The use of composite indicators to evaluate the performance of Brazilian hydropower plants

• Date: 01 July 2018
• Author: Andreia Zanella,Felipe A. Calabria,Ana S. Camanho
• DOI: http://doi.org/10.1111/itor.12277
• Published date: 01 July 2018

Intl. Trans. in Op. Res. 25 (2018) 1323–1343

DOI: 10.1111/itor.12277

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The use of composite indicators to evaluate the performance

of Brazilian hydropower plants

Felipe A. Calabriaa, Ana S. Camanhoaand Andreia Zanellab

aFaculdade de Engenharia da Universidade do Porto,Rua Dr. Roberto Frias, 4200-465, Porto, Portugal

bUniversidade Federalde Santa Catarina, Campus Reitor Jo ˜

ao David Ferreira Lima, 88040-900 Florian´

opolis, Santa

Catarina, Brazil

E-mail: felipecalabria@yahoo.com.br [Calabria]; acamanho@fe.up.pt [Camanho]; andreia.zanella@ufsc.br [Zanella]

Received 20 March 2015; receivedin revised form 31 January 2016; accepted 1 February 2016

Abstract

This paper investigates the performance of the largest Brazilian hydropower plants. This study covers 78%

of the total installed capacity from hydros in the country,and considers indicators reflecting operational and

maintenance costs as well as quality of service. The assessment was conducted using a new approach for the

construction of composite indicators, based on a directional distance function model. First, we assessed the

hydropower plants allowing for complete flexibility in the definition of weights, enabling the identification

of underperforming plants, and quantification of their potential for improvement. Next, we assessed the

plants considering different perspectives regarding the importance attributed to each indicator. This allowed

reflecting different points of view, focusing primarily on operation and maintenance costs or quality issues.

The results identify the hydropower plants that can be considered benchmarks in different scenarios, and

allow testing the robustness of plants’ classification as benchmarksin the unrestricted model.

Keywords:data envelopment analysis; directional distance function; performance assessment; cost and quality indicators;

Brazilian hydropower plants

1. Introduction

This paper aims to evaluatethe efficiency of the largest hydropower plants in Brazil. Considering that

the Brazilian electrical power system has around 133 GW of installed capacity and usually operates

with around 80–90% of the electrical energy generated from hydropower plants, an analysis of the

hydropower plants’ performance is a relevant contribution to the electrical sector.

The Brazilian Federal Constitution of 1988, which is currently in force, establishes that “it is the

responsibility of the Union to operate, directly or through authorization, concession or permission,

the services and facilities of electricity and the energy utilization of watercourses in conjunction

with the States where hydropower potential is available.” In the case of electricity generation,

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1324 F. A. Calabria et al. / Intl. Trans.in Op. Res. 25 (2018) 1323–1343

exploitation occurs through concession or authorization. Transmission services are provided under

the concession regime,while electricity distribution is carried out through concession or permission.1

According to the current legislation, all hydropower plants with installed capacity more than

50 MW are given a concession grant. These hydros participate in public auctions, which oper-

ate through competition with a single buyer or purchasing agency, and where companies offer

price bids considering that both fixed and variable costs will be recovered along the concession

period.

Recently, the Brazilian Government gave a referral to the issue of the renewal of the electricity

generation concessions through the provisional measure no. 579/2012, converted into the law no.

12.783, of 11 January 2013 (Brazilian Presidency of the Republic, 2013). This norm enables the

extension of the generation concession contracts for a period up to 30 years, provided that, among

other conditions, the remuneration of assets fully depreciated or amortized is reduced until this

compensation reaches the point to pay only the costs of operation and maintenance.

Regarding the electrical generation activities, about 20% of the total hydro installed capacity of

the country (equivalent of 22 GW) should be extended under this standard or tendered by public

auctions. At the end of this process, the generation companies that passed through the process

of granting extension are remunerated by a tariff stipulated by the Brazilian Electrical Regulatory

Agency (ANEEL). Moreover, the normativeresolution ANEEL no. 541 of 12 March 2013 (Brazilian

Electricity Regulatory Agency, 2013), which establishes the standard quality of service that should

be provided by these utilities, states that hydros observed performance should be taken into account

for the calculation of their allowed revenue in each annual adjustment and review process. In other

words, those that accept the conditions for the concession renewal receive an annual income, paid

monthly, adjusted annually according to their quality of service.

The data envelopment analysis (DEA) technique can help the Brazilian electrical regulatory

authority in the evaluation of hydropower plants’ performance and diffusion of best practices. In

addition, DEA can support the implementation of information campaigns and regulatory schemes,

aiming to promote information exchange and learning in the electrical sector. The performance

assessment conducted in this paper will take into account the operation and maintenance costs as

well as the quality of service standards. The comparison of performance among plants can suggest

pathways to improve both quality and cost indicators, ensuring adequate service provisionwith low

tariffs.

From an empirical perspective, the identification of the benchmarks and potential for improve-

ments of the inefficient hydros is a major contribution of this study. From a theoretical perspective,

the novelty lies in a new performance assessment methodology, based on the construction of com-

posite indicators (CIs) with directional distance functions (DDFs), which can be used to incorporate

decision makers’ preferences.

This paper is organized as follows. Section 2 provides a review of the literature on the assessment

of hydropower plants’ performance. Section 3 presents the indicators used to assess the Brazilian

hydros. Section 4 provides a brief review of the DEA technique applied to the construction of CIs

1In the Brazilian legal system, the differentiation between the concession, permission, and authorization is related to

the contractual nature.Concession is granted by contract, and permission and authorization through administrative act.

Concession is normally used when large capital is allocated to the performance of the public service and when the risks

involved are higher. Unlike the concession and permission, in the authorization, the services used are not always paid by

users through tariff.

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2016 The Authors.

International Transactionsin Operational Research C

2016 International Federation of OperationalResearch Societies