Opportunities in Brazil’s free power market

April 2024  |  SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2024 Issue

The Brazilian energy market is currently divided into two distinct environments: the regulated power market (known as ACR), consisting of regulated consumers, and the free power market (known as ACL), comprised of free consumers.

In the regulated environment, consumers acquire power directly from the local power distribution concessionaire to which they are connected. In this setting, each consumer must make a monthly payment for the power they consume, along with tariffs for the use distribution system and sectorial charges regulated by the federal government. In order to acquire the power necessary to meet the demands of regulated consumers, power distribution concessionaires enter into power purchase agreements (PPAs) in the regulated environment (known as CCEARs), which are awarded to power generators through public auctions coordinated by the National Agency of Electric Energy (ANEEL) and the Chamber of Commercialization of Electric Energy (CCEE).

The free power market allows participants to acquire their power directly from generators or traders authorised by CCEE, through bilateral contracts. Although the participants are, as a general rule, still subject to certain tariffs and charges, which vary depending on the specific characteristics of the consumer and the power being acquired, the price for the power itself is freely negotiable, by executing a private PPA. These PPAs are then registered in CCEE’s system.

Since 1 January 2024, consumers receiving electricity at or above 2.3kV, or served by an underground distribution system (group A) are entitled to migrate to the free power market, under the terms of MME Ordinance No. 50 of 27 September 2022.

According to ANEEL’s Market Information Monitoring System (SAMP), there are currently around 170,000 high-voltage consumers able to migrate to the free power market.

The opportunity to negotiate the price, term, amount and type of energy is attracting a wide range of consumers seeking to reduce their costs, as well those with an environmental, social and governance (ESG) agenda looking to benefit from the acquisition of power from renewable power sources.

There are prescribed stages of this process, as well as documents that must be submitted to CCEE for qualification purposes.

Before deciding whether to move to the ACL, it is important to consider certain aspects, including those outlined below.

Assessment of contracted demand. To transition to the ACL, the consumer must assess if it meets a minimum demand of 500kW, potentially aggregated with other consumers to achieve the required minimum. Those with a lower demand may also transition to the ACL, but due to the complexity of the operations in this environment, these smaller consumers need to be represented by an authorised power retail trader.

Economic feasibility. Consumers should compare current costs in the ACR to estimated costs in the ACL. Factors such as energy consumption at different times and other characteristics should be analysed for economic feasibility. Since the ACL is more complex, consumers need a team to oversee ACL compliance or engage a power retail trader to represent them.

Termination of the relationship with the distributor. Regulated consumers need to coordinate their ACL migration with termination of their existing local power distribution concessionaire relationship. This is done by sending a ‘letter of termination’ six months before the desired migration date, which can be brought forward by paying a contractual penalty. Planning for migration is necessary to avoid power exposures to the consumer.

Billing metering system (SMF) suitability. Adjustments to physical power installations at consumption sites are required so data can automatically be sent to CCEE. This process involves designing and approving SMF assembly, commissioning and connectivity. Associated costs generally fall to the consumer, who is guided by the distributor to ensure the process is carried out correctly.

From CCEE’s perspective, the ACL structure was originally designed with a wholesale focus, targeting large companies and industries that, at the time, were the only ones that could enter the market. Now, with the opening of the ACL to all group A consumers, including smaller consumers, the regulatory and operational model will need to be adapted accordingly.

To this end, CCEE and ANEEL are working jointly to develop a new framework to simplify processes for small consumers. The CCEE is reviewing current rules and legislation to create a computerised system for exchange of information between agents and competent authorities.

Considering the need for the sector to adapt in light of the market opening, it is expected that, throughout this year, there will be many agendas at ANEEL that may be subject to consultations and public hearings.

For example, according to CCEE, there are currently 100 retail agents authorised by CCEE and another 50 in the process of becoming able to serve this new market.

Considering the exponential expansion of participants in the free power market, a surge in investments and opportunities within the sector is expected in the coming years. To address escalating demand, significant investment in power generation projects and improving the national transmission infrastructure will be imperative.

According to the Brazilian Association of Energy Traders (ABRACEEL), by 2035, the broad opening of the ACL has the potential to reduce power expenses by BRL210bn, create over 600,000 jobs and deliver a 27 percent average discount in power purchases.

This change, however, requires a restructuring of the sector, to prepare for the new reality. Consumers who migrate to the ACL stop acquiring energy from the distributor, reducing their revenue. This may force the distributor to raise prices and tariffs to compensate for the loss, especially since they are usually bound to long-term CCEARs of around 15 to 30 years. A practical solution from ANEEL will be needed in the future.

Nevertheless, from an investor’s point of view, the sector is booming and full of opportunities. New business models may drive greater development and maturity for the power sector.

Brazil’s power sector is on the rise and expected to attract significant investment, both domestic and international, in the coming years.

 

Fabiano Gallo is a partner and Breno Cintra is an associate at Campos Mello Advogados in cooperation with DLA Piper. Mr Gallo can be contacted on +55 (11) 3077 3500 or by email: fabiano.gallo@cmalaw.com. Mr Cintra can be contacted on +55 (11) 3077 3500 or by email: breno.cintra@cmalaw.com.

© Financier Worldwide

BY

Fabiano Gallo and Breno Cintra

Campos Mello Advogados

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