Thought leadership from our experts

The Brazilian power sector modernization project

The need for a deep restructuring in the current model of the Brazilian power sector has been discussed for a long time. The last major structural change occurred in 2004, with the creation of the Electric Energy Trading Chamber ("CCEE"), which is responsible for managing all the power purchase and sale transactions in the national electricity market.

Since then, a lot has changed. The world is no longer the same as it was 15 years ago, there has been a substantial technological advance in several segments of the economy, personal and business interactions are made in other ways and we live in a highly globalized and connected world. However, the Brazilian power sector did not follow this evolution, that's why we are currently experiencing in Brazil a mismatching of the model created in 2004.

Among the factors that contributed to the saturation of the current model, it is worth highlighting the following:

a) The severe water crisis that has been affecting the country during the last few years (more strongly after 2013);

b) The use of the power sector to achieve political objectives (such as reduction of tariffs at any cost, disregarding the financial balance of the concessionaires, reduction of the fiscal deficit, etc.);

c) The interference of the Judiciary Power in regulatory matters, often restricting the application of the regulatory rules;

d) The recent and gradual change in the Brazilian power matrix, which was predominantly hydroelectric and now has a significant share of power generation through renewable sources, mainly wind and solar;

e) Technological evolution, which allowed the reduction of equipment costs for power generation and enabled small producers, or even consumers, to generate electricity; and

f) The need for more active consumer participation in the management of its consumption, with the possibility of free choice of its power supplier, as already occurs in other countries such as the United States, Germany, the United Kingdom and France.

This saturation of the current power sector model was even more evident in 2015, when the entire market was stuck for a few months in 2015.

In this scenario, in February 2018, the Ministry of Mines and Energy ("MME"), which is a Brazilian body responsible for planning, managing and developing the sector's legislation, as well as supervising and controlling the implementation of policies aimed at the country's energy development, presented a draft bill that aims to restructure and modernize the model of the Brazilian power sector.

With the restructuring, the MME aims to achieve the following objectives:

a) Encourage efficiency in business decisions, guaranteeing low tariffs, security of supply and socio-environmental sustainability. The MME understands that the model of the Brazilian power sector must provide incentives for the individual decisions regarding investments and commercial and operational management of the assets of the agents that operate in the market which lead to optimal results for the entire national electric system;

b) Appropriately allocate the risks among the agents that operate in the market, in order to allow their individual management. The intention is to allocate the risks to agents who are best prepared to deal with them;

c) Remove barriers to the participation of agents in the market. The MME understands that all those interested in participating in the free energy market should be able to do so; and

d) Respect existing contracts, providing an appropriate transition between the current and the new proposed model, which makes the market safer for receiving investment from other countries.

As can be observed, the changes proposed by the MME have the objective of making the Brazilian power sector more open, mature and more competitive compared to other countries.

In the search to achieve these objectives, the main changes suggested by the MME in the draft bill are:

Opening of the free energy market

The proposal proposes that all electricity consumers that are served in high and medium voltage can freely choose their energy supplier. Currently, besides being attended in high or medium voltage, the consumer has to fulfill a minimum charge requirement to have the right to choose from whom to buy power.

The idea is that the opening of the free energy market be made gradually until 2026, the year from which it will no longer demand a minimum charge requirement for consumers to choose their power supplier.

Moreover, the proposal suggests that ANEEL, the body that regulates and supervises the activities of generation, transmission, distribution and commercialization of power in Brazil, carries out studies until December 31, 2022 with the objective of opening the free market for all consumers served at any voltage level (high, medium or low). The ultimate goal is to have the total opening of the free energy market, in which any consumer has the freedom to choose from whom to buy power, without any kind of barrier or restriction.

Mandatory disclosure of a reference price in the open market

The disclosure of a reference price for the purchase and sale of power is intended to reduce the asymmetry of information between purchasing agents and energy sales agents and to create a price reference. The MME understands that the disclosure of a reference price is essential for the sustainability of the free energy market.

Presentation of Stronger Financial Guarantees

It is proposed that financial guarantees be provided daily by debtor agents that may cause some damage to the national power market. With this, the MME would like the market expansion to take place in a sustainable and safe way, which can only happen with the adoption of tools that inhibit excessively risky behavior. Currently, financial guarantees are provided monthly.

Destination of charges for the payment of the indemnities of the transmitters

The MME suggests that Global Reversion Reverse1 funds be used to pay the indemnities of the transmitters whose concessions were extended in 2012. Currently, these amounts are included in the tariff paid by the consumers.

This is an attempt by the MME to solve several lawsuits filed by consumers who question the inclusion of payment of indemnities in tariffs, trying to conduct the involved parties to reach an agreement.

Valorization of environmental attributes

The proposal suggest the development of a mechanism for the valorization of environmental attributes, which will capture the benefits of the advancement of technology and sources of low-carbon electricity generation. To this end, the concessions for power generation granted until 2020 will have a discount on the tariff for the use of electricity transmission and distribution systems, which would remain valid until the end of the grant.

Moreover, the proposal stipulates that Executive Power must submit by March 31, 2020, a plan for the creation of markets to value the low carbon emissions, to be implemented by December 31 of the same year. Such a plan should be discussed together with the Ministries of Environment, Industry, International Trade and Services and Mines and Energy.

Finally, the document also stipulates the termination of the contracts and the shutdown of the thermoelectric power plants, whose electricity generation is much more expensive and highly polluting.

Attraction of foreign investments

The purpose of this amendment is to increase the competitiveness of the Brazilian power sector vis-à-vis the world market and create an environment conducive to the development of alternative sources of power generation.

Therefore, it is proposed to remove the limit imposed by Law No. 5,709/1971 for the acquisition of rural properties by foreigners. The MME understands that this limit acts against Brazilian interest in modernizing its energy matrix and makes it difficult for Brazil to honor its domestic and international commitments to reduce the emission of greenhouse gases.

Research & Development Investments

Finally, the proposal stipulates the possibility of the registration of research centers for the receipt of resources from the federal government for the research and development of the national power sector. With this, the MME recognizes the need to look deeper into several issues that affect the Brazilian power sector, with society and power sector specialists, which is essential for the detailing and construction of the new model.

The draft bill will be discussed in the National Congress, when it may undergo changes and subsequently lead to the sanction from the President.

  1. The RGR is a charge paid by the power generation, transmission and distribution concessionaires, whose purpose is to finance improvement and expansion projects for companies in the energy sector.