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Energy Tariff and Demand Response in Brazil: an Analysis of Recent Proposals from the Regulator

P. Lino, P. Valenzuela, R. S. Ferreira, Student Member, IEEE, L. A. Barroso, Senior Member, IEEE, B. Bezerra, M. V. Pereira, Fellow, IEEE
PSR Rio de Janeiro, Brazil {priscila, paula, ferreira, luiz, bernardo, mario}@psr-inc.com
AbstractThe development of the smart grid has received growing attention from various institutions of the Brazilian electricity sector since 2009. Recent Public Hearings held by the Brazilian Electricity Regulatory Agency (ANEEL) aimed at presenting proposals for smart grid related regulation, and gathering contributions of different stakeholders regarding the issues discussed. The objective of this paper is to analyze some of the topics discussed in Public Hearing #120/2010, in which ANEEL proposed mechanisms to incorporate economic signals to the energy tariffs of regulated consumers supplied by distribution companies. These measures may be interpreted as efforts to begin the gradual advance of smart grid enabled demand response programs. As will be discussed in the paper, special attention should be given to the conciliation between the proposed measures and the particularities of the Brazilian electricity sector regulation, in order to implement such proposals in a smooth way. Keywords- Regulation, distribution services, smart grid, demand response

Brazilian distribution companies are legally obliged to invest a fixed percentage of their net revenue in R&D programs and energy efficiency measures. This low risk, compulsory expenditure has been the main source of funding for the abovementioned smart grid related R&D projects, and it has also been used, to a lesser extent, to fund pilot smart grid programs. The electrical and electronics industry has also taken actions regarding the development of the smart grid. According to ABINEE (the Brazilian Electrical and Electronics Industry Association), the Power Generation, Transmission and Distribution (GTD) segment of the electrical and electronics manufacturing industry was responsible for R$ 12.1 billion in revenues and accounted for 22,000 employees in 2010 [3]. Though those figures refer to the entire range of products form the GTD segment i.e. not only electricity meters , they do indicate the potential influence of this industry in regulatory decision making. ABINEEs Smart Grid Working Group has been actively participating in all smart meter related processes, such as the standardization of data output protocols (currently conducted by ABNT, the Brazilian Technical Standards Association), and the specification of minimal requirements for electronic meters (currently conducted by ANEEL, the Brazilian Electricity Regulatory Agency). According to ABINEE, the Brazilian internal market for electricity meters in 2010 was of roughly of 4 million meters per year, from which about 3 million were demanded by the connection of new consumers [3]. These numbers must be interpreted while keeping in mind that no countrywide initiative for rolling out smart meters is yet in force. In 2010, Brazil was still a net exporter of meters (mainly to Latin America) [3], but it is unclear if this situation will be maintained in 2011, partially due to the appreciation of the R$/US$ exchange rate. The development of the smart grid has also received attention from the federal government and from the regulator. In April/2010, the Ministry of Mines and Energy (MME) issued Ordinance #440/2010, creating a working group with the objectives of laying out the roadmap for the development of the smart grid in Brazil. ANEEL has, since late 2009, held a number of public hearings and consultations that aimed at allowing different stakeholders to make contributions to the development of regulation for issues regarding the smart grid. Public Consultation #015/2009 addressed general issues related

I.

INTRODUCTION

Opportunities associated with the development of the electrical network towards a smart grid have definitively found their way into the agenda of Brazilian power sector institutions, and a number of relevant actions have been set in motion by different agents since late 2009. In a sense, distribution companies have taken the lead in these actions. A number of utilities have begun pilot programs essentially proof of concept programs through which they wish to gather information that will help answering questions on technical and economic feasibility of future, broader initiatives. The Cities of the Future project [1], launched at the end of 2009 by Cemig, one of the countrys largest utilities, is one of the earliest examples of such programs. It was followed by initiatives by Light, Eletrobrs Amazonas Energia, and Eletropaulo, among others. So far, those pilots have focused on evaluating options for rolling out advanced metering, communication and control infrastructure, and on analyzing possible benefits of network self-healing schemes and of demand response mechanisms. Distribution companies have also invested in R&D projects, aiming mainly at the development of equipment and technological infrastructure. It is worth mentioning that, according to Act #9,991/2000 [2],

978-1-4577-1801-4/11/$26.00 2011 IEEE

to the implementation of electronic meters for consumers connected to low-voltage distribution networks [5]. This consultation was followed by Public Hearing #043/2010, held in January/2011, in which contributions on the minimal technical functionalities and requirements for those meters were gathered [6]. In March/2011, ANEEL held Public Hearing #120/2010, which addressed the altering of the tariff structure for the electricity distribution sector [7]-[11]. This hearing had a broad scope, and among the topics discussed were there were measures, proposed by ANEEL, to incorporate economic signals to the energy tariffs of regulated consumers supplied by distribution companies [10]. These measures may be interpreted as efforts to begin the gradual advance of smart grid enabled demand response programs, and their discussion will be the focus of this paper. At the time of this writing (September 2011), ANEEL is still processing the information gathered in the abovementioned hearings. Some of the topics presented at Public Hearing #120/2010 might be influenced by possible incongruities among the proposed measures and specific items of the Brazilian electricity sector regulation. This work aims at presenting and discussing those incongruities, with focus on possible negative effects of the items proposed by ANEEL. It is worth stressing that Public Hearings are forums for discussion, in which different stakeholders might expose their point of view and thus contribute to decision making regarding regulation. It is also worth mentioning that ANEELs proposals, as well as the contributions presented at the public hearing, are currently under analysis. Thus, the choice of ANEELs proposals as the object of analysis of this document should be interpreted solely as an option for discussing possible regulatory challenges for demand response with help of concrete suggestions made by the regulator and not as a critique of regulatory mechanisms that have come or that will come to force. The remainder of this paper is organized as follows. In Section II, we present some general background on the electricity distribution sector in Brazil, focusing on tariff formation for retail consumers. In Section III, we present the proposed measures to incorporate economic signals to the energy tariffs of regulated consumers, as presented by ANEEL in the support material for Public Hearing #120/2010 (PH #120/2010). In this section, we also discuss the possible challenges that the current regulation might pose for the implementation of demand response. Conclusions are presented in Section IV. II. DISTRIBUTION IN BRAZIL: OVERVIEW OF REGULATION

230kV) and for retailing energy to local captive consumers. Consumers whose load is greater than 3 MW are eligible to freely negotiate their own energy procurement agreements, and thus pay the distributor only the wires service (if they are not connected directly to the bulk transmission network). We shall refer to those consumers as deregulated or free consumers, as opposed to the captive consumers. A. Basic rules for security of supply In order to better understand the distribution activity in Brazil, it is important to know the basic rules that aim at assuring security of supply within the electricity sector. Generally, all security of supply mechanisms are design taking into account that Brazil is an energy-constrained, and not a peak-constrained, system. The main reason for that is the preponderance of generation from hydro plants with large reservoirs in the countrys electricity matrix. Those plants average energy production (as measured in average MW) is significantly lower than their installed capacity, as they are designed to take advantage of situations in which inflows are larger than their average values. This situation might change in the long term1, due the augmented significance of run-of-river hydro plants and thermal units in generation expansion [12]. The first of the basic rules for assuring security of supply states that every load in the system must be entirely covered by a supply contract. This means that there should be power purchase agreements for the supply of each kWh consumed in the system, and that the obligation to contract applies for distribution companies and free consumers. The distribution utilities are responsible for contracting energy for their regulated consumers, while each free consumer is responsible for contracting its own consumption. The second basic rule states that every energy contract must be backed up by a physical plant capable of producing the contracted energy in a sustainable way. B. Energy contract auctions to set generation prices The bulk of energy consumption is contracted via long-term contracts celebrated as a result of new energy auctions (see [13] and [14] for more details). Two types of new capacity auctions are held in a yearly basis: the main and the complementary auctions, in which long-term contracts are offered for new capacity that will be commissioned respectively in five years and in three years. Participation in the main auction obviously requires distributors to forecast energy consumption five years in advance. It is worth noticing that distribution companies cannot negotiate contracts bilaterally with any supplier all energy purchases in the regulated environment (i.e. for captive consumers) are carried out by means of contract auctions. There are strong regulatory incentives for distribution companies to contract in the new capacity events, particularly in the main auction. For example, the amount of energy contracted by a distributor in the complementary auction is limited to 2% of its total consumption observed two years before; and the amount of energy contracted in an adjustment auction is limited to 1% of the companys total load contracts.
The possibility that peak supply would become a constraint for the Brazilian system partially justifies the interest in demand response.
1

Distribution is a regulated monopoly in Brazil. It is treated as a public service, ruled by concession contracts signed between distribution companies and ANEEL. There are over 60 distribution concessions, each of them corresponding to a geographic area that can range in size from a relatively small town to a large state. Within each concession area, the distribution utility is responsible for the wires service (generally, all transport facilities with rated voltage lesser than

This mechanism has a simple purpose: since the regulated market (captive consumers) accounts for the most significant share of the total market, the results of the new energy auctions will drive the expansion of the generation system. There is, evidently, the need for a short-term marketplace, where differences between contractual and physical energy consumption are settled. This is not a real market, in the sense that system dispatch is cost-based, and determined by the results of a stochastic optimization model. Short-term prices are calculated by applying a cap and a floor to the short-run marginal costs of this model, and a zonal pricing scheme is adopted (currently, with four pricing zones or submarkets, as they are referred to in Brazil). The portfolio of energy supply contracts of a distribution company comprises a mix of different types of contracts (whose parameters are the lead time until start of energy delivery, contract duration, etc.), and the price of this mix will drive the cost of electricity in the regulated market (i.e. for captive consumers). In recognition to that, there are also incentives for distribution utilities to seek efficient contracting strategies and have accurate demand forecasts for the energy auctions. There are, for instance, limits on the costs of over- or under-contracting that can be passed-through to end consumers 2 . Distributors are allowed to pass-through overcontracting costs only up to 103% of the observed energy load. Also, in case less than 100% of the total load is contracted, companies are subject to penalties, and are allowed to passthrough the costs of energy bought in the short-term market only up to a certain limit. In order to better understand how the price of the distribution contracts mix drives the tariffs in the regulated market, it is also important to discuss the types of contracts negotiated in the new and existing capacity auctions. There are: (i) standard financial forward energy contracts, also known as quantity contracts, in which the buyer pays a fixed price (R$/MWh) for the energy contracted and the seller has the delivery risk, clearing the difference between energy produced and energy contracted at the spot market; and (ii) energy call options, also known as availability contracts, in which the consumer rents the plant from the investor, paying a fixed amount (R$/kW/month), and reimburses the plant for the variable operating costs (R$/MWh) whenever it is dispatched. MME has the right to decide which type of contract will be offered in each auction, and does so with the general objective of providing distributors with a portfolio that will minimize costs for the captive consumer. C. Distribution tariff In order to better understand how generation costs are passed-through to captive consumers, and to what extent they impact the distribution tariff, it is important to discuss tariff formation for the distribution service in Brazil. As previously

mentioned, distribution companies are wires providers and also retailers for the captive consumer. The tariffs charged by distribution utilities are regulated by ANEEL under a price-cap regime. The regulator establishes several measures to induce the investors to be more efficient in their services, reducing costs but maintaining satisfactory service quality. Basically, the distributors revenue is limited by the price-cap, determined by the regulator considering the companys allowed regulatory revenue, and cost reduction is the main means of increasing profits. Two parcels are considered for determining the allowed regulatory revenue. The first of those (referred to as Parcel A) includes non-manageable costs, whose amount and variation are not controllable by the distributor as energy purchasing costs, transmission costs and sectorial charges. The second parcel (Parcel B) includes manageable costs, such as operation, maintenance and repair costs (including labor, materials and outsourced services), investments and asset depreciation. The tariff formation process includes a multiannual process (every five or three years, depending on the concession contract of the distributor), in which ANEEL determines a reference value for Parcel B; and an annual adjustment process, in which the value of Parcel B is adjusted by an appropriate inflation index discounted by a productivity factor (referred to as X factor). The discount by the X factor aims at incentivizing efficiency and at sharing productivity gains with captive consumers. Costs of Parcel A are passed-through to consumers (considering the previously described constraints on passedthrough energy costs). D. Tariff structure Before moving on to the topics discussed in PH #120/2010, it is relevant to discuss the current tariff structure of captive consumers. Essentially, captive consumers may be included on different tariff modalities, either compulsorily or optionally, according to parameters such as their rated supply voltage and their contracted instant power demand. According to the modality, tariffs may be bundled (a single R$/kWh rate that recovers the costs of the wires service and the costs of purchased energy) or unbundled (different tariff components in R$/kW and R$/kWh). The tariff components may also vary according to time of day (with different peak and off-peak rates) and to the current season (with different values for dry and wet seasons3). Table I details the current tariff modalities: Low-Voltage Conventional (LC), High Voltage Conventional (HC), HighVoltage Hourly-Seasonal Green (HHS-Green) and HighVoltage Hourly-Seasonal Blue (HHS-Blue). Currently, all consumers supplied at voltages lesser than 2.3kV are compulsorily allocated to the LC modality. Consumers with lesser than 300kW of contracted demand and supplied at voltages inferior to 69kV (yet greater than or equal to 2.3kV) may opt for the LC, the HHS-Blue or the HHS-Green modality. If contracted demand is at least 300kW and supply voltage is inferior to 69kV, consumers may only choose among
3

There is a mechanism that allows distribution companies with energy surpluses to transfer part of their contracts to those in deficit. This mechanism was created in order to reduce the risk of over- and under-contracting. There are, however, limits on the energy which can be transferred via this mechanism.

Dry season runs from May to November.

the HHS-Blue or HHS-Green modalities. Consumers supplied at a voltage level higher than or equal to 69kV are compulsorily allocated to the HHS-Blue tariff modality.
TABLE I. Modality Supply Voltage (kV) < 2.3 2.3 2.3 2.3 CURRENT DISTRIBUTION TARIFF MODALITIES Rate type Bundled, R$/kWh R$/kW and R$/kWh R$/kW and R$/kWh R$/kW and R$/kWh Hourly differentiation (peak/off-peak) None None R$/kWh R$/kW and R$/kWh Seasonal differentiation (dry/humid) None None R$/kWh R$/kWh

effect for the dry period are 12% more expensive than those for the wet period. This fixed ratio was determined in the mid1980s, and some agents have long argued that it no longer adequately reflects the seasonal energy prices variation in the short-term market. Furthermore, ANEEL observed that regulated consumers bear, in addition to fixed costs, two types of monthly varying costs: (i) costs deriving from thermal plants with availability contracts, which include both the compensation for operating costs when those plants are dispatched and the purchase of energy in the short-term market when they are not dispatched; and (ii) operating costs of thermal plants activated due to security reasons, which are incorporate to an account named System Services Charges (SSC) and prorated among all consumers, both free and regulated ones. Although costs to consumers vary monthly, current regulations allow tariffs for the captive consumer to vary only once a year. In order to address this mismatch between fixed tariffs and variable expenses, ANEEL incorporates to distribution utilities tariffs, at each yearly adjustment, a prediction of the variable operating costs for the subsequent year. Throughout the year, these utilities perform monthly payments to the generators contracted by availability, and also pay for the energy purchased in the short-term market when the plants are not dispatched. In the following year, the difference between the predicted and the actual cost which may be positive or negative is passed-through to tariffs. According to ANEELs evaluation, the above procedure has two unsatisfactory aspects. The first is that significant discrepancies have been observed between predicted and actual costs, mainly due to de facto operating procedures that are not incorporated to the stochastic optimization model used for system operation planning. Regardless of the technical justification of these operative actions, they have originated discrepancies that reduced the efficacy of the process of incorporating the prediction of variable operating costs to tariffs. The second aspect, perhaps more relevant from a demand response point of view, is that consumers do not receive a timely signal that, in that month, there will be a greater transfer of costs to them due to the dispatch of thermal plants. Thus, they cannot rationally respond to this increase in tariff by reducing their consumption. With the objective of enhancing the demand-side response to that monthly variation of generation costs, ANEEL proposed, in Public Hearing #120/2010, the replacement of this pre-calculated seasonal variation of the hourly-seasonal tariff (the abovementioned 12% ratio) with an economic signal that varies monthly. This new monthly varying signal would be based on the sum the short-term price (the outcome of the dispatch model) with the parcel of SSC associated to system security (SSCSS). Operationally, the scheme would work as follows: at the monthly meeting in which the ISO and the agents gather to discuss the premises for the programming of system operation for the coming month, the ISO would inform the agents of the Tariff Flag to be activated on the coming month, in each price zone. This Tariff Flag would be set based on the expected

LC HC HHSGreen HHSBlue

III.

PUBLIC HEARING #120/2010 AND REGULATORY CHALLENGES FOR DEMAND RESPONSE

After providing a general overview of the current status of distribution services regulation and pricing schemes, we may proceed to the discussion of the topics of Public Hearing #120/2010 that are related to the introduction of economic signals in the energy tariffs of regulated consumers [10]. We limit our discussion to the incorporation of price signals to the energy tariffs of regulated consumers mainly due to requirements on the conciseness of this paper. Nevertheless, it is worth noticing that Public Hearing #120/2010 had a broader scope [7]-[11], and there were other measures proposed by ANEEL that also relate to demand response. For example, the regulator proposed measures to gradually reduce the number of consumers in HC tariff modality what would result in increasing the portion of captive consumers that effectively experience hourly-seasonal varying tariffs. There are also measures aiming at sending time-of-use economic signals to consumers whose supply voltage is inferior to 2.3kV: ANEEL proposed the creation of the Low-Voltage Hourly-Seasonal White (LHS-White) modality, with R$/kWh tariffs that would vary according to the time of day (upon condition that smart meters are installed previously to allowing consumers to adhere to the LHS-White modality). There are, of course, other regulatory challenges for the development of the smart grid in Brazil (for instance, for rolling out smart metering) that will not be addressed in this paper. The rest of this section is organized as follows. We begin by introducing ANEELs proposal regarding the incorporation of price signals to the electricity tariff of captive consumers. In the following items, we will discuss possible negative impacts of ANEELs proposals, pointing out the specific mechanisms of the current regulation that might be responsible for the identified incongruities. A. ANEELs Proposal on Price Signals to be Incorporated to Energy Tariffs Currently, the differentiation between dry and wet periods in hourly-seasonal tariffs is made using a fixed ratio: tariffs in

values of next month's short-term prices and SSCSS, according to the rule presented in Table II.
TABLE II. Tariff Flag Green Yellow Red TARIFF FLAG AND ECONOMIC SIGNAL IN ENERGY TARIFFS Interval for {Short Term Price + SSCSS} (R$/MWh) < 100 100, < 200 200 Additive economic signal in tariff (R$/MWh) 15 30

model is that the whole demand would be 100% contracted and, therefore, shielded against this price variation. It seems rather inadequate to maintain the same tolerance band for the accuracy of load forecasts after inserting a novel uncertainty source i.e. the demand response to price signals, a phenomenon for which theres little amount of raw data, at least for the Brazilian sector, to support sound modeling to whatever forecasting model is currently used by distributors. The increase in the uncertainty of distribution companies annual consumption forecasts would expose them to commercial risks beyond their control and not anticipated in the original design of the new sectorial model. A possible alternative to rebalance the risks of utilities would be to increase the tolerance band for passing-through over-consumption costs 4 . This could lead, however, to an average increase in tariffs, as current experience shows that utilities aim at the center of the statutory tolerance band. That is to say: if nowadays utilities, aiming at the center of the tolerance band, in average contract 101.5% of their actual load, if the tolerance band were to be increased, e.g., by 5%, it could happen that utilities would aim at 104% of their contracted load (i.e. the center of the new tolerance band), what could result in more over-contracting costs passed-through to end consumers. From the above, it follows that the introduction of the Tariff Flag must be accompanied by a thorough investigation of the incentive mechanisms for accuracy of demand forecast, and even of an evaluation of the role of demand response in a model in which competition for purchase agreements in auctions with a five-year delivery delay are the main drivers of generation expansion. C. Increased Uncertainty for Consumers Even in countries where there is full retail competition, few consumers generally opt for exposure to the short-term price signals, as the variability of energy expenditure is undesirable for the budgeting activity of most institutions (including private households). Consumers usually protect themselves from variability in short-term price by signing contracts with energy traders, generators and/or suppliers of last resort. For regulated consumers in Brazil, current tariffs can be viewed as an implicit contract, which guarantees a fixed price throughout the year. Indeed, this contract is a hedge against monthly costs variations, by means of two procedures: (i) forecasting of varying operating costs at the beginning of each year and incorporation of those forecasted values to tariffs; and (ii) the incorporation of observed differences between predicted and actual figures into next years tariff. It is arguable that introducing a monthly change in tariff, as currently proposed by ANEEL, does not bring any immediate benefit to consumers, compared with the stability they currently experience, due to the implicit contracts. It worth noticing, however, that the inexistence of immediate benefits
4 Actually, the situation is somewhat more complex. The reason is that variable costs of each utility depend on the proportion of contracts by availability in its portfolio and, as we shall see later, this proportion may vary significantly from one utility to another. As a result, the additional uncertainty in demand forecasts would also vary among distribution utilities, if the demand response to Tariff Flags is to come to force

From Table II, it is clear that all economic signals are additive, thus representing an increase in tariffs experienced by regulated consumers. Depending on the value of the sum of {short-term price plus SSCSS}, consumers would receive information on the Tariff Flag for the following month (green, yellow or red) and their next energy bill would be increased by an economic signal, in R$/MWh. At first glance, signaling the occurrence of costs to consumers at the time they take place seems to have only positive aspects especially for the reduction of thermal plants operating costs and for the increase of operational security. However, if we look closely into the current regulation, we can identify potential negative impacts of the proposed measures, both for distribution utilities and for consumers themselves. This means that a careful analysis of the benefits and costs of demand response programs under current regulatory constraints should be made. It is only with help of this analysis that the design of demand response programs and of eventual regulatory adjustments can be done, in order to ensure the greatest possible benefit for consumers and a fairer allocation of risks and responsibilities among agents. In the following, we shall examine three potential concerns of possible impacts resulting from ANEELs proposal: (i) increased uncertainty in demand forecast; (ii) asymmetry in the treatment of regulated consumers, compared to free consumers and to other electricity sector agents; (iii) decoupling between Tariff Flag and monthly costs incurred by distribution utilities. B. Increased Uncertainty in Demand Forecast As previously mentioned, distribution utilities currently have a 3% tolerance band for passing-through costs of overcontracting energy. This tolerance was defined during the design of the new sectorial model with contributions of generation and consumption agents, as well as representatives of government agencies, including ANEEL itself and was supported by probabilistic simulations of costs incurred by each agent group. Such a tolerance band was intended to allocate the risk of inaccuracies in consumption forecasts among agents in an equitable way. The uncertainties in consumption forecasts represented at that time were exclusively those associated with natural market uncertainties, such as economic growth, demographic patterns, climate, etc. The representation of demand response had not been envisioned at the time as being the responsibility of distribution utilities, because the basic premise of the sectorial

does not preclude the existence of future benefits, in the medium or long term. However, it seems important to: (i) demonstrate that future benefits resulting from price signals and demand response are in fact significant; and (ii) develop tools to enable regulated consumers to protect themselves from changes in tariffs, by means of additional contracts, if desired. It is arguable that the possibility of choice by regulated consumers is of uttermost importance. Otherwise, ANEELs proposal may be interpreted as a way of imposing the burden of serving as additional support for system security to captive consumers. As an example, assume that 100% of a distribution utility purchase agreements are quantity contracts, where the energy seller is responsible for all production and price risks, and therefore receives a premium in the contract price. If the regulated consumer starts to experience the short-term price in his tariff, his possible reduction in consumption for which he will not receive any remuneration will reduce these same prices in the following months. This reduction in prices is attributed to the possibility of energy storage in the large reservoirs of hydro plants. Thus, the immediate beneficiaries of price reductions will be two types of agents: (i) those generators that are short in their contracts (and we shall recall that those generators receive premiums to manage these risks); and (ii) those free consumers that do not possess enough contracts to cover their load, and would have to buy energy in the short-term market. It is arguable that the Tariff Flag, as currently proposed by ANEEL, would create an asymmetry of obligations among agents, as captive consumers would be given the burden of contributing to supply security, while deregulated consumers and generators would benefit from this effort. D. Does the Tariff Flag Reflect the Consumers Variable Costs? At first glance, a high correlation should exist between the monthly value of the sum {short-term prices plus SSCSS} and the monthly costs of distribution utilities energy purchases for the supply of the captive load. However, the utilities monthly costs are actually a function of the proportion of the amount of energy purchased through availability contracts, with respect to the total portfolio of contracts of distribution utilities: the greater the share of contracts by availability in the total mix, the greater will be the expected volatility in the energy tariff due to the variability of short-term prices. It is worth mentioning that, currently, different utilities have very different proportions of availability contracts in their portfolio. As an example, the proportions of availability contracts for different distribution companies for 2012 may vary roughly between 10% and 30% of their total forecasted load in MWh. Thus, it can be argued that the strength of the economic signals embedded in the Tariff Flags, when analyzed with respect to the proportion of availability contracts in the utilities portfolio, is not isonomic: the price signals are either too strong for a distribution company with only 10% of

availability contracts, or too weak for a utility with 30% of those contracts. Theres yet another phenomenon that must be taken into account when evaluating how the utilities variable cost vary with system operating costs. It might happen that, for high values of {short-term prices+SSCSS}, the actual variable cost decreases, instead of increasing. The reason for this rather counter-intuitive behavior is that, in the case of availability contracts, each thermal plant is responsible for meeting an amount of demand equal to its physical ballast (which, for the purposes of this discussion, might be defined as the amount of average energy a plant produces in the long term). However, the energy produced by the plant when it is activated is equal to its available capacity, which is always greater than the physical ballast. This means that there is a generation surplus, which is sold to the system at the short-term price. The net income from this sale i.e. the difference between the short-term price and the unitary production cost of this particular generator, multiplied by the MWh produced is used to reduce the consumers tariff. In the case of plants with lower unitary production costs, such as coal or natural gas plants, the difference between available capacity and physical ballast is relatively small. As a result, the net income from the sale of the surplus generation in the short-term market is also low. In the case of plants with higher unitary costs, such as oil-fired plants5, this difference is much greater, as well as the resulting net income. This means that the correlation between economic signal and real costs may be negative in a certain interval i.e., consumers may have an incentive to reduce their demand when, in fact, the costs of energy purchase will decrease. The main issue described in this subsection is the necessity of creating economic signals that, while incentivizing efficient system operation, correctly reflect the actual costs incurred by the utilities in the short-term. IV. CONCLUSIONS

The development of the smart grid has received growing attention from various institutions of the Brazilian electricity sector since 2009. Recent Public Hearings held by the Brazilian Electricity Regulatory Agency, ANEEL, aimed at presenting proposals for smart grid related regulation and gathering contributions of different stakeholders regarding those proposals In this paper, we analyzed some of the proposals of Public Hearing #120/2010, in which ANEEL proposed mechanisms to incorporate economic signals to the energy tariffs of regulated consumers supplied by distribution companies. These measures may be interpreted as very positive efforts to begin the gradual advance of smart grid enabled demand response programs. Nevertheless, as shown in this work, there are some specific aspects of the proposed mechanisms that

5 Its worth mentioning that significant capacity from oil-fired thermal plants has been contracted in the 2007 and 2008 complementary new capacity auctions.

could conflict with the particularities of the Brazilian sector regulation. For instance, we discussed how the current incentives for accuracy in the load forecasts of distribution companies might result in significant exposure to penalties in case demand response mechanisms come into force. We argued that the Tariff Flag incentive, as currently proposed by ANEEL, could create an asymmetry of obligations among agents, as captive consumers would be given the burden of contributing to supply security, while deregulated consumers and generators would benefit from this effort. We also advocate for the creation of economic signals that, while incentivizing efficient system operation, correctly reflect the actual costs incurred by the utilities in the short-term and that might not be the case for the proposed Tariff Flag incentive, as the utilities monthly costs are actually a function of the proportion of the amount of energy purchased through availability contracts, which may vary extensively among different distribution companies. Finally, we stress that the choice of ANEELs proposals as the object of analysis of this paper should be interpreted solely as an option for discussing possible regulatory challenges for demand response with help of concrete suggestions made by the regulator and not as a critique of regulatory mechanisms that have come or that will come to force. It is worth mentioning that the incorporation of economic signals to energy tariffs is not the only regulatory issue related to the development of the smart grid currently addressed by ANEEL. In fact, the agency has been playing an active role in the development of smart grids in Brazil by tackling other issues (such as the deployment of smart meters), and has received contribution from different stakeholders from the electric sector. REFERENCES
[1] Cemig, Cidades do Futuro (in Portuguese) [Online]. Available: http:// www.cemig.com.br/Inovacao/AlternativasEnergeticas/Paginas/Cidadesd oFuturo.aspx Brazilian Presidency, Act #9.991, July 24th, 2000 (in Portuguese). Brasilia, Jul. 2000. ABINEE, Smart Grid - Industry View (in Portuguese) [Online]. Available: http://www.tec.abinee.org.br/2011/s4.htm Ministry of Mines and Energy. Ordinance #440, April 15th, 2010 (in Portuguese). Brasilia, Apr. 2010. ANEEL. Technical Note #0107/2009-SRD/ANEEL (in Portuguese). Brasilia, Sept. 2009. ANEEL. Technical Note #044/2010-SRD/ANEEL (in Portuguese). Brasilia, Sept. 2010.

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BIOGRAPHIES
Priscila Rochinha Lino received the B.Sc. degree in mathematics and the M.Sc. degree in operations research from UFRJ, and the MBA in corporate finance from PUC-Rio, Rio de Janeiro, Brazil. She is a technical director in PSR, where she has been working on power systems economics, planning, and operation. Paula Valenzuela received the B.Sc. degree in E.E. from UFF and is working towards a M.Sc., also in E. E., at PUC-Rio, Rio de Janeiro, Brazil. She joined PSR in 2009, where she has been working on power systems economics, planning, and operation. Rafael de S Ferreira (S10) received the B.Sc. degree in E.E. from UFMG and is working towards a M.Sc., also in E. E., at UFRJ, Rio de Janeiro, Brazil. He joined PSR in 2008, and has been working on power systems economics, planning, and operation. Luiz Augusto Barroso (S00-M05-SM06) received the B.Sc. degree in mathematics, and the M.Sc. and Ph.D. degrees in operations research from UFRJ, Rio de Janeiro, Brazil. He is a technical director in PSR, where he has been working on power systems economics, planning, and operation. Bernardo Bezerra received the B.Sc. degree in E. E. and the M.Sc. degree in operations research from PUC-Rio, Rio de Janeiro, Brazil. He joined PSR in 2004, and has been working on power systems economics, planning, and operation. Mario Veiga Pereira has a BSc in E.E. from PUC-Rio and a Ph.D. in OR from UFRJ, Rio de Janeiro, Brazil. He is the president of PSR and is currently engaged in regulatory studies and development of new methodologies and tools for risk management in energy markets. He was one of the recipients of the Franz Edelman Award for Management Science Achievement, granted by ORSA/TIMS for his work on stochastic optimization applied to hydro scheduling.

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