Govt. hails auction success, players unsure

With 25,000MW of power traded for a total of 72bn reais (US$26.1bn) in Tuesday's auction of 55,000MW of power from existing capacity in Brazil, the government hailed the sale as a resounding success, while generators and analysts expressed concerns about the lower than expected prices. Average prices for delivery starting in 2005 were expected at 60-70 reais/MWh but were 57.51 reais/MWh, below the 61 reais/MWh in current contracts. The 10 generators that closed contracts for 2005 delivery sold 9,054MW in eight-year contracts, meeting 98% of the demand from the 35 distributors in the auction. Average prices for delivery in 2006 reached 67.33 reais/MWh. The 11 generators that signed contracts for this product sold 6,782MW, or 92% of distributors' demand. The average price for delivery starting in 2007 was 75.46 reais/MWh, and the eight companies that signed contracts for this product sold 1,172MW, or 100% of the demand from distributors, the government said. Mines and energy minister Dilma Rousseff was jubilant. "The great winner is the consumer as prices were below the average price for current contracts," she said after the 10-hour, 21 round auction. "From the ministry's point of view the auction was a success, showing that all companies behaved technically and with great maturity," she said. The auction met its goal of allowing generators to renew portfolios and cut excess generation capacity that has resulted from expiring contracts and a recent reduction in power consumption patterns, Rousseff said. "Now generators have a cash flow expectation they can work with over the next years," she said. "The auction allowed each company to develop its own strategy and price structure." The government will now move ahead with preparations for a second auction of existing power (known as old power), scheduled for end-March, before the government sells concessions for new generation capacity. But while the government celebrated, market analysts were quick to point out their disappointment in the end prices, indicating that generators' finances will be hurt, especially those companies whose generation or financial costs are higher than auction prices. The chairman of São Paulo state generator Cesp, Mauro Arce, reportedly said the auction did not help the company revise its earlier decision of not investing in new generation. Cesp sold power at 62.10 reais/MWh, and Arce said he was looking for prices over 70 reais/MWh to service the company's US$3bn debt. Federal power company Furnas sold power at below production costs, Furnas board member and power sector consultant at the Ilumina power research institute, Roberto D'Araújo, told BNamericas. Furnas is currently buying power from thermoelectric generators such TermoCuiabá and from the Cien interconnection from Argentina at over 100 reais/MWh, he said, while at the auction it sold power at 60.94reais/MWh. On the other hand, federally owned generators Chesf and Eletronorte, and Paraná state's Copel, sold at prices significantly above production costs, D'Araújo said. "The bad thing about this auction was that it brought companies with different profit levels down to the same standard," he said. "Everything is upside down, it will be difficult for companies with such unbalanced cash flow to invest." The low prices hammered power companies on the stock markets. Voting-right shares in federal power sector holding Eletrobrás fell 9% on Tuesday and another 10% on Wednesday morning, and the electric power index (IEE) of the São Paulo stock exchange fell 2.3% during Wednesday morning trading, with generation falls offset by rising stocks of distributors. "Prices came in well below expected and the market will have to adjust as cash flow and returns will fall proportionately," Socopa analyst Marcos Paulo Pereira told BNamericas. "Only the government says prices were not below expectations, but, having said that, I think the process was good and just, and prices fell because of competition in the auction." The main reason behind declining prices were the auction's transparency and competitive environment and the fact that large generators, mainly state generators, opted to sell power close to 60 reais/MWh for eight years for 2005 delivery, instead of offering power at around 18 reais/MWh on the wholesale market, he said. This is the case with the Eletrobrás group. "I don't think Eletrobrás will lose money, but its cash flow will be affected [negatively]," Pereira said. "It's a logical choice they had to make." Although Pereira agrees with government arguments that a future capacity auction is a separate event with different price structures, the low prices of Tuesday's auction indicate that maybe government funding and state companies will have a greater than expected role in attracting the US$7bn reais in investment needed to build new generation capacity, he said. Successful expansion is estimated to need prices of some US$30-32/MWh, which the government trusts will be reached in the new capacity auction. "The trend shown in the auction is that prices are rising over the years and are converging at the marginal expansion cost," Rousseff told reporters Tuesday night. But the auction process and the new model were also praised by private sector players. "The auction was very successful and well done, now we have to see how much power was left outstanding to see what prices to expect in future auctions," Cristopher Vlavianos, a senior partner at power trading firm Comerc, told BNamericas. The 7,000MW excess in Brazil's power market could all have been soaked up through 2008, when more power will be available since no contracts were signed for delivery then, Vlavianos said. About one third of Brazil's annual power consumption was sold at the auction, and according to the ministry's initial announcement, some 30,000MW have still to be sold at the upcoming existing power auction in March 2005. Companies that traded in the auction will share the process's 3.4mn-real cost, power trading board CCEE said.