1 Supply Adequacy in the Brazilian Power Market Mario Veiga Pereira, Member, IEEE, Luiz Augusto Barroso, Member, IEEE and José Rosenblatt Abstract—this paper discusses how the issue of supply adequacy is treated in the Brazilian power market, analyzing lessons learned from past experiences and describing the solutions that are being implemented to reconcile competition in generation with an adequate supply. Index Terms-- Power system economics, power system planning, hydroelectric power generation. I. INTRODUCTION B razil started its power sector reform in 1996. Similarly to many other countries, the new rules were designed to encourage competition in generation and retailing, while transmission and distribution remained regulated activities, with provisions for open access. Other reform ingredients included the establishment of an Independent System Operator (ONS), a short-term electricity market (MAE) and a regulatory agency (ANEEL), as well as the privatization of distribution and generation companies. Implementation of the reforms was stalled by political difficulties, and in 2001 it was disrupted by a severe energy crisis. During nine consecutive months in 2001 and 2002, rationing was imposed to all classes of consumers in regions corresponding to 80% of consumption, in order to reduce total load by 20%. One consequence was severe economic loss, on the order of tens of billions of US dollars. Another consequence is that the supply crisis played a prominent role in the 2002 presidential elections, which were won by the opposition. During the campaign, sector reform and its reliance on the “market” to provide security of supply were blamed for rationing. The California crisis and the Enron debacle were widely used as additional evidence of the failure of markets. This paper analyzes what went wrong, and describes the solutions that are being implemented to reconcile competition in generation with supply adequacy. We follow Turvey in Ref. [1] in considering that markets can, in principle, ensure sufficient generation capacity to avoid power cuts. The question we address is whether the market scheme actually implemented in Brazil would do so. This work is organized as follows: sections II to IV present the main system characteristics of the Brazilian interconnected system, market design and supply adequacy. Sections V to VII analyze the major causes of the 2001-2002 supply crisis and the corrective regulatory measures proposed immediately afterwards. Section VIII discusses the new (December 2003) proposals to deal with the issue of supply adequacy and Section IX presents the conclusions of this paper. M.V.Pereira, L.A.Barroso and J.Rosenblatt are with Power Systems Research/Mercados de Energia, Rio de Janeiro, Brazil (e-mails: mario@psr- inc.com, luiz@psr-inc.com and jrosenb@psr-inc.com). L.A.Barroso is also with COPPE-Sistemas, UFRJ, Rio de Janeiro, Brazil. II. OVERVIEW OF THE BRAZILIAN POWER SECTOR A. Physical system The Brazilian interconnected system 1 had, in 2003, a total installed capacity of about 85 GW. The system is hydro- dominated 2 , with 110 hydro plants larger than 30 MW distributed in 12 main river systems. Some plants have large reservoirs, capable of multi-year regulation. Thermal generation (28 plants) includes nuclear, natural gas, coal and diesel plants. The area supplied by the system is served by 75 thousand km of meshed EHV transmission network, called Basic Grid, with voltages ranging from 230 kV to 765 kV ac, plus two 600 kV dc linksconnecting the binational Itaipu power plant to the Basic grid. The main direct international interconnections are the back-to-back links with Argentina, with a maximum flow of 2,200 MW. B. G, T and D sectors In December 2003 there were 64 distribution utilities (Discos). Sector reform brought about the privatization of most distribution companies and of transmission expansion, so that private Discos now serve 85% of total captive load. Political opposition interrupted the privatization of generation companies (Gencos); as a result, only 15% of total generation capacity is controlled by private investors. The transmission sector is composed of 26 transmission companies (Transcos), 13 of which were created after the reform. III. KEY ASPECTS OF MARKET DESIGN The main drivers and constraints for the Brazilian market design were: • need for generation expansion – In most industrialized countries, there was over-capacity in the existing generation systems when reforms were implemented. Therefore, one of the drivers for the power sector reform in those countries was to promote better use of existing resources through more efficient dispatch and smaller generation reserve margins [2]. As a consequence, supply adequacy was not regarded as a critical issue, at least in the short- and mid- term perspectives. In contrast, the need for expansion in 1 The interconnected system accounts for 98% of total demand 2 Hydro generation accounts for 85% of the installed capacity.