the marginal costs (implicit) for each sub-market, per scheduling period. CCEE calculates the short term price (PLD) based on the same optimisation model used by ONS. This price is weekly calculated and published by CCEE, having for base the system marginal operational cost with lower and upper price bounds, for three different load levels ( high, medium, low ) and for four different sub-markets (South, Southeast, North, Northeast). The Figure 6 presents the monthly average spot prices from 2000 to now. The high prices from June 2001 to February 2002 can be explained by the Brazilian electricity system supply crisis occurred due to the scarce rains and delays in investments in the system expansion. The main resulting of the rationing was a reduced demand scenario related to the consumption (near 20%) that didn t rise back to the previous level. As consequence, an excess of supply energy occurred and led to lower short term prices. Fig. 3. Institutions in the Brazilian Electricity Sector IV. AN OVERVIEW OF THE BRAZILIAN SHORT TERM MARKET CCEE is responsible to promote the monthly accounting of the agent s transactions in the short-term market by calculating the difference between what is produced or consumed and what is contracted. These differences (imbalances) are settled at a short-term price (PLD) established by a mathematical model that takes account technical information received by the ONS. The generators dispatch approach in the Brazilian Interconnected System is based in a tight centralized system by using optimization tools. The justification for these kind of trading arrangements is the peculiarity of the Brazilian System based on energy produced mainly from multiple ownership hydroelectric plants located on the same river, and subjected to stochastic inflows. Under this approach the tight pool and short term market price mechanism considers the following aspects: Hydro and thermal generators submit technical data on their plant including water levels in reservoirs, rate of inflow, thermal efficiency and fuel, operating cost data and the technical availability of their turbines. Consumer agents submit demand data. Based on these data, together with forecast reservoir inflow based on scenarios derived from historical data, demand and supply projections, ONS does the real centralized, cost-based dispatch using an optimization models (NEWAVE/DECOMP). NEWAVE model computes the hydrothermal dispatch on a monthly basis while DECOMP establishes the hydrothermal dispatch on a weekly basis. Fig. 6. Monthly average short term prices (US$/MWh) V. AN OVERVIEW OF THE REGULATED CONTRACTING ENVIRONMENT - RCE According with the present Brazilian regulatory framework established by Law 10,848 of 16 March 2004, distribution utilities must ensure that their market demand has full contract coverage by purchasing electric energy through public auctions conducted within RCE. Besides the general contracting rule formalized in regulated bilateral contracts (CCEAR), the distribution companies may also acquire energy for covering their demand from: The Binational Itaipu plant. The Incentives Programmers for Alternative Energy Sources (PROINFA). Distribution companies are allowed to contract energy from distributed generation plants. This must be done through public bidding directly promoted by the distribution. Bilateral contracts signed before 16 March 2004 (publishing data of Law 10,848)
4 The auction system in RCE is related to the service of captive consumers by distribution utilities, and its aim is to ensure the provision of energy to these consumers in a reliable, equitable and economically efficient way (fair tariffs) through auctions and regulated pooled contracts. The new institutional framework was thus designed to allow public and private firms to coexist in a competitive environment. Auctions play a central role in this design, since the existence of clear rules and a transparent trading process work as a guarantee to private firms against a possible abuse of power by public firms. In this sense, auctions for generation projects were thus instituted with the following purposes: Create a long-term contract market that generates efficient and timely price signals to guide the expansion of installed capacity. Ensure that the purchase of energy to supply captive consumers is done in a competitive and transparent way, leading to fair tariffs. Provide clear, easy to audit trading rules, in order to hinder collusion and the use of market power to manipulate prices. In this context, RCE may be considered as a buyers pool that aggregates the demand of the various distribution utilities in periodic auctions, in order for utilities to sign bilateral contracts with the generators who offer winning bids in each auction. To attract investment in generation, energy auctions for long term energy contracts (15 and 30 years) were created to direct energy contracting by distribution utilities. This scheme aims at reducing risks for investors, while the auction by least price stimulates economic efficiency and in principle gives correct signals for the system expansion cost through competition... Finally, these auctions are fed by governmental planning studies to propose feasible (and with a preliminary environmental license) expansion projects for a forecast demand growth, together with demand forecasts by distribution companies, although investors may propose alternative projects in the auction blocks. The RCE Auctions are classified as: Auctions of Energy from Existing Power Plants Auctions of Energy from New Power Plants Auctions of Reserve Energy Auctions of Energy Adjustment (just from Existing Power Plants) A. Existing Energy Auctions Existing energy auctions comprise contracts with energy delivery one year ahead ( A-1 ) and contract durations from 5 to 15 years. From 2004 to now, nine auctions from existing energy auctions have been implemented. These auction offered 8 or 3 years contracts. The last two auctions, that occurred in 2009 and 20110, the modality of the biomass plants auctions was for energy availability. In this kind of auction the buyers (distribution companies that participated in the auction) rent the plant and pay the investor fixed costs. Whenever the plant generates energy the buyers pay the variable operating costs and share the risks of the short term market transactions. Taken together these energy existent auctions involved a sales volume of 19,987 averages MW, a financial amount in the range of 78 billion and signature of 1,610 CCEAR contracts. The results of the auctions to contract energy from existing plants may be followed in Figure 8. The Prices in the Figure 8 were updated up to December 2010 and considered the last 3 year average exchange rate of 2,63 R$/. Fig. 8. Existing energy Auction Results CCEE B. Adjustment Auctions In accordance with ACR trading rules, uncertainty as to market growth is absorbed by distribution companies, which must declare their expected demand and contract the necessary energy in auctions 1 to 5 years before the date. In order to allow proper management of this risk, there is a mechanism for complementary contracts: Adjustment Auctions for electric energy purchase. C. New plants energy Auctions New energy auctions comprises contracts with delivery five ( A-5 ) or three ( A-3 ) years ahead, with durations between 15 (thermal) and 30 (hydropower plants) years. These contracts allow the project finance for investors usually in enough time to build mainly hydro (five years) and thermal (three years) plants. Energy availability contracts signed in Brazil foresee capacity payment clauses but may not be understood as capacity market mechanisms, as they are restricted to thermoelectric plants and aim at dealing with fuel price volatility and dispatch uncertainties. Therefore, they constitute rather an instrument to confer predictability to the cash-flows of thermoelectric plants which have signed long term contracts . Hydropower plants, on the other hand, have only contracts for energy amounts and must incorporate risk premiums in their selling prices in order to cope with additional reliability costs. This approach recognizes that generators possess better pricing mechanisms for exposure risks and that competition in long term auctions enable the valuation of the utility of
5 reserve capacity necessary to ensure supply of a specific amount of energy. Nevertheless, auctions designed to buy energy from new plants enabled expansion of generation capacity through market signals in a time horizon compatible to maturation lags required by new investments, which are important to mitigate the risk of long periods of scarcity. From 2005 to now, thirteen auctions from new energy auctions have been implemented, including two Madeira River hydroelectric auctions, one from Belo Monte plant and two specific auctions for alternative energy. These auction offered 15 and 30 years contracts to respectively thermal and hydro new plants. The modality of the thermal plants auctions was for energy availability. In this kind of auction the buyers (distribution companies that participated in the auction) rent the plant and pay the investor fixed costs. Whenever the plant generates energy the buyers pay the variable operating costs and share the risks of the short term market transactions. The alternative energy auction can be occur in specific situations determined by MME, comprising contracts with durations between years, from small hydropower plants (with installed capacity up to 30 MW), solar, wind or biomass power plants. The first alternative energy auction occurred in June 2007 and sold 46 MW of energy from small power plants and 140 MW from biomass power plant. The Santo Antonio, Jirau and Belo Monte power plants located on the Amazon region were indicated by the government as a high priority implantation project. Their A-5 auctions occurred in December 2007, May 2008 and April 2010 respectively. There auctions sold 70% (5.736 Average MW) of the assured energy for their plants to RCE and presented final price offer very below of the price cap set by the government. The 30% of the assured energy of these power plants will be destined to FCE environment where the sellers can recover their revenues through higher prices contracting. Besides these new power plants auctions, in August 2008 was implemented the first auction for reserve energy with the aim of increasing the national power energy supplying. This auction sold 1,100 MW specifically for biomass power plants. The costs of this mandatory energy purchase will be paid through the reserve energy charges, shared among ACR and ACL consumers. In 2009 occurred the second auction for reserve energy specifically for wind plants and the results were very good, with 753 average MW were negotiated and a average price of 58,16 /MWh. The third auction for reserve energy occurred in 2010 for biomass, wind and small hydraulic plants, with 445 averages MW were contracted. Taken together the new energy auctions involved a sales volume of 23,975 averages MW, a financial amount in the range of 210 billion and signature of 6,081 CCEAR contracts. The results of the auctions to contract energy from new plants, concerning prices and amount of energy contracted may be seen in Figure 9. Fig. 9. Average prices of all energy auctions performed to CCEE Table II presents a summary of existent and new power plants auctions, including the alternative energy and reserve capacity auctions. The Figure 10 presents the resulting matrix for these new power plants auctions. TABLE III SUMMARY OF EXISTENT AND NEW POWER PLANT AUCTIONS Average Auction Contracts Billions MW Existing Energy Auctions ,987 1,610 New Energy Auctions ,329 4,935 Alternative Energy Auctions ,146 Reserve Energy Auctions ,746 - Total ,962 7,691 Fig. 10. Total amount negotiated in the auctions by energy source These results show that RCE is a mature contracting market, capable to attract private capital and provide the expansion of generating capacity. However, special attention must be given to the demand contracting frustration in the existent power plant auctions that signalizes a tendency of energy migration to FCE environment where the prices are freely negotiated . VI. AN OVERVIEW OF THE FREE CONTRACTING ENVIRONMENT - FCE
6 The Free Contracting Environment (FCE) is comprised of free consumers who have the right to choose their electricity supplier paying a rate for using the distribution or transmission system. In FCE Agents are free to make bilateral contracts, defining prices, quantities, durations and hedge clauses. The free market was created in Brazil by Law 9,074/1995, afterwards altered by Law 9,648/1998 and complemented by ANEEL s Resolution 264/1998. This Law determined that the market should be gradually liberalized to allow large consumers to become free. From July 1995 and July 2000 this possibility was restricted to consumers with an installed demand load of 3 MW or more, supplied at a voltage of 69 kv or more. The Law 9,074 also determined the possibility to expand even more this market by reducing the demand and voltage limits from 2003 on. According with Law 9,427/1996 afterwards complemented by Law 9,648/1998 and 10,438/2002, special consumers with an installed demand of 500 kw or more are allowed to buy electricity from alternative energy sources i.e. supplied from small hydroelectric plants with installed capacity from 1 to 30 MW or from wind, solar, biomass (with installed capacity lower than 30 MW) or other plants with installed capacity equal or lower than 1,000 kw). In 2004, with the definition of the commercial rules under the new model framework, the medium sized industrial consumers awake of the gains they could obtain by saving electricity bills. The scenario of short term prices caused by demand reducing and supply energy excess after the rationing also motivated the migration of captive consumers to the free market. The Figure 11 shows the evolution of free consumers. VII. FINAL REMARKS In the present reform new arrangements were designed to attract new investment in generation, and to obtain fair prices for consumers with competition in expansion. Central to these arrangements were new contracting procedures between generators and distribution utilities, based upon auctions. From this point of view, the auctions carried out were reasonably successful because they have signaled expected future prices for new energy compatible with investment costs and capital remuneration. However, several issues must still be solved to guarantee security of electricity supply and the current model still needs adjustments in many dimensions. A proposed solution to adequate and strengthen the contracting in the FCE, could be to permit free consumer to sell their contract surplus, in order to stimulate long term contracting. The financing criteria could be adequate to attend the FCE features, for example through the requirement of shorter term contracting. Also the execution of specifics auctions comprising certificates or titles of energy could contribute to the system s capacity expansion. A right s property in the case of receiving an energy quantity time along and the possibility to transfer this right with flexibility and liquidity could offer interesting alternative to deal with time and commercial guaranties while induce new investments in the sector, including new different financing options and investors profiles. Inclusive, it could be created a specific market to trade these energy certificates that would work as an instrument for management of risks and investments. As the country financial markets become more mature, financial hedge may become useful. The implementation of a contracting platform to energy negotiation may be provides simplest, more efficient and more transparency short term price signals to the market. REFERENCES  J. L. R. Araujo, T. B. Correia, A. M. Costa, E. A. S. MELO, Energy contracting in Brazil and electricity prices. In: Fereidoon P. Sioshansi. (Org.). Competition Electricity Market - Design, Implementation, Performance. 1 ed. Oxford: Elsevier, 2008, v. Vol II, p  J. L. Araújo, R. H. de Costa, M. de A. da Agnes; T. Correia, E. Melo, Energy contracting in Brazil and electricity prices, v. 2, p ,  E. A. S. Melo, E. M de A. Neves, L. H. A, Pazzini, An Evaluation of the Regulation of Incentives for Alternative Electricity Sources in Brazil - BIEE Conference -Energy in a Low Carbon Economy -New Roles for Government and Markets. Oxford September 2010 Fig. 11. Evolution of Free Consumers Agents FCE To return to the condition of a regulated consumer, the free consumer must notify the distribution company of its concession area 5 years in advance, and the deadline can be reduced according with the criterion of the distribution company. The free market participation in the consumption measured (54,671 averages MW) is about 26% of the whole market in Brazil.