IEEE Power & Energy Magazine - November/December 2014 - 34

floating-storage regasification units, with a total import
capacity of 40 million m3 per day. Even though the main
motivation for Brazil's move toward LNG was actually the
need to ensure the firm supply of existing gas demand, the
power sector was quick to identify an opportunity in that
alternative gas supply source. While gas pipelines are highly
specific investments that connect a specific supplier to a
specific point of demand, LNG terminals are more flexible,
in the sense that they allow access to a global "network"
of producers and consumers. This promises the ability to
deliver to the electricity sector a much-desired flexibility in
gas supply, through building thermal power plants close to
LNG delivery ports and promoting a spot market for flexible
LNG delivery or re-exports.
But even though the characteristics of LNG supply
seemed to perfectly match the electricity sector's needs,
an incompatibility in the regulatory framework created an
important obstacle. According to the power sector's prerogatives, gas-fired plants were required to be available to dispatch given only 24 hours' notice from the system operator,
an interval that did not allow for adequate procurement of
LNG shipments due to sea travel lag times. Although it might
have been possible in some situations to purchase spot LNG
for immediate delivery by diverting cargo from other destinations, these purchases would not have been reliable and
would have involved large premiums relative to typical LNG
prices. An interesting debate ensued about how best to integrate LNG into the Brazilian market, given that the preorder
of LNG cargos under hydrological uncertainty can induce expost "regrets" when an LNG plant is dispatched needlessly or
when it remains idle but it should have been dispatched.
One way to manage the variability in LNG demand would
be the construction of physical gas storage, which is practically nonexistent in Brazil. But in the abstract at least it was
much more attractive to use Brazil's existing hydro reservoirs
as energy warehouses or "energy banks" that could enable
intertemporal energy swaps, accommodating the various technologies' needs. To exploit this synergy, in 2008 the electricity
regulatory framework introduced a creative "virtual storage"
mechanism. This mechanism determines that a thermal plant
that is not dispatched by the system operator but that elects
to generate anyway (for example, because it is already committed with an LNG cargo) can do so by displacing reservoir
hydro plants in order of merit, receiving an "energy credit"
that is linked to the amount of water that was stored. It was
determined that, for accounting purposes, the virtually stored
"thermal generation" would be lost first whenever spillages
occurred but that hydro plants were not to receive any payment in exchange for providing this service, since the available capacity was essentially idle and augmenting the storage
level could not possibly harm hydro production. Taking full
advantage of hydro "energy banks" has the potential to greatly
improve the system's efficiency by capturing the benefits of
international gas price seasonality and optimizing plant maintenance schedules.
34

ieee power & energy magazine

In 2011, the stochastic dispatch model was changed in
order to better represent LNG-based generators' nonanticipatory constraints and shield them from unmanageable uncertainties. In the enhanced model, LNG plants' dispatch was to
be centrally determined by the system operator two months
in advance, with no possibility of ex post adjustment, since
this lag period was determined to be optimal to minimize gas
procurement costs.

Current Obstacles to Full Electricity
and Gas Integration
Despite these achievements in promoting a better integration
between the gas and electricity industries in Brazil, the role
of natural gas in system expansion has been minor. Over the
past five years, only two new natural gas plants were contracted in new energy auctions (representing less than 7%
of the total planned expansion); both were developed by
companies that owned gas assets themselves. Because other
natural gas plants have been displaced chiefly by wind power
and run-of-river hydro plants in the system expansion, it is
likely that the beneficial attributes of thermal plants, such as
dispatchability and location factors, are being undervalued
in the energy auctions. This situation has led to inefficiencies
in energy contracting.
Another issue is that there has been very little compromise
between the conflicting needs of the electricity and gas sectors, with the "stronger" electricity sector often imposing its
immediate wishes with little regard for their consequences in
the natural gas sector. As an illustrative example, each candidate thermal project in an auction for new capacity is required
to obtain a letter of commitment from a natural gas producer.
This commitment ensures the availability of gas reserves that
enable the base-load generation of the thermal plant for 20
years, which is the entire contract duration. This constraint
is costly for the natural gas sector and likely exaggerated.
This is because base-load dispatch is extremely unlikely in a
system rich with wind and hydro capacity and the gas commitment disregards unproven reserves despite the long horizon of the contract. In addition, the contractual requirement
applies to all candidate projects served by this supplier, even
though it is unlikely that all of them will win the auction. (It
would be possible instead to have thermal plants compete for
a given gas volume.) In addition, the electricity sector's new
capacity auctions often impose constraints on operational
parameters for candidate thermal plants, such as a maximum
value for the declared inflexibility (linked to take-or-pay
clauses), a maximum value for the plant's unit variable cost
(which mostly depends on its fuel price), and a limited set of
acceptable references for fuel price indexes.
Treating the gas industry as submissive to the power sector imposes a major burden on it that is not compatible with
the benefits that the natural gas industry confers to electricity system planning. This challenge will become even more
relevant as the development of the abundant Pre-Salt gas
fields unfolds.
november/december 2014



Table of Contents for the Digital Edition of IEEE Power & Energy Magazine - November/December 2014

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IEEE Power & Energy Magazine - November/December 2014 - Cover3
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