Power Engineering - Brazilian Minister outlines pool without single buyer

9 July 2003 - Brazil's mines and energy minister Dilma Rousseff Monday outlined the concept for the new electric power sector model based on a pool system without a single buyer, which she said will provide cheap electricity for consumers and drive down financing costs, reports Business News Americas.

Full details of the model should be available towards the end of this month, when it will be presented to the national energy policy council (CNPE), Rousseff told the Infra2020 conference in Sao Paulo. The provisional date for bringing the new model into play would be January 2004.

The ministry wants to end the short-term price signals from the wholesale market, MAE, and replace it with a 20-year centralized plan for supplies based on demand expectations, she said.

Production in 2002 was 347TWh, and in the best-case scenario of GDP growth of around 5-6% a year, demand is likely to double by 2012, she said, adding that the country faces possible supply problems in 2007.

The government also wants to keep the cost of electricity down, as this is one of Brazil's significant competitive advantages, Rousseff said.

By providing distributors with a generation pool, they will be able to charge consumers the average price for the cost of electric power, reverting the previous administration's move towards pushing the consumer price of electric power up to the marginal cost of a new plant, she added.

The minister plans to tender concessions for new power generation plants to the bidder that offers the lowest price for electric power production. The winner will be awarded a concession to build the plant as well as a long-term power purchase agreement (PPA) with each of the 64 Brazilian distributors, instead of having one single buyer common in other pool systems such as Mexico.

A new entity would manage the contracts between generators and distributors, taking this responsibility away from the wholesale power market (MAE).

This splits the risk amongst the whole system and will allow distributors to offer a price based on the average cost of power, the minister said.

Existing plants will be able to opt into the new pool system or remain as independent power producers signing bilateral contracts, according to the ministry's executive secretary, Mauricio Tolmasquim.

Under this initial proposal, the multi-buyer system would be backed by a fund made up of guarantees left by the distributors at the auction, Rousseff said. The actual percentage has not yet been determined, but the distributors will place a fixed amount into a fund that will pay out to the generator if a distributor defaults on payments, she said.

The fund could also receive revenues from the existing emergency thermoelectric charge, currently used to pay for emergency thermoelectric plants but which runs out in 2004, she said. This would be turned into a permanent charge that would be diverted to the new fund.

The government plans to set up a second "hedge fund" to provide guarantees for financing construction by protecting investments against exchange rate and interest rate variations, Rousseff said. This fund would allow national and international sources of finance to be mixed, along with resources from Brazil's national development bank BNDES.

"We want to create a cushion that amortizes the fluctuations of exchange and interest rates," she said, adding that this would create a "virtuous cycle," by improving the investment conditions, and thus the perception of risk, and reducing the spreads.

These two funds should reduce the risk of investments in the electric power sector and so drive down financing costs, Rousseff said. It will allow the country to focus on its hydroelectric power potential but bring in other sources, such as thermoelectric power, to complement the system, she said.

And just as the risk will be lower, so will the rates of return, Eletrobras chairman Luiz Pinguelli Rosa said. Under a new focus of what he called fair remuneration, "there's no electric Father Christmas," he said.

Joao Carlos Albuquerque, commercial director of Sao Paulo distributor Elektro, expressed concern that the new model did not address the subjective nature of regulations for the distribution sector.

Tolmasquim said the broad regulations for distributors were in place, and that the ministry does not plan to address specific issues in this review of the model.

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