Brazil has a large power system heavily dependent on hydroelectricity. Starting in the late 1990s, the power sector underwent major reforms introducing competition, privatization, and cost-recovery tariffs. Over 15 years, investments and private capital increased while quality of service improved, showing the reforms have been successful overall despite some challenges. However, licensing new hydro plants has become difficult due to lengthy evaluation processes and lack of coordination between environmental and energy goals. Better integration of power planning and demand side management could help make the most of Brazil's hydro resources to ensure a sustainable and reliable energy future.

1. Brazil's energy capacity and future needs Fall 2009 Minerva Program Luiz Maurer The World Bank Washington – November 13, 2009 V3.0

2. This presentation will address the following topics Power system in Brazil The reform process – roller coaster? Investments, competition, quality of service Sustainability issues Hydro licensing Demand response Final remarks

3. Brazil has a large power system, heavily dependent on hydroelectricity 110 GW 400 TWh 85% Hydro Estimated potential of 260 GW Extensive network, four areas

4. Starting in late 90’s, power sector has seen major institutional and regulatory reforms Competition in generation and retail, with all concessions granted competitively Energy auctions mandatory to captive markets Most D assets privatized Most new G and T assets built by private sector Cost-recovery tariffs, via a structured review process Attraction of private capital, the investor by default – domestic and foreign

5. Over almost 15 years – roller-coaster or bumpy road? Certainly the latter Success of the reform due, inter alia, to a mechanism of adjustments, sometimes by trial and error With some hiccups FCH – Lei das Concessoes and new (now old) model in 1998 Second term of FHC – reforms stalled Apagao in 2001 – but it never happened Lula’s plan announcing radical changes and scaring investors Followed by pragmatism and continuous improvements – not by ideology

6. What makes us feel confident? Has Brazil been able to increase investments? And attract private capital? Has the quality of service improved? Has competition contributed to reduce costs? Is the model sustainable? Are lights still on? What are the areas for improvement?

7. Investments in generation and transmission increased in response to the first wave of reforms

8. Quality of service exhibited remarkable improvement

9. Brazil - able to attract largest share of private resources among developing countries

10. For several years Brazil got the largest share of the pie …

11. A perceived a good investment climate

12. BOO in Transmission – a success

13. Energy Auctions – a robust procurement mechanism

14. Resulting in competitive prices

15. Sustainability checklist Ability to live with its own means If tariffs are not cost reflective – sooner or later problems will emerge, system will fall apart, or public debt escalate How to provide services to those with low ability to pay? Subsidies for access and lifeline rates necessary, but others should be closely examined – e.g. subsidies that foster wasteful consumption Sooner or later will hamper affordability and quality Poor will be the first to suffer consequences Subsidies in countries with low access – regressive taxation Sustainability also encompasses consumption of natural resources and deterioration of the environment

16. Wake up call – it has not been easy to tap into the cheap hydro potential Clear manifestation - getting licenses for new hydro plants has become a “nightmare” Long delays – averaging one year, but may be much longer Uncertainty and subjective Constraining hydro generation options for expansion Gap has been bridged by expensive, polluting thermal generation – e.g. profile in the first energy auctions

17. A recent World Bank study has revealed multiple layers of complexity Inventory studies not up-to-date Confusing institutional roles between players, states, Federal government agencies Cumbersome, lengthy evaluation process by IBAMA - oftentimes biased by extremism Excessive power from Public Prosecutor’s Office Lack of policy trade-offs between environmental concerns and need for energy Difficult to address in the absence of an efficient allocation process, grounded on economics Projects examined individually – not strategically

18. And recommended an integrated approach to enhance power sector planning

19. Identifying clear opportunities to a more effective planning process

20. The absolute cost of compliance is not a major hurdle – but uncertainty may scare investors in generation Total Costs (US$ 130/kW) Mitigation Costs (US$18/kW)

21. A particular challenge is to develop hydro resources in the Amazon region There is a baggage on poor developments in the region Projects implemented without due concern for environmental aspects – e.g. Balbina Hydro (serving the city of Manaus) Old project design only to maximize generation (e.g. Kararao, in the Xingu River) Starting in the 80’s enhanced concerns, democratic process and sector capacity (Eletrobras) to deal with environmental and social issues There are “good and bad projects”– a change in mindset has enabled the country to find (and improve) good ones 6 GW on Madeira River recently granted, very friendly Project in the Xingu river completely revisited, much more friendly Trade-offs between output and impact mastered by the private sector in the Uruguay river (Ita & Machadinho)

22. What about the demand side? an oftentimes neglected part of the equation We refer specifically to the use of energy efficiency and demand side management to make the system more … Affordable – cheaper to bridge the supply demand gap Reliable – helping the ONS build virtual reserves and deal with contingencies This is an area where Brazil could do more – ongoing discussions by Aneel under the umbrella of smart grid, smart metering

23. Demand side should be seen as a seamless part of the effort to bridge the supply demand gap

24. The 2001 Power Rationing – a rich experience

25. The 2001 Power Rationing is a best practice on the use of demand response

26. Final remarks … Brazil is blessed with hydro resources Cheap, competitive, can be exploited in an environmentally friendly way One of the few countries where the power sector is not one to blame for CO2 emissions Reforms in the power sector have been successful Achieved major goals Continuous improvements Has worked toward a healthy, contract sanctity environment Capital, quality of service, competitiveness What Brazil has achieved so far seems to be sustainable Areas for improvement Continuous examination of the pillars of sustainability, including commercial discipline Cost reflective tariffs, as much as possible Better alignment between environmental, social and energy policy goals, to unveil the hydro potential Count (and use) the demand side of the equation to make energy more reliable and affordable

27. And the Black Out – shall we change this presentation? No