1. World Bank Workshop on Electricity Supply Security vs. Intermittent Renewable Energies A tale of two systems: Brazil and Colombia Jaime Millán February 18, 2009 1

2. Presentation The Brazilian Energy Auctions in a Nutshell Brazilian Treatment of Interruptible Energy Sources Brazil and Colombia Compared Conclusions 2

3. Presentation The Brazilian Energy auctions in a nutshell Brazilian treatment of interruptible energy sources Brazil and Colombia compared Conclusions 3

4. Motivation No more power shortages and affordable tariffs for the regulated market –Need to gain distance from Cardoso’s reform –But acknowledging the need for new private investment and some sort of market –Develop hydro potential and local entrepreneurs –Acknowledgment of synergies of joint operation of hydrothermal system 4

5. Two Contractual Environments ACR Regulated DISCOS Captive customers ACL Free Large consumers Self-generators ACL “controls” ACR prices Short- term Market Generators Free contracts Small activity Auctions Existing Energy New Energy Distributed Generation Price defined by model 5

6. ACR Two type of contracting Old Energy and New Energy with different terms but procured in auctions organized by CCEE ( Market Operator) annually Old Energy Distributors and old generators participate in auctions 1 year planning time, 5 to 15 years delivery time New Energy: – 3 and 5 years planning time and 20 years Forward Contracts with physical backing – Thermal projects call options bid Premium and Strike price compete with hydro –Special Hydro Projects –Developers compete for hydro projects designed by EPE (Planning government office) and with cleared EIA –All new energy is allocated prorated to distributors according to their needs. Information http://www.ccee.org.br 6

7. ACL Large Consumers and self-generators Load is free to sign bilateral contracts (?) Self generators can participate in ACR auctions Special projects participate in ACR and set up a portion for ACL Contracts settled in the Short term market at PLD 7

8. Several auctions Old Energy auctions –Regular auctions –Adjustment auctions Max1% of load New Energy auctions –3 and 5 years ordinary auctions –Renewable –Special projects –Reserve auctions Biomass Wind Distributed energy 8

9. Product Firm energy – Hydro defined by the regulator as the incremental energy to the system with a reliability based on hydrology and joint operation of the hydrothermal system –Thermal is energy plant is able to deliver in a continuous basis –Biomass is the energy produced in the 7 harvest months –Wind total annual energy 9

10. Contracts New hydro contracts are forward (“quantity”) –Generator assumes price and quantity risks (difference between production and contracted energy) New thermal contracts are “call options” (“Availability”) –generators offer a fix amount (“premium”) and variable cost (“strike price”). Distributors pay premium and compensates cost when option is exercised 10

11. Evaluating “Call Options ” cost Unit Price Pd (R$/MWh): Pd = (Fd + EO(CV) + EC(CV)) (R$/year) / E(CV) (MWh/year) + ∆K Where: –Fd is (“premium”) –EO(CV) is expected value of annual operation co; EC(CV) is expected value of energy bough/sold at the spot market; and E(CV) is the firm Energy of the Project –∆K is LNG Adjustment –All values depend on the strike price CV and are computed by the government before the auction takes place 11

12. New Energy: Procedure Distribuitors inform their contractual needs Each generators to sign bilateral contracts with all distributors –Contracted amounts cannot be reduced A “Menu” of generation alternatives is prepared – Hidro (concesions prepared by EPE) –Agents presented projects, (thermal, renewables or interconexions) –Each project has a firm energy Two Stage auction. 1. Hydro concesions; 2 Technology competition Government to produce environmental licenses for Hydro projects in advance! 12

13. 2 Stage Auction Hydro candidates bid a contract price Projects are stacked until energy offered tops demand Winners receive a “pre-concession” Projects with “pre-concession” participate in stage 2 –Must offer energy at the price resulting in pre-concession – “pre-concession” becomes a concession only if energy is contracted in stage 2 Stage 2 (Hydro vs Thermal) –Hydro and Thermal compete to meet demand at least cost –Initial run, unit and discriminatory Administrative definition of quantities to H15 and H30 13

14. Presentation The Brazilian Energy auctions in a nutshell Brazilian treatment of interruptible energy sources Brazil and Colombia Compared Conclusions 14

15. Renewable Energy PROINFRA. To buy 3300 MW in equal quotas for Small Hydro (SH), Biomass, and Wind to be bough by Eletrobras was unsuccessful In 2007 auction for renewable with different caps for each; SH, Wind and Biomass At present SH can compete in phase 1 Hydro auctions and Biomass and Wind in phase 2 Special auction for reserve energy –for Biomass in 2008 –Wind in 2009 15

16. Firm Energy for interruptible sources in Brazil Biomass and Wind: Declared by the supplier for every month. –Biomass declare for the 7 months bagass is available High penalties for not delivering Obligation to report wind data on at least one complete year in the past five years 16

17. Reserve auctions Held for delivery in 1 to 2 years to accommodate changes in positions and/or provide a security buffer Technology Driven: Special features to accommodate intermittent supply, connections to the grid, and uncertainty in resource (wind) –May increase cost without a proportional increase in security 17

18. The new wind reserve auction MEM Open consultations on February 10 (Portaria # 52) Product is total energy in year independently of when it is produced 20 year CER contract starting in January 2012 Generators can pull resources for connection to the grid Handling of uncertainties in production 18

19. Handling of uncertainties in production –Contract is divided Five four year periods to adjust quantity to real production + balances <10% passed to next period or valued at Min {VR, Average PLD} + negative <10% valued at VR Quantity for next period is adjusted to the valued observed in the precious capped by the original quantity –Annual balances up to 10% from contract annual quantities are passed to next year Negative balances >10% are valued at 1.1 contract price (VR) and paid in 12 monthly quotas Positive balances > 10% at Min { VR, Average PLD} 19

20. Presentation The Brazilian Energy Auctions in a nutshell Brazilian treatment of interruptible energy sources Brazil and Colombia compared Conclusions 20

21. Energy Auctions prices in R$/MWh Source: PSR 21

22. 1ª New energy auction: 28.800 Gwh/year, 2009 y 2010 Dic 2005 Natural gas 22

23. New Energy Auction 2006 A-3 A-5 14734 GWh/year 9671 GWh/year 25% SOE 23

24. Small renewable“A-3” 2007 Limited participation 20% of registered plants (2,800 MW) 402 GWh/Año SH 1226 Gwh/Year Biomass 24

25. New Energy Auction 2007 A-3 A-5 11423 GWh/year 20253 GWh/year 100% Oil Hydro Coal Natural Gas Oil 25

26. 2008 Auctions Reserve Auction –8.800 GWh Year of biomass contracted Less than expected –Price between 90 and 100 $/Mwh New Energy A-3 and A-5 mostly fossil fuel generation Special Projects Santo Antonio and Girau bring new hydro energy at low prices 26

27. Prices Santo Antonio RS78 Jiraud RS71.80 ACL 2010 RS175 ACL 2011 RS 135 27

28. Colombia CC at 13.998 usd/mwh 1 N, 2 E 1N, 5 E 40 Existing plantsplantas existentes, The existing part of 2 special plants 3 new plants, 1 new agent 6 hydro plants in the GPSS 28

29. BrazilColombia Objectives Reliability and affordability Facilitate use of hydro potential and local investors Small renewables treatment evolves Efficiency and reliability Nondispatchable < 20 MW do not participate in the MEM Contracting Mandatory 100% of demand for distributors (ACR) and Free (ACL) Auctions for; Existing, new, reserve, adjustment and distributed ISO contracts Firm Energy Options covering the whole demand in two actions Regular GPPS Bilateral voluntary forward contracts Product contracts for Energia Garantizada with physical backing. Hydros: Forward Contracts; Fuel: Call Options. Different products but compete in 2 phase auction Firm energy Options OEF, Planning Period New energy, 3 and 5 years, Old energy, 1 year, Reserve. 1 to 2 Existing 1 year; New, 3 years; GPSS>3 years Commitment Period New energy: Hydro, 20;thermal 15; reserve 20 Old energy: 5-15 New Up to 20;Existing 1;Special 10 Procurement Hybrid Auctions for old, new and adjustment energy Descending Clock for OEF Closed envelope GPPS with a cap In a nutshell 29

30. Product definition facilitate treatment of intermittent resources in Brazil Colombia: Availability of Energy during Scarcity Event –Firm Energy for the Reliability Charge (Energía Firme para el Cargo por Confiabilidad or ENFICC): maximum energy that a generation plant (Hydro or Fuel) is able to deliver on a continual basis during a year. Brazil (Energía Garantida): Incremental Energy that the plant contributes to the System when jointly operated with a given probability of been exceeded. –When intermittent are a small share large reservoir capacity smooth needs for availability on a continuous basis 30

31. Presentation The Brazilian Energy auctions in a nutshell Brazilian treatment of interruptible energy sources Brazil and Colombia Compared Conclusions 31

32. Conclusions Both countries managed to procure new resources and avoid shortages but: –Brazilian goal of bringing large amounts of new hydro has been delayed by environmental hurdles –Colombian was able to contract large amounts of hydro but goal of bringing new players was not met or barely met –Brazilian Old and New energy managed to moderate prices but renewal of concessions poses a new threat Processes are work in progress and subject to improvements 32

33. Conclusions… Intermittent Energy sources participation facilitated in Brazilian auctions but limited by cost of resource More difficult to handle intermittent in Colombia within the framework of the CC, limited hydro storage –One possible solution may be to procure on a limited basis reserve energy following the Brazilians Two lessons –Think in the objectives before you come with a procedure –Think again 33

34. 34 Thank you for your attention Jaime Millán millanuribe@gmail.com