Developments in the Brazilian power sector
January 2022 | SPECIAL REPORT: ENERGY & UTILITIES
Financier Worldwide Magazine
January 2022 Issue
Choosing a power supplier, buying power credits in advance, buying different amounts of power for each month or week or even hour of the day, choosing to buy power from renewable sources only, being able to track power consumption in real time, or buying power credits for charging your car at any recharge station – all with the tap of a finger on your mobile phone.
That may sound like a pipe dream, but it is likely to be the reality from 2024 onward, when all consumers, including those served by the low voltage distribution grids, will be able to access the free power market in Brazil.
Expectations are that the average Brazilian household will the able to choose its energy providers from a list of hundreds of suppliers, similarly to what consumers of certain areas of Texas in the US already experience today.
Historically, end-users were tied to the local power company, which supplied them with both power distribution services and power. But things started to change, albeit slowly, in 1995 with the publication of Law 9074/1995, which allowed consumers with a contracted load of 3MW or more and connected to high-voltage lines to purchase power from any seller in the market and allowed, after eight years, the government to reduce load and voltage requirements.
As of 2006, consumers with a contracted load of 0.5MW or more were allowed to purchase power in the free market, if it was from incentivised renewable sources only, such as solar, wind, biomass and so on.
A big step toward deregulation occurred in 2018, when Ordinance No. 514 (later amended by Ordinance No. 465/2019) from the Brazilian Ministry for Mines and Energy (MME) set forth a gradual reduction to apply in the coming years. From 1 January 2021 onward, for a load equal to or greater than 1.5MW from 1 January 2022, 1MW from 1 January 2023 and 0.5MW until 31 January 2022, the National Electric Energy Agency (ANEEL) and the Chamber of Electric Energy Commercialization (CCEE) must complete studies describing the regulatory modifications necessary to allow consumers with a contracted load under 0.5MW and connected to low-voltage lines (under 2.3kV) with the aim of allowing access to the free market for all consumers, including residential units, as of 1 January 2024.
2022 will see intense discussions on establishing the new regulatory framework for the participation of low-voltage consumers in the free market. Brazilian regulators normally conduct public hearings and contribution processes to allow market players and other interested parties, such as trade associations, non-governmental organisations (NGOs) and so on, to participate and provide feedback on proposed new regulations.
Brazil has a total 68.6 million power consumption units, of which only around 10,000 currently meet the regulatory conditions and enjoy the benefits of the power free market. The potential for new suppliers of power and associated services and technologies is truly enormous.
It is not all good news, though, as the massive migration of consumers to the free market will require distribution tariff reform. Much of the economic return power distribution companies obtain from the sale of power to end-users will cease, and distribution grid use tariffs are likely to be increased to make up for it, reducing the overall benefits brought by the migration of consumers to the deregulated market.
Other aspects to be considered are that power distribution companies are the main sponsors of power generation capacity expansion in Brazil. As of today, distribution companies are allowed to purchase power solely from new energy auctions, where greenfield projects enter into power purchase agreements of 20 years or more with a pool of distribution companies. This arrangement has created a robust stream of bankable projects over the last two decades and was responsible for the rapid development of the Brazilian renewables industry, especially windfarms.
In a fully deregulated scenario, the new generation projects pipeline will have to rely on other off takers. The void is likely to be filled by power commercialisation companies, but many fear how this transition will work out.
If things do not go well, projects may become less bankable and subject to higher interest rates. As a result, power prices may increase in the long term and undermine the purpose of power market deregulation.
If things do go well, deregulation of the power market will drive a dynamic and creative environment, and may also help kick-start a much-needed project finance industry supported by private lenders, in lieu of the single-lender model based on financing from the state-owned credit agency, the National Bank for Economic and Social Development (BNDES).
New market for environmental attributes
Law No. 14.120/2021 has amended article 26 of Law No. 9427/1996 for purposes of replacing the current incentives through discounts on transmission and distribution grid use tariffs, with a new environmental attributes market for new renewable power generation projects to receive power generation authorisation from 1 March 2022.
Climate change will have serious impacts on global growth and development, and so the benefits of mitigation policies will certainly outweigh their implementation costs.
Despite the government’s reluctance to recognise, step up and take hold of Brazil’s role in helping to reduce worldwide greenhouse gas emissions, corporate Brazil is very keen on creating and using mechanisms designed to foster clean and sustainable economic development.
With the new legislation in mind, and in view of the zeitgeist, Energetic Research Company (EPE), a state-owned entity supervised by the MME published Technical Note EPE/DEA/GAB/014/2020 to assess alternatives for the new Brazilian environmental attributes and carbon offset market. Two main alternatives are being considered. First, a new carbon offset and environmental attributes market, whereby projects may sell renewable energy certificates or carbon credits within the power sector and to other sectors of the Brazilian economy. Second, taxing carbon, which is being considered as it was adopted by countries like Sweden and Chile, although there is concern that it will negatively affect the competitiveness of the affected sectors, and fail to create incentives for further investment in renewable power generation.
There is a general view that the first option is most likely to be pursued, since it is more in line with the provisions of Brazil’s Law No. 14.120/2021.
The new market will be a welcome development, as new renewable projects that receive power generation authorisation from 1 March 2022 on will not be entitled to an incentive programme consisting of 50 percent discounts on grid use tariffs. The new market is expected to create a stream of revenues to make up for cessation of the discounts programme.
With more than 80 percent of power generation coming from renewable sources, the Brazilian power sector is a source of carbon credits for other sectors in Brazil and for the world, where, conversely, 85 percent of power generation is fossil-fuel based. The new market has prospective clients in the Brazilian livestock, manufacturing and transportation industries, which are responsible for the majority of the country’s emissions.
Brazil has been experiencing a recent surge in metal and mining companies procuring power purchase agreements from non-fossil fuel power generation sources, probably to comply with the European Union (EU) and US ‘Global Arrangement on Sustainable Steel and Aluminium’, which highlights the need to create widespread environmental attribute certification practices, which is to be expected following the creation of the new market.
Tiago Kümmel Figueiró and Daniel Engel are partners and Luisa Tortolano Barreto is an associate at Veirano Advogados. Mr Figueiró can be contacted on +55 11 2313 5887 or by email: tiago.figueiro@veirano.com.br. Mr Engle can be contacted on +55 11 2313 5719 or by email: daniel.engel@veirano.com.br. Ms Tortolano can be contacted on +55 11 2313 5719 or by email: luisa.barreto@veirano.com.br.
© Financier Worldwide
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Tiago Kümmel Figueiró, Daniel Engel and Luisa Tortolano Barreto
Veirano Advogados
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