1. The Brazilian Energy Market ANEEL/FERC/MoPSC/UtahPSC Workshop Brasília, August 9 th, 2005 ANEEL/FERC/MoPSC/UtahPSC Workshop Brasília, August 9 th, 2005 Edvaldo A. Santana Superintendent of Market Studies Edvaldo A. Santana Superintendent of Market Studies USEA / USAID / ANEEL Energy Partnership Program USEA / USAID / ANEEL Energy Partnership Program

2.  Regulatory Framework  Expansion Planning and Energy Auctions  The Energy Market Outline  The Brazilian Power Industry  Trading Arrangements  Emerging Challenges 2 2

3. The Brazilian Industry Long transmission links Hydro domination Plants in cascade High demand growth rate Long-term hydro regularization Long transmission links Hydro domination Plants in cascade High demand growth rate Long-term hydro regularization Public utilities Independent power producers Self-producers Co-generation Merchants Public utilities Independent power producers Self-producers Co-generation Merchants Extra-large hydro units Large thermal units Small hydro units Green energy Extra-large hydro units Large thermal units Small hydro units Green energy Originally vertically integrated Limited resources for expansion Lack of incentives towards efficiency Originally vertically integrated Limited resources for expansion Lack of incentives towards efficiency 3 3

4. Hydro 70,884 MW Small hydro (< 30 MW) 1,421 MW Thermal18,806 MW Nuclear2,007 MW Wind31 MW Partial93,149 MW Import (excl. Itaipu) 8,170 MW Emergency thermal2,050 MW TOTAL103,369 MW Hydro 70,884 MW Small hydro (< 30 MW) 1,421 MW Thermal18,806 MW Nuclear2,007 MW Wind31 MW Partial93,149 MW Import (excl. Itaipu) 8,170 MW Emergency thermal2,050 MW TOTAL103,369 MW Statistics Annual Consumption350 TWh Consumers51.2 millions Growth rate~ 4.5% year Average tariff (2004)R$ 0.1975 / kWh Annual revenue~ R$ 70 billions Transmission > 138 kV~ 173,000 km Network > 230 kV~ 70,000 km Annual Consumption350 TWh Consumers51.2 millions Growth rate~ 4.5% year Average tariff (2004)R$ 0.1975 / kWh Annual revenue~ R$ 70 billions Transmission > 138 kV~ 173,000 km Network > 230 kV~ 70,000 km

5. The Brazilian Power Systems Interconnected System installed capacity: 92,389 MW Interconnected System installed capacity: 92,389 MW Isolated Systems installed capacity: 2,810 MW Isolated Systems installed capacity: 2,810 MW 5 5 Import 8,170 MW Import 8,170 MW

6. The Brazilian Sub-systems North Northeast Cap: 15,646 MW Load: 6,531 MW avg Northeast Cap: 15,646 MW Load: 6,531 MW avg South Southeast/ Midwest Cap: 53,163 MW Load: 28,502 MW avg Southeast/ Midwest Cap: 53,163 MW Load: 28,502 MW avg 6 6 Cap: 17,144 MW Load: 7,465 MW avg Cap: 6,466 MW Load: 3,131 MW avg

7. International Exchanges Uruguay Argentina Venezuela Paraguay 72 MW 2,200 MW 70 MW 200 MW Unlike the NordPool the energy markets are not integrated 7 7

8. The Energy Market Market of Differences  DISCOs have get into long-term PPAs for 100% of their demand requirements  GENCOs have to demonstrate “selling capacity”  PPAs are registered by the market operator (quantity only)  PPAs are cleared bilaterally @ contracted prices  System operator dispatches generation resources  Market operator calculates spot prices  Generation and consumption mismatches are cleared within the market operator environment @ spot prices Market of Differences  DISCOs have get into long-term PPAs for 100% of their demand requirements  GENCOs have to demonstrate “selling capacity”  PPAs are registered by the market operator (quantity only)  PPAs are cleared bilaterally @ contracted prices  System operator dispatches generation resources  Market operator calculates spot prices  Generation and consumption mismatches are cleared within the market operator environment @ spot prices 8 8

9. Regulation Why Regulate ? Fundamentally a political-economic concept Regulation @ ANEEL Monitoring Inspection and Auditing Mediation Ruling Prevent market failures (Monopoly power; Asymmetry of Information; Externalities) Prevent market failures (Monopoly power; Asymmetry of Information; Externalities) 9 9

10. Generation – SRG  Optimisation models for dispatch and pricing; assured energy Generation – SRG  Optimisation models for dispatch and pricing; assured energy Regulation at ANEEL Transmission – SRT  Transmission tariffs; transmission standards Transmission – SRT  Transmission tariffs; transmission standards Distribution – SRD  Network distribution tariffs; reliability and quality indexes Distribution – SRD  Network distribution tariffs; reliability and quality indexes Market – SEM  Rules for spot transactions; auctions; market monitoring Market – SEM  Rules for spot transactions; auctions; market monitoring Retail trade – SRC  Free consumers; captive x DISCOs affairs; universal access Retail trade – SRC  Free consumers; captive x DISCOs affairs; universal access Economic – SRE  Energy tariffs; system fees Economic – SRE  Energy tariffs; system fees 10

11. Regulatory Framework Market rules and procedures  Agents or CCEE can propose new rules and procedures  ANEEL approves and issues new rules  Transparency reached by public hearings Market rules and procedures  Agents or CCEE can propose new rules and procedures  ANEEL approves and issues new rules  Transparency reached by public hearings Arbitrate Chamber  Solves disputes between agents  ANEEL can mediate disputes Arbitrate Chamber  Solves disputes between agents  ANEEL can mediate disputes 11

12. Trading Arrangements Long-term market Trading Arrangements Long-term market 12 Regulated Tariffs Market prices Regulated Pool Auctions Single-buyer model GENCO Captive Consumers Captive Consumers Free Consumers Free Consumers GENCO IPP DISCO Traders Free Market

13. Trading Arrangements Spot Market Trading Arrangements Spot Market Bilateral contracts (PPAs)  DISCOs have to contract bilaterally for 100% of their market requirements  PPAs have to be registered/approved by ANEEL  PPAs are registered in CCEE (only quantity)  PPAs are cleared bilaterally  ANEEL oversees “selling capacity”  CAP value to pass on to regulated supply tariffs Bilateral contracts (PPAs)  DISCOs have to contract bilaterally for 100% of their market requirements  PPAs have to be registered/approved by ANEEL  PPAs are registered in CCEE (only quantity)  PPAs are cleared bilaterally  ANEEL oversees “selling capacity”  CAP value to pass on to regulated supply tariffs Spot market  Energy mismatches (contracted vs. measured) are cleared in the spot market  GENCOs can sell up to 100% of their capacity (merchants)  Traders can buy or sell Spot market  Energy mismatches (contracted vs. measured) are cleared in the spot market  GENCOs can sell up to 100% of their capacity (merchants)  Traders can buy or sell 13

14. Products: Blocks of 1 MW avg; 8-year PPA (starting supply on 2005, 2006 and 2007) Products: Blocks of 1 MW avg; 8-year PPA (starting supply on 2005, 2006 and 2007) 17 GENCOs Selling to 34 DISCOs ~ 900 PPAs 14 Existing-energy Auctions December 2004 Existing-energy Auctions December 2004 Results: 1,325 blocks 17,008 MW avg Prices (R$/MWh): 57.51(2005) 67.33 (2006) 75.46 (2007) Results: 1,325 blocks 17,008 MW avg Prices (R$/MWh): 57.51(2005) 67.33 (2006) 75.46 (2007)

15. Products: Blocks of 1 MW avg; 8-year PPA (starting supply on 2008) Products: Blocks of 1 MW avg; 8-year PPA (starting supply on 2008) 1 GENCO 450 MW avg 1 GENCO 450 MW avg 34 DISCOs 0.43 – 57.24 MW avg 34 DISCOs 0.43 – 57.24 MW avg 34 PPAs for each GENCO 15 Existing-energy Auctions April 2005 Existing-energy Auctions April 2005 Results: 1,325 blocks 92,920 GWh R$ 88.13 / MWh R$ 7.7 Billions (8 years) Results: 1,325 blocks 92,920 GWh R$ 88.13 / MWh R$ 7.7 Billions (8 years)

16. Spot Market Evolution 16

17. Average Spot Prices Southeast / Midwest Average Spot Prices Southeast / Midwest 17

18. Free Consumers Consumers Choice June 2003: 292 GWh per month June 2003: 292 GWh per month June 2005: 6,935 GWh per month June 2005: 6,935 GWh per month 18

19. Government Ensure generation and transmission expansion Guarantee the reliability and quality of supply Environmental licensing Government Ensure generation and transmission expansion Guarantee the reliability and quality of supply Environmental licensing Emerging Challenges ANEEL Rules and regulations for new-energy auctions Increase transparency and credibility to attract investments Financial guarantees for project finance (investment in new capacity) Market monitoring Tariffs review ANEEL Rules and regulations for new-energy auctions Increase transparency and credibility to attract investments Financial guarantees for project finance (investment in new capacity) Market monitoring Tariffs review 19

20. New-energy Auctions Supply adequacy in the long term Generation Expansion Planning 20 Emerging Challenges (cont.)

21. New-Energy Auctions Single-buyer-like model DISCOs inform demand requirements System demand result from aggregating DISCOs´ needs EPE propose list of candidate projects Least-cost-based procurement Winner of the auction will be awarded concessions (or authorization) and PPAs Single-buyer-like model DISCOs inform demand requirements System demand result from aggregating DISCOs´ needs EPE propose list of candidate projects Least-cost-based procurement Winner of the auction will be awarded concessions (or authorization) and PPAs  Complimentary to the generation expansion planning 21  Scheduled to happen late December 2005

22. http://www.aneel.gov.br Telefone: 0800 727 2010 Fax: (61) 3426 5705 institucional@aneel.gov.br http://www.aneel.gov.br Telefone: 0800 727 2010 Fax: (61) 3426 5705 institucional@aneel.gov.br 22