An organized market that auctions “firm energy” contracts to acquire new energy

1. Overview of Energy Auctions in Brazil • An organized market that auctions “firm energy” contracts to acquire new energy • The contract auction system has been very effective in promoting the development of new generation, offering long-term contracts (that ease project financing), fostering competition, and providing a transparent and objective selection criterion • Since 2005, these auctions have resulted in the contracting of 31 GW of new capacity (40% of which is conventional hydro, and 20% non-conventional renewable), awarding US$ 300 billion in long-term contracts • Key Brazilian System data • Over 70% of the country’s 120 GW of generation capacity comes from hydro sources • Wind resources very abundant: potential capacity estimated at 300 to 400 GW • Wind power’s production intermittency is partially offset by the presence of significant storage capacity in the form of large hydro reservoirs

2. Some details of the auctions • The auction mechanism follows a two-phase hybrid scheme: • in Phase 1, a descending price clock auction is executed, • in Phase 2 a final pay-as-bid round for the winners of Phase 1 is carried out • Winning projects have to deposit several guarantees • Some results of different auctions (1) • In December 2009, an exclusive reserve auction for wind farms took place: • 13,000 MW in wind power projects participated in the auction • 20-year contracts offered for delivery in July 2012 • 1,800 MW of new wind capacity was contracted at an average price of 95 US$/MWh • In 2010, wind power was allowed to compete on equal grounds with small hydro and bioelectricity projects in two energy auctions for energy delivery in 2013 • Wind power outclassed its competitors in both auctions, being responsible for nearly 80% of all energy contracted and reaching average prices of 80 US$/MWh (regular auction) and 73 US$/MWh (reserve auction). • 1,500 MW of wind capacity was contracted (regular) + 500 MW (reserve)

3. Some results of different auctions (2) • In August 2011, one regular and one reserve energy auctions for delivery in 2014 • were organized: • the reserve energy auction remained exclusive for non-conventional renewable sources • In the new energy auction wind power was allowed to compete directly with natural gas-fired thermal plants • An energy mix including 1,000 MW of wind capacity was contracted in this auction; while in the reserve energy auction an additional 860 MW of wind capacity was acquired. • Wind and gas projects competed in this auction using a purely economic criterion: • No positive externalities relative to carbon emissions were taking into account • The average wind energy price in these auctions was 60 US$/MWh, lower than the average natural gas energy price (62 US$/MWh). • Some ideas for a similar application in Europe • Long term energy contracts are a good way to attract investment • Different generation technologies can be treated differently but still can compete in the same auction. • Different auctions can be organized for different “products” addressed to different technologies

4. A potential application in Europe is more difficult but possible • In Brazil, the existing system has enough “manageability” to allow the introduction of non-manageable energy sources without any problem. • The system only needs more energy and this is what is contracted in the auctions • Manageability could be defined as the possibility to manage generation so as to produce it when it is needed. Two different characteristics are included: • Capacity to change quickly (regulating capacity) • Capacity to produce when called to do so. The highest need is in winter peaks • In Europe we need energy and “manageability”. RES do not provide “manageability” and therefore it is very difficult to put CCGT in direct competition with RES as it has been done in Brazil. • This means that long term energy auctions could be organized for RES energy only • Additional “capacity” auctions for “manageable power” would be needed • Plants that have won the capacity auctions should receive no more remuneration from the markets. The capacity auctions should have a fixed term for firm capacity and a variable term for energy. Specified conditions for regulation. • In fact, an indirect competition between new RES energy and the energy that could be produced by the plants that have already won the capacity auctions will always exist. This is good and makes visible whatever level (positive or negative) of support for the RES sources