Brazilian Electricity Market

Workshop: Wholesale Electricity MarketsHurdles to Overcome

Kellogg School of ManagementNorthwestern University

January 30, 2013

Luiz Eduardo Barata FerreiraChairman

CCEE - Electric Energy Commercialization Chamber

Agenda

Main Facts and Figures about Brazil

Update on Brazilian Electricity Market Operation

Update on Brazilian Electricity Market Design

Technical Exchange CCEE – EPEXSPOT – ECC

Main Facts and Figures about Brazil

Main Figures and Facts about Brazil

BRAZILTerritorial Extension 8,514,876 km²Population (Aug 2012) 193.9 millionGDP 2011* US$ 2.221 trillion

ELECTRICITY SECTORInstalled capacity (Dec 2012) 121 GW

Hydro 66% Thermal 27%

Transmission lines 103,362 km

Consumption (Nov 2012) 59,187 average GWCaptive Market: 73.8 % Free Market: 26.2 %

NUMBER OF MARKET PARTICIPANTSGenerators: 514Traders: 149

Total (Jan 2013): 2,364

Distributors: 47Free Consumers: 1,654

(*) US$ = R$1.865 on 12/31/20114

Source: ONS

Update on Brazilian Electricity Market Design

5

1) Regulation of Retail Trading

2) Balance Responsible Entity Proposal

3) Ex-ante Nomination and Price Transparency

4) Federal Government Tariff Reduction Initiative

1) Regulation of Retail Trading (Public hearing by the regulator [ANEEL] closed on July 13, 2012)

Objective: to simplify the operation of NCRE* consumers and small generators at CCEE that don’t have insufficient know-how and infrastructure for managing contracts and operations at CCEE

The retailer will be responsible for portfolio management and operations at CCEE on behalf of the small agents

Accounting and settlement will be consolidated by the retailer

Update on Brazilian Electricity Market Design

6(*) NCRE: Non-Conventional Renewable Energy

2) Balance Responsible Entity Proposal

Objective: to improve the collateralization methodology for settlement of the spot market

1st phase: concluded in January, 2013Long contract position that exceeds the operational limit will automatically not

be accepted, avoiding an uncollateralized short position in the spot market

2nd phase: 2nd semester 2013 (estimate)The credit risk of the agents will be assessed by financial institutionsFinancial institutions will guarantee the agents’ debts up to their operational

limits regarding the spot marketThe operational limit will be predetermined by CCEE and approved by ANEEL

Update on Brazilian Electricity Market Design

7

3) Ex-ante Nomination and Price Transparency

Objective: the new regulation, by order from Ministry of Mines and Energy in August 2012, to be in force in July 2013, was designed to improve default risk management and enhance information symmetry

Obligation to nominate the free market bilateral contracts before the energy delivery (ex-ante), in a weekly basis

Obligation of reporting price information to CCEE, allowing the creation of price references in the free market (price indexes and forward curve)

Update on Brazilian Electricity Market Design

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4) Federal Government Tariff Reduction Initiative – Bylaw 12,783 (January, 2013)Objective: reduction in end-user tariffs expected to be around 20%

I. Renewal of concessions in the electricity industry – Generation, Transmission and Distribution Conditions for renewal of generation concessions:

Regulated prices (reduction estimation from US$ 44.36 to US$ 14.79) All the energy will be allocated to distributors in long term contracts

(regulated market) Representation of Renewals

Generation: 13% of the current installed capacity (15,279 MW) Transmission: 67% of the national interconnected system Distribution: 35% of the regulated market

II. End or reduction of some charges of the electricity industry

Update on Brazilian Electricity Market Design

9

Update on Brazilian Electricity Market Operation

10

1) New approach for Market Surveillance

2) New Accounting and Settlement System

3) Liquidity in the Brazilian Electricity Market

Update on Brazilian Electricity Market Operation

11

1) New approach for Market Surveillance

CCEE is restructuring its market surveillance area and processes, reinforcing that this activity is essential for a smooth functioning of the wholesale market

Monitoring the market trading/participants behavior and stress-testing analyses

Perceived atypical transactions are placed under deeper scrutiny for appropriate actions

Update on Brazilian Electricity Market Operation

12

2) New Accounting and Settlement System

Replacement of an obsolete system (+ 10 years)

Innovative solution for managing the commercial operations of the electricity market

Architecture focuses on security of information treatment, speed in the accounting processes and flexibility to address regulatory changes and growth of the electricity sector

3) Liquidity in the Brazilian Electricity Market

CCEE launched the 1st Monthly Liquidity Report in August 2012, using the churn ratio as a measure of overall levels of liquidity

Accounting and Settlement System

nconsumptio yelectricit Monthlytraded volume Monthlyrate Churn

Comparison of Electricity Markets’ Churn Rates

13

Liquidity of the Brazilian and Colombian Electricity Markets:Far from the Germany and Nord Pool benchmark marketsActions to improve the liquidity are recommended

Electricity Markets’ Churn Rates Germany

Nord Pool

GB

Netherlands

France

0

2

4

6

8

10

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Brazil

Colombia

Source: OFGEM/CCEE

Technical Exchange CCEE – EPEXSPOT – ECC

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Technical Exchange CCEE – EPEXSPOT – ECC

CCEE has partnered with the European Power Exchange (EPEXSPOT) and the European Commodity Clearing AG (ECC) for technical exchange formalized by a Memorandum of Understanding (MoU) signed in February 2012

Objectives

Improving the collateralization methodology of the spot market

Studying trading platform design and clearing solutions

Enhancing quality in price formation

Deliverable Documents

Feasibility study developed by CCEE – EPEXSPOT – ECC

White Paper with a prospective vision to be presented to the Brazilian authorities and stakeholders – launched in November 2012, in Salvador, Brazil

Conceptual roadmap containing an indicative timeline to improve the Brazilian electricity market (under construction)

15

Technical Exchange CCEE – EPEXSPOT – ECC

White Paper – Building a Smart Brazilian Electricity Market

16

CompetitivenessFinancial security

Sustainability

Transparency

Organized market

Neutrality Symmetry ofinformation Liquidity

• Find out complete version of the White Paper: www.ccee.org.br

www.ccee.org.br

Thank you!