1. gp / mls - jfca Brazilian Development Bank BNDES BNDES - Brazilian Development Bank 18 th World Energy Congress Buenos Aires, October 24, 2001 Francisco Gros President of BNDES 18 th World Energy Congress Buenos Aires, October 24, 2001 Francisco Gros President of BNDES Imperfections in the Energy Market: The Brazilian Crisis and the Measures Adopted for Overcoming It Imperfections in the Energy Market: The Brazilian Crisis and the Measures Adopted for Overcoming It

2. gp / mls - jfca Brazilian Development Bank BNDES  Brazilian Electricity Sector Basic Characteristics  Electricity Sector Model  2001 Crisis  Plan of Action  Brazilian Electricity Sector Basic Characteristics  Electricity Sector Model  2001 Crisis  Plan of Action INDEX

3. gp / mls - jfca Brazilian Development Bank BNDES Brazilian Electricity Sector Basic Characteristics Brazilian Electricity Sector Basic Characteristics

4. gp / mls - jfca Brazilian Development Bank BNDES  Hydroelectric: 93.2 %  Conventional thermoelectric: 4.2 %  Nuclear: 1.6 %  Imported: 1 %  Hydroelectric: 93.2 %  Conventional thermoelectric: 4.2 %  Nuclear: 1.6 %  Imported: 1 % Electricity sector basic characteristics in Brazil SourcesSources

5. gp / mls - jfca Brazilian Development Bank BNDES  Present total generating capacity of 74,000 MW, for an estimated demand of: Before the crisis Today 44,000 MW (average) 33,000 MW (average) 56,000 MW (peak) 43,000 MW (peak)  Present total generating capacity of 74,000 MW, for an estimated demand of: Before the crisis Today 44,000 MW (average) 33,000 MW (average) 56,000 MW (peak) 43,000 MW (peak) Electricity sector basic characteristics in Brazil

6. gp / mls - jfca Brazilian Development Bank BNDES 1995 2001 98 % 37 % Public sector participation on distribution Public sector participation on distribution Private Market for Distribution State with privatized distribution systems

7. gp / mls - jfca Brazilian Development Bank BNDES Public sector 78 % Public sector 78 % Private Sector 22 % Private Sector 22 % Present installed capacity Generation: New Private Market Cesp Paranapanema & Cesp Tietê Cesp Paranapanema & Cesp Tietê Cachoeira Dourada Gerasul

8. gp / mls - jfca Brazilian Development Bank BNDES Brazilian Electricity Sector Model

9. gp / mls - jfca Brazilian Development Bank BNDES ELECTRICITY SECTOR MODEL (1995) Basic Principles ELECTRICITY SECTOR MODEL (1995) Basic Principles  Market-based investments and privatization  Competition (generation and trade) and regulation (transmission and distribution)  Independent regulatory body to ensure adequate balance between needs of utilities and consumers and high quality of services  Diversification of the energy matrix  Market-based investments and privatization  Competition (generation and trade) and regulation (transmission and distribution)  Independent regulatory body to ensure adequate balance between needs of utilities and consumers and high quality of services  Diversification of the energy matrix

10. gp / mls - jfca Brazilian Development Bank BNDES  Transition  Regulation  Coordination  Transition  Regulation  Coordination ELECTRICITY SECTOR MODEL Risks ELECTRICITY SECTOR MODEL Risks

11. gp / mls - jfca Brazilian Development Bank BNDES Transition  Transition Long and not synchronized Privatization not preceded by the implementation of regulatory rules Partial implementation of the privatization process (on the generation side) Transition  Transition Long and not synchronized Privatization not preceded by the implementation of regulatory rules Partial implementation of the privatization process (on the generation side) ELECTRICITY SECTOR MODEL Risks ELECTRICITY SECTOR MODEL Risks

12. gp / mls - jfca Brazilian Development Bank BNDES Regulation  Regulation Uncertainties associated with the regulatory framework, e.g. environmental licenses Non-enforcement of clauses of pass-through costs Indefinition concerning methodology applicable to the Ordinary Revision of the concession contracts Difficulties on the operation of the wholesale market of energy Regulation  Regulation Uncertainties associated with the regulatory framework, e.g. environmental licenses Non-enforcement of clauses of pass-through costs Indefinition concerning methodology applicable to the Ordinary Revision of the concession contracts Difficulties on the operation of the wholesale market of energy ELECTRICITY SECTOR MODEL Risks ELECTRICITY SECTOR MODEL Risks

13. gp / mls - jfca Brazilian Development Bank BNDES Coordination  Coordination Need to articulate the reform of the three main segments of the energy sector: natural gas, electricity and oil Coordination  Coordination Need to articulate the reform of the three main segments of the energy sector: natural gas, electricity and oil ELECTRICITY SECTOR MODEL Risks ELECTRICITY SECTOR MODEL Risks

14. gp / mls - jfca Brazilian Development Bank BNDES 2001 Crisis

15. gp / mls - jfca Brazilian Development Bank BNDES  Immediate cause: extremely unfavorable rainfall patterns in 2000/1 San Francisco River Basin: worst year since 1930 Grande River Basin: 4th worst year since 1930  Other causes: Independent commission created to investigate the crisis’ origins concluded that there were significant delays in implementing new and on-going projects (41% of the storage capacity of Northeast, Southeast and Midwest regions)  Immediate cause: extremely unfavorable rainfall patterns in 2000/1 San Francisco River Basin: worst year since 1930 Grande River Basin: 4th worst year since 1930  Other causes: Independent commission created to investigate the crisis’ origins concluded that there were significant delays in implementing new and on-going projects (41% of the storage capacity of Northeast, Southeast and Midwest regions) 2001 Crisis

16. gp / mls - jfca Brazilian Development Bank BNDES Reservoirs levels Southeast/Midwest and Northeast - 1997-2001 (% capacity) Reservoirs levels Southeast/Midwest and Northeast - 1997-2001 (% capacity) 12,8 0 0 10 20 30 40 50 60 70 80 90 100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1997 1998 1999 2000 2001

17. gp / mls - jfca Brazilian Development Bank BNDES  Other causes (cont.): Insufficient private investments in generation due to the lack of correct signaling Complexity of the transition from the state-model to the competitive- model Lack of policy for maintaining safety back up capacity of generating thermal plants  Other causes (cont.): Insufficient private investments in generation due to the lack of correct signaling Complexity of the transition from the state-model to the competitive- model Lack of policy for maintaining safety back up capacity of generating thermal plants 2001 Crisis

18. gp / mls - jfca Brazilian Development Bank BNDES Generation projects: Private sector x Public budget Generation projects: Private sector x Public budget Projects Installed Energy (MW) Private Public  Cost US$ mm US$/ MW US$/ MW US$ mm US$/ MW US$/ MW Serra da Mesa 1.2931.2937797796036031.6901.6901.3071.307 –54% Itá 1.4501.4506206204284281.3991.399965965 –56% Machadinho 1.1401.1405145144514511.4611.4611.2821.282–65%–65% Total Total 1.9131.913 4.5504.550 –58%–58% Source: BNDES and Plano Decenal de Expansão/ELETROBRAS

19. gp / mls - jfca Brazilian Development Bank BNDES Plan of Action for Overcoming the Crisis Plan of Action for Overcoming the Crisis

20. gp / mls - jfca Brazilian Development Bank BNDES 1) 20% reduction in consumption, as required by the National System Operator 2) Emergency program for immediate increase in energy supplies 3) Structural program for more durable increase in energy supplies 4)Revitalization of the model for the electricity sector 5)Conservation and Rationalization 1) 20% reduction in consumption, as required by the National System Operator 2) Emergency program for immediate increase in energy supplies 3) Structural program for more durable increase in energy supplies 4)Revitalization of the model for the electricity sector 5)Conservation and Rationalization PLAN OF ACTION

21. gp / mls - jfca Brazilian Development Bank BNDES  20% reduction in consumption, in reference to May-July 2000 average, as required by the National System Operator  Results: Extraordinary enrollment of the population Reservoirs accumulation above expectations (close to 8% above the estimated levels in the Southeast) Dealing of consumption rights reduced the economic impacts of rationing  20% reduction in consumption, in reference to May-July 2000 average, as required by the National System Operator  Results: Extraordinary enrollment of the population Reservoirs accumulation above expectations (close to 8% above the estimated levels in the Southeast) Dealing of consumption rights reduced the economic impacts of rationing 1) Reduction of the Consumption

22. gp / mls - jfca Brazilian Development Bank BNDES 2) Emergency Supplies Aims  Obtain additional energy supplies, mostly of foreign origin, on a temporary basis  Set up a public energy trader to: buy electricity from independent producers lease or buy generating equipment purchase the consumption rights of larger consumers  Obtain additional energy supplies, mostly of foreign origin, on a temporary basis  Set up a public energy trader to: buy electricity from independent producers lease or buy generating equipment purchase the consumption rights of larger consumers

23. gp / mls - jfca Brazilian Development Bank BNDES  New energy sources: operating in 4 to 12 months  Mobile thermoelectric plants: ships, containers, trucks and other equipment  Fuel: oil and diesel  Cogeneration and biomass (gas)  2 to 3 year contracts : “ bridge” to return to normalcy  New energy sources: operating in 4 to 12 months  Mobile thermoelectric plants: ships, containers, trucks and other equipment  Fuel: oil and diesel  Cogeneration and biomass (gas)  2 to 3 year contracts : “ bridge” to return to normalcy 2) Emergency Supplies Characteristics

24. gp / mls - jfca Brazilian Development Bank BNDES 200120022003Total HYDROELECTRIC ( 22 ) 1,016 3,513 3,163 7,692 THERMOELECTRIC ( 32 ) 1,630 3,768 5,409 10,807 COGENERATION 160 300 500 960 WIND / SOLAR 50 500 1,050 IMPORTS ( 6 ) 1,048 900 800 2,748 TOTAL (MW)3,9519,381 10,77224,104 TRANSMISSION LINES - Km 5051,1914,5306,226 SUBSTATION 3,525 MVA Supply Increase TYPE ( Projects ) SMALL PLANTS 47 400 847847 3) Program for Increasing Energy Supplies

25. gp / mls - jfca Brazilian Development Bank BNDES Investment Forecast (2001 - 2003) 3) Program for Increasing Energy Supplies Private HYDROELECTRICHYDROELECTRIC THERMOELECTRIC IMPORTED ENERGY TRANSMISSION NETWORK OTHER SOURCES (*) TOTAL Obs: The above figures include work carried out and still to be performed under the Electicity Emergency Strategic Program (*) Cogeneration, wind, solar and small hydro plants Type of Project Estimated Value (2001 - 2003) (US$ million) 2,736 1,243 3,978 4,558 2,755 7,314 488 - - 851 432 1,284 2,116 178 2,294 10,7494,60815,358 StateTotal

26. gp / mls - jfca Brazilian Development Bank BNDES  Economic cues to stimulate private investment  Government management: eliminate overlaps and gray zones among public agencies  Action to correct market failures  Clear and transparent rules of the game  Elimination of regulatory uncertainties  Solution to pending issues (pre and post-crisis) FOCUS 4) Committee for the Revitalization of the Electricity Sector Model (under BNDES coordination) 4) Committee for the Revitalization of the Electricity Sector Model (under BNDES coordination)

27. gp / mls - jfca Brazilian Development Bank BNDES  Objectives  Efficient allocation of energy resources / environmental preservation  Establishment of maximum levels of specific consumption and minimum levels of energy efficiency for machines and equipment FOCUS 5) 5) Conservation and Rationalization

28. gp / mls - jfca Brazilian Development Bank BNDES  Specific Program for the support of small and medium enterprises Information Information Capacitation Capacitation Consultant services Consultant services Credit Credit Management and assessment Management and assessment FOCUS 5) 5) Conservation and Rationalization

29. gp / mls - jfca Brazilian Development Bank BNDES www.bndes.gov.br BNDES – Brazilian Development Bank BNDES – Brazilian Development Bank BNDES – Brazilian Development Bank Presentation prepared by the Office of the President of BNDES