Brazilian Electrical Power Sector

Transcription

1 Brazilian Electrical Power Sector May/2014 v.01

2 Index 1. Introduction Regulatory Framework Power Generation Power Transmission Summary Power Generation and Transmission 6. Power Distribution 7. Glossary

3 1. Introduction

4 Electrical Power Sector Overview There are five different regions in Brazil: North, Northeast, Central West, Southeast and South. While the North region has the biggest hydropower potential, the Southeast and the South region have the biggest windpower potential Regions of Brazil North Region Biggest hydropower potential SUDAM Tax Benefit: 75% reduction of Income Tax for 10 years Underdeveloped transmission grid Northeast Region Great windpower potential SUDENE Tax Benefit: 75% reduction of Income Tax for 10 years Central West Region Relevant hydropower potential, mainly in Mato Grosso State Relevant biomass UTE potential South Region Great windpower potential Highly developed transmission grid North Region Northeast Region Central West Region Southeast Region South Region Southeast Region Biggest energy consumer with Brazil s biggest population Highly developed transmission grid 4 Sources: ANEEL and Upside. Own elaboration

5 Electrical Power Sector Overview The Brazilian Power Sector is regulated by the Federal Government and is divided into generation, transmission, distribution and commercialization. Furthermore, the electrical power consumption is steadily increasing Electrical Power Sector in Brazil The agents in the Brazilian power sector are divided according to the activities they perform: generation, transmission, distribution and commercialization. This division is designed to increase the competition in the generation and commercialization segments, and to regulate the power distribution and transmission, that are considered natural monopolies and are therefore regulated by the Brazilian government. The current power system is based in big generating power plants, which are connected by high-voltage electric transmission lines to substations located near population centers. From these substations the power is distributed through local wiring by the distribution agents. In the last ten years, the electrical power consumption was steadily increasing, with a Compounded Annual Growth Rate (CAGR) of 3.91%. Similarly, between 2014 and 2023, the electrical power consumption forecast entails a CAGR of 4.28%. Electrical Power Consumption in Brazil (TWh) - Past Electrical Power Consumption in Brazil (TWh) - Forecast CAGR: 3.91% CAGR: 4.28% Source: EPE. Own Elaboration

6 Electrical Power Sector Generation Overview The electrical power sector installed capacity in Brazil will increase 41,41% up to 2022, with a CAGR of 3.92%. In the same period, the EOLs will increase its participation in the Brazilian energy matrix from 3.01% to 9.54% Electrical Power Sector in Brazil Generation Overview Between 2008 and 2012, the electrical power sector installed capacity in Brazil increased from 102,949 MW to 120,973 MW, entailing a CAGR of 4.12%. Up to 2022, the installed capacity is forecasted to increase to 183,053 MW, with a CAGR of 3.92%. An important highlight of the period is a significant increase in the participation of the windpower plants in the Brazilian energy matrix, from 3.01% in 2013 to 9.54% in Installed Capacity by Source in Brazil - Past ( ) and Forecast ( ) 3.0% 4.9% 6.4% 7.3% 1.5% 7.9% 8.1% 8.5% 8.9% 9.3% 9.5% 1.4% 1.4% 1.3% 2.1% 2.1% 2.0% 1.9% 1.9% 22.3% 23.8% 26.2% 26.7% 27.1% 22.8% 22.6% 21.5% 20.8% 20.1% 19.8% 20.0% 20.1% 20.3% 19.8% 75.3% 73.8% 71.2% 70.4% 69.7% 72.6% 71.1% 70.6% 70.6% 70.7% 70.0% 69.5% 69.1% 68.5% 68.8% Past UHE + PCH + CGH UTE UTN EOL + UFV CAGR: - 0,65% CAGR: - 0,86% CAGR: - 0,32% CAGR: 25,73% Forecast 6 Sources: EPE and MME. Own Elaboration UHE: Hydroelectric Power Plant (> 30 MW), PCH: Small Hydroelectric Plant (1 to 30 MW), CGH: Hydroelectric Power Plant (< 1 MW), UTE: Thermal Power Plant, UTN: Nuclear Power Plant, EOL: Wind Power Plant, UFV: Photovoltaic Power Plant

7 Electrical Power Sector Generation Overview The electrical power sector installed capacity in Brazil will increase between 2013 and 2022 mainly by new UHEs, mostly in the North Region, and EOLs, mostly in all but the North Region. EOL, PCH and Biomass Expansion, Contracted Forecast UHE Expansion, Contracted and Authorized Forecast Thousand MW ,675 MW Thousand MW ,215 MW Northeast South Southeast / Central West North Northeast South Southeast / Central West North EOL, PCH and Biomass Expansion, Planned Forecast UHE Expansion, Planned Forecast Thousand MW ,140 MW Thousand MW ,965 MW Northeast South Southeast / Central West North Northeast South Southeast / Central West North 7 Source: EPE. Own Elaboration UHE: Hydroelectric Power Plant (> 30 MW), PCH: Small Hydroelectric Plant (1 to 30 MW), CGH: Hydroelectric Power Plant (< 1 MW), UTE: Thermal Power Plant, UTN: Nuclear Power Plant, EOL: Wind Power Plant, UFV: Photovoltaic Power Plant

8 Electrical Power Sector Generation Overview Given the forecasted increase in electrical power sector installed capacity in Brazil between 2013 and 2022, the required investment will total USD 98.4 billion, primarily to UHEs and EOLs Investments in Power Generation Forecast, Given the forecasted increase in electrical power sector installed capacity between 2013 and 2022, from 120,973 MW to 183,053 MW, the required investment will total USD billion, considering contracted, authorized and planned UHEs, PCHs, EOLs, UTEs and UTEs (only Biomass). Moreover, from 2003 to 2012, Brazil rose from 10 th to 9 th position in the worldwide energy production ranking. Sources Forecasted Investment (USD Billion) Contracted and Authorized Plants Planned Plants Total UHE PCH + Biomass (UTE) + EOL UTE Total Power Generation in Brazil (TWh, ) World Power Generation (TWh, 2012) CAGR: 4.76% ,938 4,256 1,101 1,066 1, Sources: EPE and BP Statistical Review of World Energy Own Elaboration UHE: Hydroelectric Power Plant (> 30 MW), PCH: Small Hydroelectric Plant (1 to 30 MW), CGH: Hydroelectric Power Plant (< 1 MW), UTE: Thermal Power Plant, UTN: Nuclear Power Plant, EOL: Wind Power Plant, UFV: Photovoltaic Power Plant 1 Base Date: May-14. USD to BRL exchange rate: 1 USD = 2.22 BRL, as of May 15 th, 2014

9 Electrical Power Sector Transmission Overview Up to 2022, the forecasted investment in power transmission is USD 29.7 billion, with USD 18.6 billion to transmission lines and USD 11.1 billion to substations. In the same period, 103,231 MVA will be added to the transmission system Transmission Map Investments in Transmission Forecast (USD Billion) Horizon Transmission Lines Substations Transmission Physical Evolution Transformation (MVA) 2 Physical Evolution of Transmission System Forecast Tension 750 kv 500 kv 440 kv 345 kv 230 kv Total 2012, Existing 249, , Forecast 1,500 59,576 2,200 9,848 30, , , Forecast 1,500 51,068 1,600 8,949 26,655 89, , Forecast ,452 13, , Forecast 352,832 9 Sources: EPE and ONS. Own Elaboration 1 Base Date: May-14. USD to BRL exchange rate: 1 USD = 2.22 BRL, as of May 15 th, MVA: Megavolt Ampere, a unit of measure of apparent power

10 Electrical Power Sector Transmission Overview Up to 2022, 15,562 km will of transmission lines be added to the transmission system. In addition, the forecasted investment of USD 29.7 billion will be mainly applied to 500 kv tension transmission lines and substations Investments in Transmission Lines Forecast, Investments in Substations Forecast, kv 0.5% 440 kv 0.3% 345 kv 4.2% 440 kv 1.2% 230 kv 9.8% 800 kv 16.0% 230 kv 19.1% 500 kv 39.8% 750 kv 0.0% 600 kv 10.4% 500 kv 63.0% 800 kv 23.6% 600 kv 11.8% 750 kv 0.3% Transmission Physical Evolution Distance (km) Physical Evolution of Transmission System - Forecast (km) Tension ± 800 kv 750 kv ± 600 kv 500 kv 440 kv 345 kv 230 kv Total 2012, Existing 0 2,683 1,612 35,534 6,727 10,225 47, , , Forecast 7, ,750 29, ,093 51, , Forecast 2, ,750 21, , , Forecast 5, , , , Forecast 7,279 2,683 6,362 64,596 6,871 10,475 57, , Source: EPE. Own Elaboration

11 Electrical Power Sector Agents The Brazilian electric sector operates under concession, authorization or permission of the State providing public services on electricity to the population Agents Organization Chart Energy Energy Energy Distribution Agent 1 Generation Agents TUST ($) TUSD ($) ONS RAP ($) Transmission Agents Energy Distribution Agent 2 Energy $ Consumers $ Distribution Agent n PPA CCEE PPA PPA $ $ $ ANEEL 11 Sources: ANEEL, EPE and Upside. Own Elaboration Free Market (ACL)

12 2. Regulatory Framework

13 Regulatory Framework Relevant Institutions While the CNPE serves as advisor to the Brazilian president, the MME is empowered with policymaking, regulatory and supervisory capacities on behalf of the Federal Government Regulatory Framework Relevant Institutions A) National Energy Policy Council (CNPE) CNPE In August 1997, the National Energy Policy Council (CNPE - Conselho Nacional de Política Energética) was created to advise the Brazilian National Energy Policy Council president with respect to the development and creation of the national electricity policy. The CNPE is presided over by the MME, and the majority of its members are ministers of the Federal Government. The CMSE MME EPE CNPE was created to optimize the use of Brazil s electricity resources and to ensure the supply of electricity to the country. Power Sector Monitoring Committee Ministry of Mines and Energy Energy Research Company B) Ministry of Mines and Energy (MME) The Ministry of Mines and Energy (MME - Ministério de Minas e Energia) is one of the primary regulators of the power industry, acting ANEEL as the granting authority on behalf of the Federal Government and empowered with policymaking, regulatory and supervisory capacities. ONS Brazilian Electricity Regulatory Agency CCEE Following the adoption of the New Industry Model Law 1, the Federal Government, acting through MME, assumed certain duties that were previously under the responsibility of ANEEL, particularly the granting National Power System Operator Electricity Commercialization Chamber of concessions and the issuance of directives governing the bidding process for public service concessions. 13 Sources: ANEEL, ONS and MME. Own Elaboration 1 Mostly with Law 10,848/2004 and Act 5,163/2004

14 Regulatory Framework Relevant Institutions While the CMSE is an advisory board under direct coordination of the MME, the EPE is a state-owned company responsible for conducting strategic research on the electricity industry Regulatory Framework Relevant Institutions C) Power Sector Monitoring Committee (CMSE) CNPE The Power Sector Monitoring Committee (CMSE - Comitê de Monitoramento do Setor Elétrico) is an advisory board under direct National Energy Policy Council coordination of the MME. Its goal is to monitor and evaluate power supply continuity and safety throughout Brazil. Its main attributes include: monitoring of generation, transmission, distribution, CMSE MME EPE commercialization, import and export of electricity; evaluation of supply and service conditions; periodical, integrated supply and service Power Sector Monitoring Committee Ministry of Mines and Energy Energy Research Company analysis; identification of problems and obstacles that may affect power sector regular operations, safety of supply, and expansion; elaborate proposals for adjustments or for preventive actions in order to preserve safety of supply and service. ANEEL D) Energy Research Company (EPE) ONS Brazilian Electricity Regulatory Agency CCEE Created in 2004, the Energy Research Company (EPE - Empresa de Pesquisa Energética), a state-owned company, is responsible for conducting strategic research on the electricity industry, including with National Power System Operator Electricity Commercialization Chamber respect to electricity, oil, gas, coal and renewable energy sources. The research carried out by EPE will be used to subsidize MME in its policymaking role in the domestic electricity industry. 14 Sources: ANEEL, ONS and MME. Own Elaboration

15 Regulatory Framework Relevant Institutions The ANEEL, whose main duties are to regulate and supervise the sector and to ensure the quality and the universal coverage of the services provided, is the regulatory agency for the electrical power sector Regulatory Framework Relevant Institutions E) Brazilian Electricity Regulatory Agency (ANEEL) CNPE The Brazilian electrical sector is regulated by Brazilian Electricity Regulatory Agency (ANEEL - Agência Nacional de Energia Elétrica), National Energy Policy Council an independent federal regulatory agency. ANEEL s main assignments are to regulate and supervise the production, transmission, distribution and commercialization of electrical power and also to ensure the CMSE MME EPE quality and the universal coverage of the services provided. These services are supplied by agents of the electrical sector, divided Power Sector Monitoring Committee Ministry of Mines and Energy Energy Research Company in three categories: generation, transmission and distribution. Individual agents or agents joined in consortium that intent to participate in energy projects must receive from the ANEEL or the ANEEL MME a concession, permission or authorization to produce electrical power which can be commercialized in the Regulated Market (ACR - ONS Brazilian Electricity Regulatory Agency CCEE Ambiente de Contratação Regulada) and in the Free Market (ACL - Ambiente de Contratação Livre). National Power System Operator Electricity Commercialization Chamber 15 Sources: ANEEL, ONS and MME. Own Elaboration

16 Regulatory Framework Relevant Institutions The ANEEL, besides regulating and supervising the Brazilian electrical power sector, is responsible for organizing the public bidding process for new concessions and settling administrative disputes among agents of the power industry Regulatory Framework Relevant Institutions E) Brazilian Electricity Regulatory Agency (ANEEL) CNPE ANEEL s current responsibilities include, among others: controlling concessions for the generation, transmission and National Energy Policy Council distribution of power, including the approval of tariffs; supervising the performance of services by the concessionaries and imposing the applicable penalties; CMSE MME EPE enacting regulations for the electricity industry; Power Sector Monitoring Committee Ministry of Mines and Energy Energy Research Company implementing and regulating the exploitation of electricity sources, including the use of hydroelectric electricity; providing for the public bidding process for new concessions; ANEEL settling administrative disputes among agents of the power industry; and ONS Brazilian Electricity Regulatory Agency CCEE defining the criteria and methodology for the determination of transmission tariffs. National Power System Operator Electricity Commercialization Chamber 16 Sources: ANEEL, ONS and MME. Own Elaboration

17 Regulatory Framework Relevant Institutions While the CCEE is responsible for accounting and clearing short-term transactions and registering the volume of all electricity purchase agreements, the ONS coordinates and controls most of generation and transmission operations Regulatory Framework Relevant Institutions F) Electricity Commercialization Chamber (CCEE) CNPE The Electricity Commercialization Chamber (CCEE - Câmara de Comercialização de Energia Elétrica) is comprised of power National Energy Policy Council generation, distribution, trading agents and free consumers. One of the main roles of the CCEE is to conduct public auctions in the Regulated Market. Additionally, the CCEE is responsible, among other things, for CMSE MME EPE registering the volume of all the electricity purchase agreements within the Regulated Market (CCEAR - Contratos de Comercialização de Power Sector Monitoring Committee Ministry of Mines and Energy Energy Research Company Energia no Ambiente Regulado, or PPA - Power Purchase Agreement), and the agreements resulting from the free market, and the accounting for and clearing of short-term transactions. ANEEL G) National System Operator (ONS) Created in 1998, the National System Operator (ONS - Operador ONS Brazilian Electricity Regulatory Agency CCEE Nacional do Sistema) is a non-profit private entity comprised of power generation, transmission and distribution agents, free consumers and electricity traders. The primary role of the ONS is to coordinate and National Power System Operator Electricity Commercialization Chamber control the generation and transmission operations in the National Interconnected Power System, subject to ANEEL s regulation and supervision. 17 Sources: ANEEL, ONS and MME. Own Elaboration

18 Regulatory Framework Main Concepts The Brazilian electric sector operates under concession, authorization or permission of the State providing public services on electricity to the population Regulatory Framework Main Concepts Regulation by the Federal Government The Brazilian Electric Sector operates under concession, authorization or permission of the State providing public services on electricity to the population. While public service performed under concession, authorization or permission of the State, the operation of the Brazilian Electric Sector is highly regulated, the regulatory framework extensively defining the powers, rights and duties of the Granting Authority, the Regulatory Agency, Sector Entities and Agents, all with the fundamental goal of ensuring management's commitment to safety of supply and low tariffs in the short, medium and long terms. The regulatory framework attaches to the Granting Authority, in addition to its typical responsibilities of State, as the definition of national energy matrix, ensuring the balance between supply and demand in the short, medium and long terms: for that it reserves the planning and management of the grant of enterprising of supply expansion, as well as taking actions that are regulated, in managing the continuity of supply in the short and medium terms. Key Features of the Regulatory Framework Some key features of the regulatory framework, which aim at making it stable, are as follows: Universalization of access to and use of services; Fair pay, defined in concession contract, authorization or permission for investments; Auctions for the grant of generation and transmission expansion; Purchase of energy through bilateral contracts for regulated and free markets (ACR and ACL); Accounting and centralized liquidation of contracts; Permanent monitoring of the conditions of attendance by the Granting Authority; Systemic operation of the Basic Transmission Grid and centralized generation dispatch; Regulated mechanisms for monitoring and evaluation by the Sector Agency. 18 Source: ONS.

19 Regulatory Framework Main Concepts The Brazilian electric sector operates under concession, authorization or permission of the State providing public services on electricity to the population Regulatory Framework Main Concepts Concession, Authorization and Permission Concession: applicable for hydropower (UHE) and transmission line projects. In these cases, the project was planned and auctioned by the Federal Government and its subsidiary bodies. There is little flexibility for the entrepreneurs Authorization: applicable for hydropower (PCH), windpower and thermal power projects. In these cases, the project was planned by the entrepreneurs. There is high flexibility for the entrepreneurs Main Legislation Law 9,478/1997: Instructs the national energy policy and activities related to the oil monopoly; creates the National Energy Policy Council (CNPE) and the National Agency of Oil, Gas and Biofuels (ANP); as well as other specific provisions Law 10,438/2002: Establishes rules and criteria for the addition of electricity supply in emergency (near rationing) situations, as well as for extraordinary tariff recovery; creates the Alternative Electricity Sources Incentive Program (PROINFA - Programa de Incentivo às Fontes Alternativas de Energia Elétrica), the Energy Development Account (CDE - Conta de Desenvolvimento Energético); establishes rules and criteria to provide universal access to electricity; as well as other specific provisions Law 10,762/2003: Creates the Electricity Distribution Companies Emergency and Special Support Program; as well as others specific provisions Law 10,848/2004: Establishes provisions regarding the commercialization of electricity; as well as others specific provisions 19 Sources: ANEEL, ONS and MME.

20 Regulatory Framework Main Concepts The Brazilian electric sector operates under concession, authorization or permission of the State providing public services on electricity to the population Regulatory Framework Legislation Main Legislation Law 11,488/2007: Creates the Special Incentive System for the Development of Infrastructure (REIDI - Regime Especial de Incentivos para o Desenvolvimento da Infra- Estrutura) and reduces for 24 (twenty four) months the minimum term for use the credit of Contribution to the Social Integration Program and Civil Service Asset Formation Program (PIS/Pasep) and the Contribution for Financing the Social Security (COFINS) arising from the acquisition of buildings; expands the term for payment of taxes and contributions. Corporations that have approved projects for implantation of infrastructure works in the sector of transport, ports, power, sanitation and irrigation are beneficiary of REIDI Act 5,025/2004: Regulates the commercialization of electricity at the wholesale level and the process for granting concessions and authorizations for electricity generation, as well as other specific provisions Act 5,163/2004: Regulates the commercialization of electricity, the process for granting concessions and authorizations for electricity generation, as well as other specific provisions ANEEL Resolution 62/2004: Approves criteria and procedures to calculate the amount of reference electricity of electricity generation enterprises, allusive to the participation in the Alternative Electricity Sources Incentive Program (PROINFA) ANEEL Resolution 63/2004: Approves criteria and procedures to regulate the levying of penalties to generation, transmission, distribution and commercialization agents, as well as to the National System Operator (ONS), the Electricity Commercialization Chamber (CCEE) and for those who are responsible for managing resources arisen from sectorial taxes ANEEL Resolution 77/2004: Approves criteria and procedures related to the reduction of electrical system s use taxes of generation and distribution for hydroelectric, wind power and biomass sources or qualified cogeneration, with installed capacity up to and including 30 MW 20 Sources: ANEEL, ONS and MME.

21 Regulatory Framework Main Concepts The Brazilian electric sector operates under concession, authorization or permission of the State providing public services on electricity to the population Regulatory Framework Legislation Main Legislation ANEEL Resolution 127/2004: Approves criteria and procedures related to the ratio of the Alternative Electricity Sources Incentive Program (PROINFA) costs, as well as the definition of electricity shares ANEEL Resolution 320/2008: Approves criteria and procedures to Party Connection Interest (ICG - Instalações de Transmissão de Interesse Exclusivo de Centrais de Geração para Conexão Compartilhada) classification, in order to access the National Grid System (SIN - Sistema Interligado Nacional) basic network of generation up on the basis of wind power electricity, biomass or Small Hydroelectric Plant (PCH - Pequena Central Hidrelétrica) ANEEL Resolution 376/2009: Approves criteria and procedures to electricity contraction, on the verge of the National Grid System (SIN), by free consumers, as well as other specific provisions Resolution CONAMA (National Council for the Environment Conselho Nacional do Meio Ambiente) 279/2001: Approves criteria and procedures related to the simplified environmental licensing of electrical enterprises with small environmental impact, including wind power plants and other alternative energy sources Law 8,987/1995: Regulates the concession and permission of services that fall within the competence of the Federal Government by means of a bidding process, in accordance with article 175 of the Federal Constitution, as well as other specific provisions Law 9,532/1997, Provisory Measure 2,199-14/2001 and Act 4,212/2002: Regulates the tax incentives (a 75% reduction of Income Tax for 10 years) granted by Amazon Development Authority (SUDAM Superintendência do Desenvolvimento da Amazônia) and Northeast Development Authority (SUDENE Superintendência do Desenvolvimento do Nordeste), aimed at encouraging the development of certain kinds of activities in specific areas of Brazilian territory 1 21 Sources: ANEEL, ONS, MME, Amazon Development Authority (SUDAM) and Northeast Development Authority (SUDENE). 1 Being the specific areas of Brazilian territory the following States: Acre, Amazonas, Rondônia, Roraima, Mato Grosso, Pará, Amapá, Maranhão, Tocantins, Piauí, Ceará, Rio Grande do Norte, Paraíba, Pernambuco, Alagoas, Sergipe and Bahia, as well as parts of Minas Gerais and Espírito Santo

22 3. Power Generation

23 Power Generation When it comes to power generation, the critical matters that can harshly affect the project s feasibility and viability are environmental license, funding and land issues Market Players Critical Matters Environmental License: Generation power projects are often located in protected lands and, thus, it becomes more difficult to obtain the Construction License (LI) of the project. When auctioned, every hydropower project already has the Prior License (LP). The delay of the licenses can jeopardize the project s feasibility, given that the funding disbursement is usually conditioned to the license s issue. Incentives The main specific incentive towards power generation is given by the Brazilian Development Bank (BNDES). The BNDES provided special conditions for generation power projects auctioned in the year of Those conditions included: (i) the lowering of the DSCR (Debt Service Coverage Ratio) from 1.3 to 1.2, (ii) and if the project had as an addition funding source the Infrastructure Debentures, the BNDES funding amortization would change from the Constant Amortization System to the PRICE (French) system. Funding: The main funder for power generation projects in Brazil is the BNDES; though it has a lower cost compared to other funding sources, its main flaw comes from its bureaucracy. The funding disbursement is linked to a series of project s conditions and while the project does not fit all of them, there will be no disbursement, leading the investors to use equity or a more expensive funding source. In addition, the investors use bridge loans before the disbursement of long term loans, as a way of reducing the invested equity Land Issues: A power generation project are often located in protected and occupied lands. Hence, there are resettlement and socio-economic issues that must be fulfilled by the entrepreneur. Another land related issue is that the BNDES does not provide funding for land acquisitions. 23 Sources: BNDES and ANEEL. Own elaboration

24 3.1. Energy Purchasing Mechanics

25 Energy Purchasing Mechanics Electricity power purchase and sale transactions are carried out in three markets: (1) the Regulated Market, which includes power purchases by distribution companies through public auctions; (2) the Free Market, which includes purchases and sales of electricity by non-regulated agents such as free consumers and electricity traders; and (3) the Short Term Market, for uses of clearance The Regulated Market In the Regulated Market or Regulated Contracting Environment (ACR - Ambiente de Contratação Regulada), distribution companies will purchase electricity for regulated customers through public auctions regulated by ANEEL and conducted by the CCEE to ensure the full fulfillment of future energy demand. The contracts assigned under this environment are regulated specifically, as the energy price, contract registration submarket and supply period are not liable to bilateral amendments. Electricity purchases will be made through two types of agreements: (1) PPA by Quantity (Contratos de Quantidade de Energia) and (2) PPA by Availability (Contratos de Disponibilidade de Energia). PPA by Quantity Under a Quantity PPA, the generator commits to deliver a specific amount of electricity and assumes the risk that the electricity supply could be adversely affected by diverse conditions that could interrupt this electricity stream, in which case the generator will be required to purchase the electricity elsewhere in order to comply with supply commitments. PPA by Availability Under an Availability PPA, the generator agrees to make generation capacity available to the Regulated Market. In this case, the power generator will have a fixed and a variable income - the latter depending on the generator being activated by the ONS. However, potential additional costs suffered by the distributors are passed on to customers. 25 Sources: ANEEL, CCEE and MME.

26 Energy Purchasing Mechanics Electricity power purchase and sale transactions are carried out in three markets: (1) the Regulated Market, which includes power purchases by distribution companies through public auctions; (2) the Free Market, which includes purchases and sales of electricity by non-regulated agents such as free consumers and electricity traders; and (3) the Short Term Market, for uses of clearance The Regulated Market Electric Energy Auctions The auctions, carried out since 2005, have introduced competitiveness among electric energy generators under the principles of secure supply and affordability by reducing the energy price. A-5 Auction: contracts energy from new ventures whose operation is to start 5 years from the auction year, e.g. hydroelectric power plants; A-3 Auction: contracts energy from new ventures whose operation is to start 3 years from the auction year, e.g. thermoelectric power plants; A-1 Auction: contracts energy from existing ventures whose supply is to start 1 year from the auction year; and Adjustment Auction ( A ): contracts up to 1% share from each distributor market in order to complement the system power load required to fulfill the consumer market Renewable Sources 10 to 30-year contracts Between A-5 and A-3 Supply Start-Up A-5 A-3 A-1 A New Ventures to build 15 to 30-year contracts Adjustment Auction Up to 2-year contracts Existing Ventures 1 to 15-year contracts 26 Sources: ANEEL, CCEE and MME.

27 Energy Purchasing Mechanics Electricity power purchase and sale transactions are carried out in three markets: (1) the Regulated Market, which includes power purchases by distribution companies through public auctions; (2) the Free Market, which includes purchases and sales of electricity by non-regulated agents such as free consumers and electricity traders; and (3) the Short Term Market, for uses of clearance The Free Market In the Free Market or Free Contracting Environment (ACL - Ambiente de Contratação Livre), electricity can be traded between generation agents, trading agents and free consumers upon free terms of volume, price and supplying period. Potentially free consumers are those having a demand that is greater than or equal to 3 MW, at voltage greater than or equal to 69 kv or at any level of voltage, according with the Laws: (a) n. 9,074 of 1995 and (b) n. 5,163 of In addition, consumers with contracted demand equal to or greater than 500 kw may be served by suppliers other than their local distributing company, by contracting power from generation projects that benefit from incentives, such as wind, biomass or small hydroelectric plants. Once a consumer has opted for the Free Market, on the terms established by Law n. 9,648 of 1998, they may only return to the regulated environment if they notify its local distributor five years in advance, or within a shorter timeframe at the discretion of the distributor. This requirement seeks to assure that, if necessary, the distributor has sufficient time to contract the necessary supply of power to meet the return of free consumers to the Regulated Market. In order to minimize the effects resulting from the migration of free consumers, the distributors may reduce the volume of power contracted with the generators through PPA deriving from existing generation projects, according to the volume of power that they will no longer distribute to these consumers. Government-owned generators may sell power to free consumers, but unlike the private generators, they are required to do so through a public procedure that ensures transparency and equal access by all of parties concerned. 27 Sources: ANEEL, CCEE and MME.

28 Energy Purchasing Mechanics Electricity power purchase and sale transactions are carried out in three markets: (1) the Regulated Market, which includes power purchases by distribution companies through public auctions; (2) the Free Market, which includes purchases and sales of electricity by non-regulated agents such as free consumers and electricity traders; and (3) the Short Term Market, for uses of clearance The Short Term Market All the energy purchase contracts, under both Regulated and Free Markets, are to be registered at CCEE, where the effective produced/consumed amounts per each agent are measured. The differences perceived between the contracted amount and the effectively produced/consumed amount by the agent, be they positive or negative, form the stock of energy of the Short Term Market. The Short Term Market clears the differences perceived at the values of the Clearance Price for the Differences (PLD - Preço de Liquidação de Diferenças). The contracts are multilateral, according to the Commercialization Rules. Clearance Price for the Differences - PLD The PLD is an Operational Marginal Cost calculated ex ante considering the declared production/consumption of each submarket agent. BRL Annual PLD Average SE/CO S NE N 28 Sources: ANEEL, CCEE and MME. SE: Southeast Region, CO: Central West Region, S: South Region, NE: Northeast Region, N: North Region 1 Until Apr-14

29 Energy Purchasing Mechanics Electricity power purchase and sale transactions are carried out in three markets: (1) the Regulated Market, which includes power purchases by distribution companies through public auctions; (2) the Free Market, which includes purchases and sales of electricity by non-regulated agents such as free consumers and electricity traders; and (3) the Short Term Market, for uses of clearance Reserve Power Reserve Power contracting was created in order to increase security in power supply to the National Grid System (SIN - Sistema Interligado Nacional) through new generation projects and/or existing undertakings. The aim is to ensure permanent power availability in order to secure national power supply. The contracting of Reserve Power is made through an auction in which the enabled undertakings compete offering lots of power to be delivered to the system, and, later, the price for the MWh, that will set the Fixed Revenue that the seller will receive yearly due to its power generation and delivery to the SIN. The Power Purchase Agreement is signed with CCEE, which is responsible for the management of the financial resources of the Reserve Power Account. This account is used to run the operations relative to the contracting and use of the reserve power. All the reserve power will be accounted and cleared exclusively in the Short Term Market. The revenue paid to the generation agents derives from the Reserve Power Charge (EER), a specific charge collected by the Reserve Power Users since 2009, intended to cover the costs arising from the reserve power contracting, including administrative, financial and tributary costs. The resources collected as EER compose a fund which finances the reserve power. CCEE signs the PPA with the seller as representative of the reserve power users, who are the distribution agent, the free consumer, special consumer, selfproducer, or CCEE export agent. Energy Reallocation Mechanism The Energy Reallocation Mechanism (MRE - Mecanismo de Realocação de Energia) is a financial mechanism where the surplus/lacking of energy produced around the average is financially transferred among the agents according to the several seasonal hydrological availabilities across the country. By means of that, the hydrological risks are shared among the generation agents through optimizing the National Grid System s hydrological resources. PCHs can optionally participate as well. 29 Sources: ANEEL, CCEE and MME.

30 3.2. Power Generation per Source

31 Hydropower Energy The hydropower source share in the Brazilian energy matrix is forecasted to decrease from 69.7% in 2012 to 68.8% in Furthermore, its installed capacity is forecasted to increase from 2013 to 2022 with a CAGR of 3.32% Introduction There are 1108 hydropower plants operating in Brazil nowadays associated to a 91,524 MW installed power capacity or 67.46% of Brazilian total installed power. The next years investments are to keep this participation average in around two thirds, according to the Energy Research Company. The following graphs display Hydropower Generation, historical data and forecast: Hydropower Generation Installed Power (MW) 86,923 CAGR: 2.31% 84,294 82,457 80,703 77,545 78,610 Main Projects According to the Brazilian Electricity Regulatory Agency, the main hydropower projects operating in Brazil are listed below: UHE Tucuruí I e II Installed Power 8,535 MW Tucuruí - PA UHE Jirau Installed Power 3,750 MW Porto Velho - RO UHE Santo Antônio Installed Power 3,150.4 MW Porto Velho - RO UHE Xingó Installed Power 3,162 MW Canindé de São Francisco SE UHE Paulo Afonso IV Installed Power 2,462.4 MW Delmiro Gouveia AL Hydropower Generation Installed Power Forecast (MW) CAGR: 3.32% 96, , , , , , , , ,918 UHE Itumbiara Installed Power 2,082 MW Araporã - MG UHE São Simão Installed Power 1,710 MW Santa Vitória - MG UHE Gov. Bento Munhoz UHE Itaipu (Brazilian side) UHE Ilha Solteira Installed Power 1,676 MW Installed Power 8,162 MW Installed Power 3,444 MW Guarapuava - PR Itaipu - PR Ilha Solteira - SP 31 Hydropower plants which are currently under construction refers to a MW installed power increment. This amount comprises 71.30% of all energy generation projects under construction. Additionally, there is a total of 4.93 MW to start construction that have already been granted. Sources: ANEEL and EPE. Own elaboration The top 10 hydropower plants shown above, represents 30.30% of the total installed hydropower capacity in Brazil.

32 Hydropower Energy Brazil s total Hydroelectrical potential is estimated to be exploited in 34.80% from a total of GW; 39.90% of which is concentrated in North region, where the frontier of exploitation is been moved to Hydroelectrical Use and Potential in Brazil According to SIPOT ( Brazilian Hydroelectrical Potential Information System ), from Eletrobras, until February, 2012, 34.80% of Brazilian Total Hydroelectrical Potential were in Operation, from an Estimated Total of 248,862 MW. Find below a chart displaying theses Uses and Potential across Brazilian Macro Regions: Hydrological Uses and Potential - Brazilian Macro Regions Total North Northeast % 39.90% 10.03% MW % MW % MW % Understudied 51, , Carried under Studies 106, , , In Construction 5, , In Operation 86, , , Total 248, , , Central West Southeast South 15.64% 17.67% 16.75% MW % MW % MW % Understudied 9, , , Carried under Studies 17, , , In Construction In Operation 11, , , Total 38, , , Brazilian Hydroelectrical Potential use is concentrated in densely populated Northeast, Southeast and South regions. In recent years, the frontier of exploitation of the hydroelectrical resources is been moved to the North region, where 39.90% of total hydroelectrical potential is located, and 3.81% of which is to enter operation: North 14.78% 3.81% 32.74% 48.67% 46.32% Northeast 28.94% 0.10% 24.94% 0.49% 10.07% Central West 45.63% 56.37% Understudied 32.46% Carried Under Studies 9.10% 1.10% In Construction In Operation 58.27% South 1.31% 31.32% 2.56% 51.02% Southeast 32 Source: SIPOT. Own elaboration

33 Hydropower Energy In the last 8 Brazilian hydropower auctions (from 2010 to 2013), the average selling price was USD/MW for UHEs and USD/MW for PCHs Hydropower Plants Market Players There are three types of hydropower plants classified according to their installed power and reservoir lake area: CGH (Hydroelectric Power Plant, Central Geradora Hidrelétrica): small scale power plant generating up to 1 MW and whose reservoir area does not exceed 3 Km²; PCH (Small Hydroelectric Plant, Pequena Central Hidrelétrica): small scale power plant generating between 1 MW and up to 30 MW and whose reservoir area does exceed 3 Km²; and UHE (Hydroelectric Power Plant, Usina Hidrelétrica): large scale power Power Plant plant generating above 30 MW. Quantity Installed Power (MW) Operating Hydropower Plants Average Installed Power per Unit (MW) Participation in Hydropower Generation Participation in Electric Generation CGH % 0.21% PCH 462 4, % 3.59% UHE , % 63.66% Total , % 67.46% Auction Average Prices The average energy selling price from the last 8 hydropower auctions (from 2010 to 2013) is USD/MW for UHEs and USD/MW for PCHs 1. Incentives The Brazilian Development Bank (BNDES) has specific conditions for renewable energy generation projects. For hydropower projects, the bank gives a twenty-year amortization period and charges nominal interests from 7.00% p.y. to 10.18% p.y., according to the client s credit risk. Thus, the maximum project s leverage varies from 70% to 90% of the fundable items (national items and foreign items that doesn t have a national substitute). Auction Process Regarding specifically to hydropower source, investors are free to trade allocating an up-to-30% parcel of the Assured Energy s venture to ACL whereas the remaining parcel is to be allocated to ACR in the auction. For UHEs, investors comply with a fixed parcel given by ANEEL. PCHs investors, in turn, are up to individually decide the parcel to be allocated to ACR. CGHs ventures are exempt from auction participation; only a grant letter is required. 33 Sources: ANEEL and BNDES. Own elaboration 1 Base Date: May-14. USD to BRL exchange rate: 1 USD = 2.22 BRL, as of May 15 th, 2014

34 Hydropower Energy On the basis of the last Upside s hydropower projects, the average USD/MW CAPEX value was approximately 1.6 and 2.4 million for UHEs and PCHs, respectively. In addition, the average FCFE IRR was 11.79% and 13.12% in real terms for UHEs and PCHs, respectively Economic Aspects The charts below show some of the most important ratios on a hydropower generation project, the ratios below were calculated with the mean values of the three last Upside s UHEs projects and two of the last Upside s PCHs projects. Investment Feasibility The graph displays the average USD/MW CAPEX values calculated using the last hydropower projects that Upside took part in. The aforementioned value is below: Below, the charts presents the weighted average EBITDA/Net Revenue ratio, the weighted average of FCFE and FCFF Internal Rates of Return (IRR) for the studied projects. The total investment of the project was used as the Investment (USD/MW) 1 weight for the average. The IRRs were calculated in BRL and in real terms, UHE 1,625,291 that means, it does not account the effects of inflation. PCH 2,420,184 FCFF IRR FCFE IRR EBITDA/Net Revenue Leverage UHE 4.87% 11.79% 71.39% PCH 8.44% 13.12% 83.46% Infrastructure Debentures (IS Debentures) have enabled UHEs projects to be feasible at more leveraged levels when compared to PCHs, whom IS Debentures are not available for. Again, the average was weighted by total 29.64% 70.36% UHE - Leverage Debt Equity PCH - Leverage Additionally, the analyzed data was plotted on the dispersion graphic below, showing the FCFE IRR for each auction date: 16.50% 11.92% 8.50% 10.24% investment. Only the last of the UHEs projects was sampled as IS Debentures were not available before % 76.64% Debt Equity 9.06% Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 UHE PCH 34 Source: Upside 1 Base Date: May-14. USD to BRL exchange rate: 1 USD = 2.22 BRL, as of May 15 th, 2014

35 Windpower Energy The windpower source share in the Brazilian energy matrix is forecasted to increase from 3.0% in 2012 to 9.5% in Furthermore, its installed capacity is forecasted to increase from 2013 to 2022 with a CAGR of 13.02% Introduction The windpower energy source presents the biggest growing rate from all of the other Brazilian energy sources. Its last five years CAGR is 40.91%. Main Projects According to the Brazilian Electricity Regulatory Agency s windpower report, the main windpower projects operating in Brazil are listed below: Windpower Generation Installed Power (MW) CAGR: 40.91% 1,886 1, ,211 EOL Praia Formosa Installed Power 105 MW Camocim - CE EOL Canoa Quebrada Installed Power 57 MW Aracati - CE EOL Alegria I Installed Power 51 MW Guamaré - RN EOL Bons Ventos Installed Power 50 MW Aracati - CE Also, there is a perspective of more investments in this energy source, as shown on the table below: EOL Icaraizinho Installed Power 54.6 MW Windpower Generation Installed Power Forecast (MW) Amontada - CE CAGR: 13.02% 6,561 9,097 10,780 12,063 13,063 14,063 15,063 16,263 17,463 EOL Alegria II Installed Power MW Guamaré - RN EOL Osório Installed Power 50 MW Windpower source s share has grown as well in the analyzed period: it has Osório - RS gone from 0.4% of the Brazilian energy matrix, to 2.3% in EOL Sangradouro Installed Power 50 MW EOL Índios Installed Power 50 MW EOL Elebrás Cidreira 1 Installed Power 70 MW Additionally, there are 135 projects under construction, corresponding to Osório - RS Osório - RS Tramandaí - RS approximately 3,447 MW of installed power. Those windpower projects under construction correspond to 17.08% of all the energy generation The top 10 windpower plants shown above, represents 21.58% of the total installed windpower capacity in Brazil. projects under construction. 35 Sources: ANEEL and EPE. Own elaboration

36 Windpower Energy The main players in the Brazilian electric sector with windpower generation are Eletrobras, Desenvix and Renova Energia. In addition, the Brazilian Development Bank offers advantageous conditions for funding the projects Market Players Below, the chart displays the main market players in the Brazilian windpower sector: Windpower Energy Brazilian Potential The map and the table below presents the Brazilian wind potential. As it can be seen, the Northeast and the South Regions have the largest windpower potential. Incentives The windpower sector is relatively new in Brazil, and as so, it has many incentives to stimulate the windpower energy generation. Brazilian Development Bank (BNDES) has special conditions for renewable energy generation projects. For windpower projects, the bank gives a sixteen-year amortization period and charges nominal interests from 6.00% p.y. to 10.18% p.y., according to the client s credit risk. Also, the bank fund over 80% of the fundable items (national items, and foreign items that doesn t have a national substitute). Additionally, for windpower plants with an installed power lower than 30 MW, the transmission charge is decreased in 50% over a ten year period. Energy Classes Average Wind Speed (m/s) - 50 m above ground Woods Open Field Coast Hills Mountain 4 > 6.0 > 7.0 > 8.0 > 9.0 > < 3.0 < 4.5 < 4.5 < 6.0 < Sources: ANEEL and BNDES. Own elaboration