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Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? An Application of Time Varying Parameter Error Correction Model Amanda Pimenta Carlos Hilton Notini Luiz Maciel Getulio Vargas Foundation Graduate School of Economics June, 2009. Amanda Pimenta Carlos, Hilton Notini, Luiz Maciel (Institute) Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? June, 2009. 1 / 32

Introduction First of all, it is necessary to de…ne the equilibrium in this market and why we are justi…ed in estimate only the demand side. Hydroelectricity accounted for 19% of total electricity consumed around the world in 2005. Speci…c situation: Brazil is the third country (only behind China and Canada) in hydro power installed capacity and a share of 85% of electricity in Brazil come from dams. The annual demand do not reach 50% of installed capacity. Construction of a Hydroeletric power plant of medium size requires not less than …ve years. So, analysts say that the estimate of Brazilian electricity demand drives the future investments in the sector and the supply growth. Amanda Pimenta Carlos, Hilton Notini, Luiz Maciel (Institute) Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? June, 2009. 2 / 32

Introduction Stylized Fact: Installed capacity expansion after reestructuring in 1994. An important issue of the electricity sector planning is understanding electricity demand, its main determinants and its answer to speci…c shocks on its exogenous variables. There are some estimates for Brazilian electricity demand parameters, using the Cointegration and Vector Error Correction Model (VECM) approach that became the standard method for electricity applied research in demand topic since the seminal works of Engle and Granger (1987 and 1989)... ... but all of them are for a period that exclude the severe power rationing crisis, occurred in 2001. Amanda Pimenta Carlos, Hilton Notini, Luiz Maciel (Institute) Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? June, 2009. 3 / 32

Contribution to Literature With the present paper we search to …ll some blanks in the Brazilian energy economics literature: To our knowledge, there isn’t a paper, applied to Brazilian data, that tests 1 structural break in an estimated electricity demand, with a period including the 2001 power rationing. Besides, there is no work that evaluates the demand equation coe¢cients dynamics. 2 Maybe there is a variation in the elasticities in the analyzed period. Inclusion of determinants (explanatory variables) commonly used in international 3 electricty demand estimation - like temperature, in residential demand (seasonality). Amanda Pimenta Carlos, Hilton Notini, Luiz Maciel (Institute) Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? June, 2009. 4 / 32

Motivation Castro & Rosental (2008) say that a change in the level of Brazilian electricity elasticity is in process, due to a more rational and e¢cient use of the input, specially by industrial consumers, that has been utilizing methods and energy saving equipments, after the 2001 rationing. Last year we saw in Brazilian data: GDP growing 3.7%, but electricity demand increasing less than expected, only 3.4%. Why? Residential - There isn’t an obvious trend to residential consumption. On the one hand, consumers are buying energy-e¢cient appliances, but on the other hand - according to EPE - more and more houses have refrigerator and television. Furthermore, an increasing share of consumers are living alone and we see population aging. Both counteract the e¢ciency gains. Amanda Pimenta Carlos, Hilton Notini, Luiz Maciel (Institute) Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? June, 2009. 5 / 32

Motivation Industrial - Eletrobras data shows that industrial consumption has been in‡uenced by self production growth. In the siderurgical sector, self production has increased more than 40 % from 2005 to 2007; the self production represented 28% of total consumption in 2005 and 37% in 2007. Energy-intensive sectors: Steel, aluminium, cement, petrochemical, paper & cellulose. From 2008 to 2017, EPE estimates that self production will increase 11% each year. From 1991 to 2007, self production have had a 8% rate of increase. Industries invest in their own plant to avoid power and prices instabilities. According to Abiape, the installed capacity from associate self producers is of 7 GW, or 7 % of total Brazilian installed capacity. Amanda Pimenta Carlos, Hilton Notini, Luiz Maciel (Institute) Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? June, 2009. 6 / 32

Update of Brazilian Demand Equation Estimation Results update; su…ciently relevant period after Rationing Crisis. Inclusion of variables like temperature and credit (important in the Brazilian recent economic context); Methodology never used; allows to test the dynamics in the short-run elasticities. Structural Break Test - not yet applied to Brazilian electricity demand. Amanda Pimenta Carlos, Hilton Notini, Luiz Maciel (Institute) Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? June, 2009. 7 / 32

Data Monthly data from January 1999 to December 2007. Sample size at least the double of others Brazilian applications. In table 1, we see our variables. Variable Name Source Residential Demand (MWh) Lres ANEEL Residential Tari¤ (R$/MWh) Ltres ANEEL GDP (R$) Lpib Notini & Issler (2008) PPI - Appliances Lipaelm Ipeadata LPG gas (Thousands of barrels) Lglp Banco Central Consumer Loan Operations (R$) Lcred…s Ipeadata Median Temperature ( o C) Ltemp INMET Industrial Demand (MWh) Lind ANEEL Industrial Tari¤ (R$/MWh) Ltind ANEEL Industrial Production (R$) Lproind IBGE PPI - Machines and Equipments Lipaq Ipeadata PPI - Oil Lipaq Ipeadata Corporate Loan Operations (R$) Lipac Ipeadata Amanda Pimenta Carlos, Hilton Notini, Luiz Maciel (Institute) Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? June, 2009. 8 / 32

Data Residential Demand (GWh in logs) Industrial Demand (GWh in logs) 9.0 9.7 9.6 8.9 9.5 8.8 9.4 8.7 9.3 8.6 9.2 8.5 9.1 99 00 01 02 03 04 05 06 07 99 00 01 02 03 04 05 06 07 Amanda Pimenta Carlos, Hilton Notini, Luiz Maciel (Institute) Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? June, 2009. 9 / 32

Data - Income Variables Residential Demand X GDP Industrial Demand X Production 4.8 4.9 9.7 4.7 4.8 9.6 4.6 9.5 4.7 9.0 4.5 8.9 9.4 4.6 4.4 8.8 9.3 4.5 8.7 9.2 8.6 4.4 9.1 8.5 1999 2000 2001 2002 2003 2004 2005 2006 2007 1999 2000 2001 2002 2003 2004 2005 2006 2007 Tendência até Racionamento Tendência até Racionamento Tendência após Racionamento Tendência após o Racionamento LRES LIND LPIB LPROINDSA Amanda Pimenta Carlos, Hilton Notini, Luiz Maciel (Institute) Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? June, 2009. 10 / 32

Data - Price Variables Since 2003, Federal government starts to apply a tari¤ realignment in the annual adjusts, whose objective is to …nish with the cross-subsidy. Residential Tari¤ Industrial Tari¤ 4.8 5.2 4.6 4.8 4.4 4.4 4.2 4.0 4.0 3.8 3.6 99 00 01 02 03 04 05 06 07 99 00 01 02 03 04 05 06 07 LTRES LTIND Amanda Pimenta Carlos, Hilton Notini, Luiz Maciel (Institute) Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? June, 2009. 11 / 32

Data - Unit Root Test ADF test indicates that all the variables can be characterized as non-stationary variables, except the temperature. Variable Terms Included T Stats p-value Residential Demand (MWh) Constant -2.08 (-2.89) 0.250 Residential Tari¤ (R$/MWh) Constant and Trend 1.10 (-3.45) 0.999 GDP (R$) Constant and Trend -2.09 (-3.45) 0.543 PPI - Appliances Constant -1.15 (-2.89) 0.690 LPG gas (Thousands of barrels) Constant -1.10 (-2.89) 0.711 Consumer Loan Operations (R$) Constant and Trend -1.65 (-3.45) 0.765 Median Temperature ( o C) Constant -7.64 (-2.89) 0.000 Industrial Demand (MWh) Constant and Trend -2.73 (-3.45) 0.226 Industrial Tari¤ (R$/MWh) Constant -1.16 (-2.89) 0.685 Industrial Production (R$) Constant -0.86 (-2.89) 0.806 PPI - Machines and Equipments Constant and Trend -1.02 (-3.45) 0.934 PPI - Oil Constant and Trend -2.50 (-3.45) 0.325 Corporate Loan Operations (R$) Constant -1.58 (-2.89) 0.999 Amanda Pimenta Carlos, Hilton Notini, Luiz Maciel (Institute) Brazilian Electricity Demand Estimation: What Has Changed After Rationing in 2001? June, 2009. 12 / 32