Xisto Vieira Filho Regulatory Affairs & Planning March, 2002

The Current Status and Short Term Evolution of the Brazilian Power Sector: A Focus on Thermal Generation Expansion Xisto Vieira Filho Regulatory Affairs & Planning March, 2002

Total Generation and Supply Thermal Hydro Others NaturalGas Nuclear Coal Oil 1415 MW(2.0%) 1862 MW(2.5%) 65821 MW(88.4%) 1740 MW(2.3%) 1966 MW(2.6%) 1608 MW(2.2%) THE CURRENT STATUS OF THE BRAZILIAN POWER SECTOR: A FOCUS ON THERMAL GENERATION EXPANSION (1) PRESENT SITUATION 74.412 MW 65.821 MW 6.983 MW 1.608 MW

(2) SHORT TERM/MEDIUM TERM POLICY FOR GENERATION EXPANSION: • Need to reduce strong dependence from hydrological conditions. A bad “hydrological year”. Difficulties to supply energy demand. • Hydro potential to be explored still high. • new hydro plants more and more distant from main load centers. • strong transmission requirements. • environmental problems.

new hydro plants are adding smaller reservoir • capacity (storage capacity). STORAGE CAPACITY BEHAVIOUR:

FURNAS RESERVOIR: ANNUAL INSTEAD OFPLURI-ANNUAL REGULARIZATION

“Need for thermal Generation to Complement the Predominantly Hydro System”. “INSURANCE” AGAINST CRITICAL HYDROLOGICAL PERIODS Thermal Generation Storage Capacity OR • Being continuously reduced • New Hydro Plants aggregate small storage capacity (most are run-of-river plants) • Construction problems

ADOPTED STRATEGY: • to develop a Priority Thermal Program (PPT) based on gas-fired thermal plants. • private investments. • to continue hydro expansion, but incentivating adequate thermal complementation. Aggregated Energy to the Interconnected System (MW):  PPT plants (under construction) Hydro plants (MW) 6.000 5.000 4.090 3.448 4.000 3.000 2.829 2486 1.693 2.000 844 894 554 1.000 491 1.261 962 799 554 353 0 2001 2003 2004 2005 2002

WHAT ARE THE DIFFICULTIES FOR THERMAL GENERATION AGENTS? • Power Sector Model IS based on competition in G. large state-owned G’s were not privatized. market for short term transactions is not working yet. market for long term transactions with difficulties – uncertainties due to “Initial Contracts”. small amount of free consumers. • Regulatory uncertainties. several present rules not “market oriented”. a strong concern of the Regulatory Agency to avoid higher tariffs for captive consumers – short term basis. changes in rules (mainly during rationing).

Gas supply. gas price. take or pay and ship or pay contracts for a predominantly hydro system. pipelines development and open access. Government decided to prepare new measures to overcome these difficulties and to enhance the competitive model. • Government has established 1 TF for each one of the measures:

(3) MAIN COMMENTS ABOUT THE MEASURES TO ENHANCE THESECTOR MODEL – PERSPECTIVES TO GAS FIRED THERMAL GENERATION: • The two big issues to solve: Market Gas supply Short Term Market Medium / Long Term Market

(3.1) MAIN POINTS ABOUT THE SHORT TERM MARKET: (a) THE WHOLESALE ENERGY MARKET (MAE) STRUCTURE: PROBLEM: • MAE not working. • DISCO’s and GENCO’s would seldom agree about measures/rules. • a difficult and heavy structure. PROPOSED SOLUTION: • a light structure. • rules established by ANEEL, after public hearings. • 3 out of 5 Directors indicated by the Government. • Arbitrage chamber established to avoid “external disputes”. COMMENTS: • Still with a considerable intervention. • Scheduled period for the intervention = 1 year.

(b) SPOT PRICES: PROBLEM: • determined by NEWAVE package. • results strongly dependent on short term hydrological condition forecasts. • results depend also on the perception of ANEEL and ONS about the generation plan and about load behaviour. Computer Package should not be used to establish PRICES. PROPOSED SOLUTION: • to improve the computer package on a temporary basis. • to implement an offer x demand system based on price (instead of cost) declarations. COMMENTS: • It is one of the most important measures – PRICES MUST BE FORMED BY MARKET PERCEPTIONS. • An actual development to the market.

Pspot Computer Package Pspot Market • Two different schemes to form prices: • different perceptions of each agent. • perceptions of “official entities”. • Technical Parameters: • hydrological conditions. • new G evolution. • maintainance program. • load forescasts. • Technical parameters. • Estimation of other agents’ behavior. • Estimation of Regulation evolution. • Estimation of Macroeconomic Aspects.

Example: The influence of short term estimation of NEI (Natural Energy Inflow) • Price volatility with no market perceptions considered.

(3.2) MAIN POINTS ABOUT THE LONG TERM MARKET: (a) A GENERATION PRICE CAP ESTABLISHED FOR PASSTHROUGH TO FINAL CONSUMERS: ~ ~ ~ T PPA at a price p DISCO Pmax that a DISCO can pass through to its captive consumers (based on VN). Final Consumers (Captive) • one typical spread sheet with data from an “average project”. • VN considered not atractive to private investors.

COMMENTS: • VN avoids or minimizes possibilities of G competition in the long term market. • 1 only VN for all the range of projects does not cover adequately several projects. • VN x competitive market free consumers.

less regulatory “constraints” dictated by ANEEL. • possibility to actually choose their suppliers. • currently for PD 3MW. • apparent protection given by ANEEL to captive consumers. (b) INCENTIVES TO FREE CONSUMERS: • Actual Competition in Generation: Will only take place if a considerable part of the consumers are free. • Free Consumers:

Measures that will be analyzed: • to gradually reduce requirement to become free (PD 1 MW). • establish tariffs to consumers that may become free and remain captive as Max VN; Pspot Other Examples of Incentives • to allow free consumers to negotiate their required reliability (different prices). • to allow free consumers to return to the status of captive consumers whenever they want

(c) REVISION OF THE AMOUNT OF ENERGY HYDRO GENERATORS CAN SELL IN THE LONG TERM MARKET: • Energy that hydro plants can trade in the • long term market. • Confidence level of 95%. • Planning criterion: RD = 5%. System Assured Energy (AE). AE for each hydro plant for a period of 5 years. AE1 AE2 • works like a nameplate of • energy for hydro plants. AE3 • Over estimated. • Rationing occurred for conditions better than the 5% region of Risk

A complete revision in the methodology. • Thermal plants must be considered adequately in the methodology. • Constraints must also be considered. • Navigation. • Environment. • Security volume to avoid flood. To improve the issue of AE: Very important measure to ensure the competitiveness of thermal generators.

GT1 ~ GT2 ~ Thermal Plants of PPT ~ GTN (3.3) MAIN ISSUES ABOUT GAS SUPPLY AND THERMAL PLANTS: (a) CURRENT SITUATION OF GAS SUPPLY: Bolivian Gas National Gas • PPT = 15.000 MW. • Gas Requirements for • PPT = 69 MMm3/day. • (until 2005) Argentinean Gas CURRENT SUPPLY SITUATION

(b) WHAT IS NEEDED TO ENHANCE THE EXPANSION OF NG THERMAL PLANTS: (b.1) TO INCREASE THE PIPELINE CAPACITY: Open Season for new capacity in the Existing Pipelines. • Schedule for the end of June. • PETROBRÁS will not be allowed to acquire more than 40% • of the new capacity only if there are not other candidates. • Compression stations and loops, basically.

In Operation In Operation Under Constrution Under Constrution Refineries Refineries UPGNs UPGNs Capitals Capitals CURRENT PIPELINE STRUCTURE IN BRAZIL: Pipelines: 8.071 km Transpetro: 2.397 km Coari Fortaleza Urucu Bolívia-Brasil (in Brazil): 2.583 km North Segment: 1.418 km South Segment: 1.165 km Salvador Cuiabá Cáceres Rio Grande Corumbá Uruguaiana-Porto Alegre: 615 km Segment 1: 25 km Segment 2: 565 km Segment 3: 25 km Guararema Paulínia Campos Basin Santos Basin Uruguaiana Lateral Cuiabá (in Brazil): 267km P. Alegre

GT1 GH1 ~ ~ GH2 GT2 ~ ~ ~ ~ GHN GTj (b.2) HOW TO CONSIDER THE DISPATCH OF NG THERMAL PLANTS IN THE BRAZILIAN PREDOMINANTLY HYDRO POWER SYSTEM: BRAZILIAN PREDOMINANTLY HYDRO SYSTEM • system centrally dispatched. • tight pool approach. • ONS performs an optimization • process for dispatch. • OBJECTIVE FUNCTION • to maximize overall available energy. • to minimize the probability of spillage.

A NEW PARADIGM NEEDED. • TIGHT POOL LOOSE POOL OFFER X DEMAND • PRICING SYSTEM. • NG Thermal Plants Contracts. • take or pay. • ship or pay FLEXIBILITY LEVEL DECLARATION TO ONS

The influence of creating/incentivating a “secondary market” for gas: • New Trading Arrangements. • industry. • major free consumers of potential gas. • Other types of use for gas. • usage in cities. • vehicle. • Increase of storage capacity. • “Green Taxes” for poluent fuels.

(c) IMPROVEMENTS IN REGULATION: • Unbundling of exploration, transportation in gas supply. • Expansion of transportation structure and open access with adequate pricing system. • Taxes for gas must be re-analysed.

Gas price A MEASURE UNDER ANALYSIS: TO SUBSIDIZE PART OF THE GAS PRICE FOR THERMAL PLANTS OF THE PPT. Note:*In accordance with the administrative rule MF/MME 03/2000 ** ANP Source ***In accordance with the administrative rule MF/MME 176/2001

(3) CONCLUSIONS: • A re-structuring process now happening in the Brazilian power sector. • Importance of including NG Thermal Plants in the country’s Energy Matrix. • Some challenges for enhancing the competitive model: • State-owned G companies privatization. • To minimize Government influence in the market. • To incentivate consumers to be free.

Regulatory rules for the power sector • to be improved. • rules not to be changed. A Recent Example: RULES CONCERNING SPOT PRICESWERE CHANGED SEVERAL TIMES DURING RATIONING SPOT PRICE REDUCTION. IT CAN BE PROVED THAT REGULATORY INTERVENTION IN THE MARKET TO KEEP PRICES LOW LEADS TO FUTURE DEFICITS IN GENERATION CAPACITY (RATIONING AND BLACKOUTS).

The need to improve gas supply and gas regulation. • Need to change paradigms in a predominantly hydro system, with the inclusion of NG Thermal Plants. • Need to move from tight pool operation to loose pool. Competitive process in the Brazilian system will be improved during this year.

Xisto Vieira Filho Regulatory Affairs & Planning March, 2002