As you may recall, two years ago I wrote to you what I included in the post Questions and Answers About Reregulated Energy Contracting Part 3. Today I see that deregulation has led Brazil into the typical lack of investment in generation capacity problem. That is a clear proof that deregulation just doesn't work.

As you have written, systemic delays will probably lead Brazil into a set of distributed generation investments. Most probably, Brazil will face rotating blackouts once again under the irrational rationing system you mentioned when you said “You asked a very interesting question. It must be said that de-regulation is about energy prices risk. It is not about physical production risk. Let me explain. De-regulated energy users have the same physical risk (of interruption) as the regulated ones.”

Since that time when I suggested that you look to “Electricity WPC,” which I write now as EWPC, the EWPC market architecture and design has emerged in the Energy Central Network. EWPC will integrate demand into power system planning, operation and control, helping develop a much needed rational rationing.

I have also written that EWPC is more likely to be developed in one of the BRIC countries. As it is very clear that deregulation is unstable, please take a look at the EWPC article Creative Destruction of the Old Electric Paradigm, to get introduced into how the new paradigm should evolve into a global or universal shared vision of electric power service.

Is Brazil up to the challenge to become the first developer of such universal electric power service?

Please advise!

Regards,

José Antonio

A few remarks about the current situation in Brazil:

1) 30% (in MWh consumed) are supplied to about 700 free-to-choose energy users - mostrly industrial (the larges in the contry)

2) 70% is for the regulated market

3) We have in Brazil a combination of free to choose and regulated markets, regulated being predominant

3) The marginal cost to expand the supply is the real challenge. The regulator is keeping rates at a level - this does not stimulate investors to increase capacity. The free to choose energy users do not find energy available if they have to contract now.

We ae facing a very delicate situation. The first issue that should be considered is solid, information about supply and demand, that is good ,consistent and audited by independent parties.

Important elections (on a national level) will take place by the end of this year. The Government will try as much as possible to "hide" the energy shortage problem. because an energy shortage migh be a liability for the situation party at this delicatre moment of the election process.

The first real problem is facing reality.

In the mean time it is my understanding that it is up for the enegy users to take actions. There are no real drivers in the Government sector as well as inn the Regulatro sector to go for the much needed actions.

The message of my article was: lit is the end user who should wake up!

I agree that the real problem is facing reality. Reality is that the market architecture and design is flawed. Brazil is in a great position to take the leadership in the power business by developing EWPC. Since Brazil has an excessive hydro capacity market share, the development of the resources of the demand side and its integration to power system planning, operation and control is the way to enable rational rationing on demand (not pun intended). Not just large industry, but all customers will be able to wake uo and take action as vibrant retail and wholesale competition develops. The real solution is about leadership, which will be fueled by the opportunities to be the EWPC pioneers of the power industry.

I agree that it is about leadership, as you put it.

The regulator, the independent system operator amd the Federal and State Goverments (who own most of the generation assets in Brazil) are telling that there is no problem. As much as they possibly can.

In this scnarion- it is the end user who should take actios. Because no one else actually cares!.

When these end users team up and face this sutation then change might happen. Otherwise it will be a matter of each indiviadual energy user.

This requires top Dollars because of the diversity,complexity and size of the markets involved.

Who would come up with ths budgedt? The supply side definitiely not (because they are too happy with the current situation:

Government owned generating companies are doing very welll selling to the spot market at very profitable prices,

Traders and brokers are making huge profits and

Distribution companies (mostrly private) are also showing excellent results (rates are very high, compaed to other countries)

and the Federal Government is collecting atxes as never befoe (about 51% of the total revenues of the energy supply chain).

All this at the energy user's expense!

So energy users would heva to pay for this new initiative. I do not see room - right now - for a new "expense".

That's why it seems to me that the action should happen at the energy user´s level - "inside the fence" as we say! It means that the driving force is the real possibility for each energy user reduce its cost by implementing new solutions.

I guess that once this first phase is accomplished the next would be for these energy users to team up and organize themselves.

I am confused with your last statement and the earlier "When these end users team up and face this sutation then change might happen. Otherwise it will be a matter of each indiviadual energy user." Usually it is just a meeting of consumer associations heads that is needed to go forward. I don´t see why they need top dollars. Please explain.

The challenge we face here (by we I designate end users) is that about 30 energy companies (generating and distribution companies) sell about US$ 50 Billion/year. They are very well organined in every respect that you could possibly imagine.

On the other side energy users are not organized at all. It means that consumer associations may exist on paper but have no real power. By far!

The Regulator (ANEEL), the Minsitry of Mines and Energy, the Federal Government as a whole, are entities that should be approached by the end users by means of a carefully strutured and funded plan otherwise there is no real chence to play the game!

Up to a few years ago energy users could only do but one thing: pay their monthly bills. They are used to be afraid of the large energy companies. Even the large energy users.

Tht´s why I see a potential of developing inside the fence energy actions and then as the energy users learn about the energy business and become more at ease go for the second step which is creating a consumer association which actually works.

Once again, I repeat the last question of my first post: Is Brazil up to the challenge to become the first developer of such universal electric power service?

It is a question that should be posted to the Regulator, to the ISO, to the Federal Governmnent (owner of more than 80% of the electric generation assets in Brazil).

As an independent consultant, hired by corporate energy users, I am led to believe that the above emntioned institutions are not interested in discussing this matter. Their situation is very comfortable as it is right now.

There is no real drive for them to change.

You may very well know that Brazilian energy companies (those ones that belong to the Government) are run by politicioans and not by exceutives with a strong experience in the energy arena. Additionally a significat proportion of diretctors and managers are also appointed by these politicians and more often than not involved in corruption scandals.

How could we possibly expect that these guys would be interested in actually facing the real challenges?

I do not see that even these politicionas recognize that Brazil has develloped a unique, system: - a mixture of regulated and de-regulated.

ILast but not least - in the 90's de-regulation started very strong. The distribution side was privatised. In the 00´s the generation was supposed to be privatised. but a new Governent took power and the temptatino was too high: privatising the energy companies would kill te current system (political apppointed executives and managers), being in control of a huge purchasing budget, etc., etc.

The bottom line: the answer to your question has close relationship with a real drive to finish corruption, to bring transparency to the energy sector. When that heppens the 51% of taxes that are colllectec by the Government for each MWh consumed would be more than enough to add new capacity to the system. Regardless of a regulated or de-regulated choice!

No need to say that right now we have very high energy prices if the comparison is other countries. Most of them burn fuel (which is not our case, since 90% comes from hydro origin). It is a shame!

Perhaps the international community might help by demanding a more tranparent and clear posture when it comes to the Brazilian energy markets.

Your are abosultely right: it is RIC and not BRIC.

(1) Hydrology is an important factor associated with the electric energy supply in Brazil.

Because of the lack of a robust supply this has become even more sensitive.

(2) Supply should increase at the market´s demand. If the the demand is for 5 GW/year then supply should be in that range and not half of it (as it has been (according to ANEEL´s statistcs) for years in a row as well as for the next few years

(3)I It is up to the end user to go for well informed decisions about distributed generation and even IPP-type projects) because depending only on the Federal and State Governmnets optimism is no longer acceptable and/or prudent

I am led to believe that the 2001 rationing and the potential new one, to come will bring us an important lesson: decision-makers should consider long term decisions as opposed to the traditional short term that reflects the Brazilian corporate culture.

This is a very tough but fascinating challenge!

What else could we wish - under these circumsances - but Mama´s delicious apple pie?!!!!!!

Please take a look at my comment to the post HEARD AT CERAWEEK by Martin Rosenberg - From the Editor's Desk Blog:

Good report Martin,

To satisfy the comments of Linda Cook, Donald Evans, Deryk King, and James Rogers, to start a revolution, it is necessary to make EWPC a shared vision to restructure the electricity industry to: 1) eliminate the barriers to the development of the demand side and 2) to enable the integration of uncertain generation. All that is needed to get the political will going is to get the shared vision to the public at large and “do what must be done. . .” without the need “to bankroll energy efficiency initiatives through the ratebase,” as Mr. King suggests.

The ongoing communications revolution is the fuel (pun intended) that reduces transaction costs and introduces the innovative networking effects that allows demand to be integrated to power system planning, operations and control. That way, utilities as we know them and their perverse incentives and barriers disappear and energy efficiency on the demand side will be able to do its job of “saving barrels of oil” with efficient pricing and not on average rates.

The key institution, to integrate demand and make money under EWPC, is the competitive second generation retailer operating at the federal (and eventually global) level that also take on the front and back office operations of the utilities enterprise: the casualty of the revolution. The new utility has a transportation (integrated transmission and distribution) compact at the federal level with a responsibility to transport at ultraquality, facilitating the integration of uncertain generation.

For more details (90 articles so far) go to the EWPC Blog at the link http://www.energyblogs.com/ewpc/

I agree with you that On-Site power Projects or, in other words, “Distributed Generation” can be an effective solution for some new industrial enterprises or rural areas. But not for big cities and industrial centers with a fast demand growth. May I ask you 3 questions: (1) Electricity prices shown on your graph are for Brazilian Free Market. What is the dynamics of electricity prices in Regulated Single-buyer market (since 2002 or 2003)? (2) As far as I know a free (competitive) electricity market was introduced in Brazil in the late of 90th. Has the Regulated market been organized after electricity shortage in 2001? (3) Who and how divides consumers on categories of “Captive consumers”, supplied from Regulated market, and “Free consumers”, supplied from Free market?

Would be grateful for your answers,

Yours sincerely Lev Belyaev

On Febr. 20.2008 I have made a short comment on your article “Brazilian Energy Market for 2008…”, sited in Energy Pulse on 02.05.08, and addressed you 3 questions: (1) Electricity prices shown on your graph are for Brazilian Free Market. What is the dynamics of electricity prices in Regulated Single-buyer market (since 2002 or 2003)? (2) As far as I know a free (competitive) electricity market was introduced in Brazil in the late of 90th. Has the Regulated market been organized after electricity shortage in 2001? (3) Who and how divided consumers on categories of “Captive consumers”, supplied from Regulated market, and “Free consumers”, supplied from Free market?

I am very much interested in Brazilian Electricity market and would be grateful for your answers. Yours sincerely, Lev Belyaev Head of Laboratory Energy Systems Institute of Russian Academy of Sciences (former Siberian Energy Institute) 130, Lermontov Street Irkutsk, 664033 RUSSIA Phone: +7 3952 42-50-34 Fax: +7 3952 42-67-96