Alternative Energy & Power 2020

Last Updated July 22, 2020

Brazil

Law and Practice

Authors



Souza, Mello e Torres is a law firm committed to rendering personalised legal services based on high technical quality and efficiency. Regarding its infrastructure, the firm comprises nine partners in its office located in the city of São Paulo. It has a team of highly qualified experts, most of whom have international experience acquired in postgraduate courses in well-known foreign universities or working as international associates in important law firms in major financial centres around the world. The lawyers apply optimum strategies to assist their clients in corporate restructurings, M&A, project finance, corporate finance, infrastructure projects and other sophisticated transactions, both in Brazil and abroad. In these often-complex procedures, the team's focus is providing its clients with well-structured legal transactions.

In recent times, three main interrelated drivers have shaped the Brazilian electricity market:

  • the relevance of hydro-energy as a natural resource in the country;
  • the ownership of the waterfall potential by the federal government; and
  • the lack of a capitalised sector capable of taking the initiative in the construction of the sizeable facilities required for the exploration of hydro resources.

As a consequence, the system established by the nationalistic governments of Getúlio Vargas and the military in the post-war era resulted in verticalised and integrated utilities controlled by the federal and state governments. There is a deep concentration in hydro power, long-distance transmission lines forming a national grid which currently covers most of Brazil and concessions in the major metropolitan distribution areas, which were taken from private international investors in the 1960s and 1970s.

After the debacle with the state finances in the 1980s and inspired by the new competition policies dominating the international political arena, in the mid-1990s Brazil adopted a new concession law (Law 8987/95) and an aggressive programme of privatisation and unbundling of existing incumbents. 

With the aim of getting the new private sector to invest, the department of energy was succeeded by an independent agency (ANEEL), with its own budgetary resources and with a management team working under fixed mandates. ANEEL has overseen and co-ordinated the privatisation process by implementing policies that create a business-friendly environment and encourage long-term investment. 

In the late 1990s and for more than a decade in this century, the initiatives, although sometimes incoherent to entrenched interests and politically disorientating, have nonetheless been effective enough to attract private investment in thermo plants, transmission lines and renewables, in this case, first with Eletrobras offering full economic support to small hydro plants and subsequently, to wind and solar power plants.

Hydro-generation has also been developed by private consortia, although the high level of public or quasi-public resources in the construction of huge dams in the Amazon region, coupled with the findings in the recent corruption investigations, clearly demonstrates that the models adopted would not survive without intense political support.

Up until 2020, distribution in the main areas of the country was consolidated in private hands with some assets operated by first-class international and local companies.

Recent initiatives to privatise federal-owned assets through the sale of Eletrobras, the holding company controlling Furnas, Chesf, Eletrosul and Eletronorte and the most relevant part of the hydro-generation infrastructure, have no clear support from congress while within the executive branch the resolution to privatise was not unanimous and therefore the sale of such assets has been delayed indefinitely. 

As the COVID-19 pandemic hit the sector, the Brazilian market was balancing public and private investment with significant sections of distribution under private control (although Copel and Cemig, in the important markets of the states of Paraná and Minas Gerais remain under government control), business-friendly rules were working well and attracting several participants to take part in the expansion of transmission lines, renewables were mostly conducted by private initiative, thermo-plants were being developed by private investors – with some thermos controlled by Petrobras in the process of being privatised – and finally, hydro-plants and transactions associated with hydro output required major repairs as the changes introduced by Dilma Rousseff in 2013 and the deficiencies of the clearing system have resulted in important dysfunctionalities.

The main statutes governing the formation of the market are referred to below:

  • Law 8,987/1995 creates the main terms and conditions to be followed under the Law of Concessions;
  • Law 9,074/1995 introduces the concepts of independent power producers and free customers;
  • Law 9,427/1996 created the National Electric Regulatory Agency (Agência Nacional de Energia Elétrica or ANEEL);
  • Law 9,648/1998 creates the legal framework for developing a market-driven industry; and
  • Law 10,848/2004 sets forth the guidelines for the New Industry Model Law, by creating and regulating the free and regulated energy market, and it created the Electricity Trading Chamber (Câmara de Comercialização de Energia Elétrica or CCEE).

The principal federal state-owned power company in Brazil is Eletrobras (Central Elétricas Brasileiras SA), which is a holding company that controls the following entities:

  • Eletrobras CGTEE;
  • Eletronorte;
  • Eletronuclear;
  • Itaipu Binacional;
  • Furnas; and
  • Eletrosul.

Individual states in Brazil also own certain energy assets, such as:

  • Companhia Energética de Minas Gerais – CEMIG;
  • Companhia Energética de Brasília – CEB; and 
  • Centrais Elétricas de Santa Catarina – CELESC.

It is important to highlight that since the beginning of 2019, when the Bolsonaro government came into power, there has been a strong movement towards privatisation in the energy sector. The Brazilian Bank for National Development (Banco Nacional do Desenvolvimento Econômico or BNDES) is conducting this process.

Regarding investor-owned companies, there are several key players, such as:

  • Engie Brasil (generation);
  • Santo Antonio Energia (generation);
  • AES Tiête Energia (generation);
  • CPFL Energia (generation);
  • Neoenergia (generation);
  • China Three Gorges (generation);
  • State Grid Brazil (transmission);
  • Alupar Investimentos (transmission);
  • Transmissora Aliança (transmission);
  • Enel Brasil (distribution);
  • Grupo Energisa (distribution);
  • Light (distribution); and
  • Equatorial Energia (distribution).

In relation to the electric power sector, the Brazilian constitution only limits foreign investment in nuclear power generation, which is a monopoly of the federal government.

Since the repeal of Article 171 of the Brazilian constitution in 1995, foreign investors receive equal treatment to that afforded to nationals in relation to power companies. The only remaining indirect restriction applicable to foreign investors and not domestic investors is the ownership or lease of rural lands. This may impact generation, transmission and distribution power facilities. Although concessions may be fully controlled by non-Brazilians, the legal entity that is granted a concession or any other form of permission must be incorporated under Brazilian law.

Pursuant to Article 3, VIII and XIII of ANEEL Law 9,427 all concentration acts are subject to ANEEL’s prior approval, however only those acts which are relevant under Article 88 of Law 12.529/11 are also subject to clearance by the Brazilian antitrust authority or Council of Administrative Defence of the Economy (CADE). These are currently transactions involving a group on one side with an annual gross revenue equal to or greater than BRL75 million and on the other side equal to or greater than BRL750 million. 

The change in control of oil, coal, gas, biogas, biomass, wind and solar power generation companies is not usually subject to prior approval by ANEEL, as these projects are subject only to authorisation. However, these companies do need to inform ANEEL within 30 days if there has been a change in control.

The National Operator of the Electric System (Operador Nacional do Sistema Elétrico or ONS) is responsible for overseeing and administering the electricity supply and the development of transmissions facilities to ensure the reliability of the electricity system and the adequacy of supply. The ONS is a private organisation. Its primary role is the co-ordination and regulation of generation and transmissions operations in the Integrated National Grid (Sistema Interligado Nacional or SIN) but it has other responsibilities, such as:

  • operational planning for the generation industry;
  • ensuring that the industry participants have access to the transmission lines;
  • organising the use of the national grid;
  • preparing regulations concerning the operation of the transmission lines, subject to ANEEL’s approval; and
  • proposing plans to the ministry of energy for extensions to the national grid.

There have been few material changes to the regulatory framework of the electricity sector. However, ANEEL is working to broaden the access of smaller consumers to the free market as this will improve the energy quality, offering and price. Recently, there have also been some changes to the framework for the imposition of penalties on market participants, which are presently generally proportional to the economic capacity of the alleged perpetrator.

As mentioned before, the government is working to privatise major state-owned players in the energy sector. CCEE and ANEEL are working closely to improve the free energy market, as there is a lack of transparency and adequate rules in this market, and they are also working towards making it easier for smaller consumers to access the free market.

The Brazilian energy matrix is composed of 60% hydro plants and at least 20% wind, solar or biomass plants. This means that Brazil is one of the cleanest energy producers in the world. ANEEL offers a lot of incentives to consumers that wish to produce their own clean energy, through a consortium or on their own.

As mentioned before, Brazil's free energy market is still underdeveloped (with 70% of consumers buying energy from the regulated market). This (together with taxes) means that the cost of electricity in Brazil is excessively high.

As anticipated, COVID-19 has provoked a steep decrease in demand for electricity during the lockdown of commercial and industrial services, offices, shops and facilities. The great reduction in the consumption of energy by business was only partially compensated by the increase in home consumption.

The reservoirs of the hydro power plants in the south of Brazil are still fairly low due to the scarcity of rain, but decreases in hydro supply are being replaced by thermo generation. However, this also adds to the high price of energy. 

The federal government, through efforts promoted by ANEEL, recently published Decree 10.350/2020, to establish rules and provide aid to energy distributors for the consequences of the COVID-19 pandemic. Basically, the decree allows the CCEE to obtain finance from BNDES in order to provide help to the energy distributors. This is especially relevant, as it anticipates an increase in the level of consumer default because the government has limited the ability of distributors to disconnect consumers for delinquency in payments.

The aid provided to the energy distributors will also benefit energy generators, as one of the covenants to obtain the loan is that the energy distributors may not reduce the number of energy contracts with generators. The energy distributors must also limit the dividends paid to their shareholders if there is default of payment in any of their energy contracts.

The wholesale energy market in Brazil is comprised of two segments. The Regulated Contracting Environment (RCE) where distributors use descending-price auctions to buy under long-term contracts the loads needed to support their market's growth. Auctions are periodically carried out by ANEEL and CCEE.

Additionally, for loads of 3 MWs or more, purchasers of energy can also access the Free Contracting Environment (FCE), which is dominated by over-the-counter (OTC) transactions. Normally, traders and brokers bring together free consumers and generators.

As mentioned in 1.8 Unique Aspects of the Power Industry, there are some incentives for the development of the ACL, including financing by BNDES to greenfield power-generation projects to sell energy in the ACL.

Transmission tariffs are determined according to the locational model by considering the correlating flux of power through the systems and the inject capacity in each connection point of the relevant system, pursuant to ANEEL normative resolution No 559 of 27 June 2013.

The import and export of electricity are subject to prior approval by MME and/or ANEEL in co-ordination with trade authorities. In 2019, Brazil imported a relevant amount of energy from Argentina and Uruguay for emergency needs and for the outflow of cheap energy. Emergency trades that result in the depletion of hydro reservoirs on the Brazilian side must be replaced by importing the same load as registered by the Brazilian ISO.

According to publicly available information on ANEEL’s website, the supply mix of the entire market is as follows: 

  • hydro – 63%;
  • wind – 9%;
  • biomass – 8%;
  • gas – 8%;
  • oil – 8%;
  • coal – 2%;
  • solar – 1%; and
  • nuclear – 1%.

In Brazil, the concentration limits are subject to oversight by CADE. Pursuant to Law 12,529/2011, concentration acts such as mergers, purchase of assets, joint ventures, etc, are subject to CADE prior approval if one of the groups involved in the transaction has an annual gross revenue equal to or greater than BRL750 million and the other group involved has at least BRL75 million of annual gross revenue.

For the purposes of analysing concentration limits, the energy sector is divided into four distinct, relevant markets:

  • generation;
  • transmission;
  • distribution; and
  • trading.

CADE is responsible for the oversight of anti-competitive behaviour in the energy market, along with ANEEL (Law 9427/96, Law 12529/11 and Normative Resolution 378/2009). The penalties may vary from an amount of 0.1% to 20% of the company’s or group’s annual gross revenue, and other penalties may be applied, such as the prohibition to enter into contracts with official financial institutions, participate in bidding proceedings for the sale of energy or transfer of control, or the repeal of authorisations.

Brazil has internalised the Kyoto Protocol and the United Nations Framework for Climate Control of 1994 (Decree 5,445/2005) in its legal framework. Furthermore, Law 12,187/2009 introduced the National Policy on Climate Change, establishing Brazil’s commitment to reducing greenhouse gas emissions. 

In 2015, during the 21st Paris Conference, Brazil pledged that renewable energy sources would reach a 45% participation level in the country's energy matrix.

Coal-fired plants have never been considered as a pillar for the development of the Brazilian energy market due to the poor quality of the coal found in the southern part of the country. Generation of power from coal plants in Brazil has reached a peak of 1.5 GW in a few plants, mostly located in the state of Rio Grande do Sul and Santa Catarina. Modern technologies are being considered for the reconfiguration of the old and very inefficient machinery that is in place, mainly by Japanese investors. Rules for the phasing out of the existing plants have not been adopted and BNDES would not finance greenfield projects or the modernisation of brown-field projects, although severe economic downturns in the southern part of Brazil and changes on the political front may bring about a change in the internal rules of the public bank.

Three major auctions for alternative energy were conducted in 2007, 2010 and 2015 with positive results for small hydro (up to 30 MW of capacity); bagasse-fired and wind power plants. ANEEL has developed micro and mini distributed generation (Normative Resolution 482/2012), allowing units to access the distribution transmission system in an arrangement which allows compensation for the injected energy against the metered consumption of the unit, with excess being shared with other units of consumption under certain circumstances. Discussions last year on curtailing benefits to limit the returns of these projects provoked suspicions as to how independently the policies and power of ANEEL are being applied to the development of solar plants as distributed generation in Brazil.

There are also other incentives for sustainable energy sources, such as tax incentives, tariff discounts, preferential financing and lower financing for greenfield projects, which are provided by BNDES and the Northeast Bank (Banco do Nordeste or BNB).

If construction of a generation facility is conducted by a state-owned enterprise, Law 13.303/2016 governs the public procurement process. This law has been passed to replace the traditional public procurement statute, Law 8.666 adopted in 1983. The purview of the new law is now limited to acquisitions by central government, as opposed to public acquisitions procured by state-owned enterprises. 

If a concession or any other kind of permit is obtained for construction and development, then the terms of the concession or other applicable rules set out by ANEEL are relevant (terms, milestones etc). However, the private concessionaire will be free to select suppliers and EPC contractors at its own discretion and there is no specific law applicable to constructions other than the Brazilian civil code or other contractual laws chosen by the parties. It is however necessary to obtain a number of permits, rights of way, access to temporary transmission etc. In addition, environmental licences are required at the municipal, state and federal level, and, in the case of hydro plants, it is necessary to get a water-usage permit or concession for the use of federal property, as these projects use water courses which are the domain of the federal government.

Hydro-power generation concessions are usually granted after a public auction, where the winning bid criterion is the lowest power price, considering the payment of a fee for the use of a public utility (Uso do Bem Público or UBP).

Authorisations for power-generation facilities may be granted by ANEEL upon fulfilment of certain legal, technical and financial requirements pursuant to ANEEL's Normative Resolutions 395/1998 (small hydro), 343/2008 (small hydro), 390/2009 (thermo), 391/2009 (wind), 412/2010 (small hydro), 673/2015 (small hydro), 765/2017 (small hydro), and 676/2015 (solar).

Authorisations are also automatically granted by MME to the winners of the new energy auctions. To participate in these auctions, the projects need to be technically qualified by EPE upon evidence of certain technical, environmental, real estate, grid connection and supply (if applicable) conditions that confirm the project's feasibility.

ANEEL's purview is restricted to electrical systems and associated rights of way (declaration of eminent domain), concession of public assets etc. Environmental permits are the responsibility of other agencies and government bodies and need to be sorted out carefully because in principle the three political divisions have overlapping authority over environmental issues. Major projects will require a full study of the environmental impact and may be subject to public hearings which are organised and paid for by the private (or public) contractor. Preliminary permits (when conditions are imposed by environmental authorities) are followed by installation and operation permits.

Concession agreements specify several obligations of concessionaires regarding the regularity, continuity, safety, efficiency and quality of public services, as well as payment of the UBP, if applicable. Authorisation acts refer to the obligation of authorised agents to comply with ANEEL Normative Resolution 389/2009, which sets forth the rights and obligations of independent power producers and self-producers under authorisations.

Both the concession agreements and authorisation for greenfield projects establish the construction schedule with the dates for achieving intermediary milestones and the dates for commencing the commissioning of the plant.

In relation to greenfield power-generation projects that have sold energy in the regulated market, the concession agreements and authorisation grant also make reference to the performance bond that must be submitted by the concessionaire or authorised agent to ANEEL, usually for an amount equivalent to 5% of the project's capital expenditure (CAPEX), to guarantee the timely implementation of the project pursuant to its approved construction schedule.

Concession agreements and authorisation also indicate the designated approved power output of the project, the so-called "physical guarantee" (garantia física), which is the maximum amount of power that the concessionaire or authorised agent is entitled to sell to the market.

Non-compliance with the terms and conditions of concession agreements and authorisation acts is subject to penalties imposed by ANEEL after an administrative proceeding. Depending on the seriousness of the violation, ANEEL may impose penalties of a warning; fine; suspension of works or activities; specific performance; temporary prohibition to participate in public auctions for new concessions, permissions or authorisations and to enter into contracts with ANEEL; revocation of the authorisation; intervention and expropriation of the concession or permission.

The lands required for the development of a project are usually purchased by a developer through amicable negotiations. However, if the landowner is not interested in selling its property, the developer may ask ANEEL to issue a Declaration of Public Utility (Declaração de Utilidade Pública or DUP), which entitles the developer of rights-of-way or expropriation rights over the land. When declared of public interest, the developer has immediate possession of the land and the matter is only transferred to the judicial system for the adjudication of fair compensation for the expropriated land.

Except for nuclear plants and self-generating plants on offshore platforms, decommissioning requirements in Brazil are established on a case-by-case basis and normally laid down by environmental agencies. Hydro power plants have a long, useful life and it may be impossible to decommission them due to the profound impact this will have on the area covered by the reservoir. Thermo plants are a more recent introduction to the Brazilian market. 

The construction and operation of transmission lines is also regulated through Law 9,074/1995 and Law 12,783/2013, which regulates the granting of rights for such a project. MME and ANEEL will define the transmission facilities to be auctioned, the cap for the annual revenue (Receita Anual Permitida or RAP) and the deadline for the commencement of operation of the facility. The main parameter for the competitive process is the lowest RAP and the concession has a term of 30 years.

There is also the need to obtain environmental permits for the construction and operation of the transmission lines. More than half of the transmission lines in Brazil are operated by Eletrobras.

In common with other energy project transmission lines, procured by the government through public auctions for the concession to build, the winning bidders of the competitive process submit evidence of their legal, technical, economic, financial and tax qualifications. It is also necessary to present a guarantee, equivalent to 5% of the project CAPEX.

Concession agreements specify several obligations for concessionaires regarding the regularity, continuity, safety, efficiency and quality of public services provided, and establish a construction schedule with dates for achieving intermediary milestones and dates for commencing the commissioning and commercial operation of the power transmission facilities.

Power transmission concessionaires are subject to regulations established by ANEEL and the ONS's grid procedures, as well as the conditions defined in the concession contract and in the Transmission Service Agreement (Contrato de Prestação de Serviços de Transmissão or CPST) entered into by and between the concessionaire and ONS, which provides for the payment of the RAP based on the availability of the power transmission facilities. The RAP is supported by revenues arising from payment of the transmission tariff (TUST) by users of the transmission grid, in accordance with Transmission Usage Agreements (Contratos de Uso do Sistema de Transmissão or CUST) entered into by ONS and such users.

The federal constitution provides for a “taking” clause, ie, expropriation is only possible upon payment of fair compensation, the determination of which may be challenged by the expropriated party under a due process of law. Similarly, in relation to power generation facilities, if the proponent fails to reach an amicable agreement with landowners over compensation for the construction and operation of power transmission facilities on their land, the proponent may request the issuance of a DUP by ANEEL, in accordance with ANEEL's Normative Resolution 740/2016. Discussion thereafter will be restricted to what denotes fair pecuniary compensation.

Power transmission concessionaires have an exclusive right to construct and operate the transmission facilities that are the object of their concession agreements. The construction of new facilities or the expansion of the capacity of existing facilities may, however, be required by ONS.

A concessionaire has no exclusive right within a specified geographical territory, but there is no competition among concessionaires, as central planning aims to define the most efficient routes for power transmission facilities and the RAP is not based on the amount of power transmitted by the concessionaires' transmission facilities, but on the availability of such facilities.

The terms of service and the transmission charges of transmission lines are regulated by the following:

  • Law 8,987/1995;
  • Law 9,074/1995;
  • Law 9,427/1996;
  • Law 9,648/1998;
  • Law 10,848/2004; and
  • Law 12,783/2013.

As mentioned in 5.1.1 Principal Laws Governing the Construction and Operation of Transmission Facilities, power transmission concessions fall under a revenue cap regulation. These concessions may be divided into three categories, as follows:

  • concessions granted prior to 1998: RAP is adjusted annually based on the Extended National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo or IPCA), the concessions were renewed for an additional 30 years in 2013 and have a tariff revision every five years; 
  • concessions granted from 1999 through November 2006: RAP is adjusted annually based on the IPCA or the General Index of Market Prices (Índice Geral de Preços do Mercado or IGP-M) and is reduced by 50% in the 16th year of their commercial operation, the concessions have a 30-year term and are not subject to tariff revision; and 
  • concessions granted after November 2006: RAP is adjusted annually based on the IPCA, the concessions have a 30-year term and three limited tariff reviews within five, ten and 15 years of the granting of the concessions, which only takes into account changes in the cost of capital.

ANEEL adopts the weighted average cost of capital (WACC) methodology to review the transmission tariffs.

In 2018 and 2019, the rates of return of transmission companies were 7.32% and 7.11%, respectively, as proposed by ANEEL.

The TUSTs are adjusted annually, simultaneously with the adjustment of the RAP. The adjusted TUSTs are valid from 1 July of the year in which they are published to 30 June of the subsequent year.

In general terms, in the periodic tariff revision, ANEEL covers the recalculation of the cost of capital, efficiency gains in operation and maintenance of the facilities, and the revenues arising from other activities (so-called "other revenues"). The tariff revision process follows a procedure of public hearing, where the company, consumers and any other party may submit contributions to ANEEL prior to definition of the new tariffs.

Law 9,074/1995, Decree 2,655/1998 and ANEEL Resolution 281/1999, as amended, provide for open-access rights to all power transmission facilities on a non-discriminatory basis for any power generator, distributor or consumer, subject to payment of the applicable transmission charges.

The transmission charges are divided into: 

  • connection charges that cover the costs incurred by the concessionaire in the construction and operation of the connection point of the user; and 
  • usage charges calculated based on the TUST and the capacity contracted by the user. 

Law 9,074/1995 and Law 12,783/2013 state that the construction and operation rights for developing distribution facilities may be granted through concessions or permissions, both of which have a 30-year term. It is also necessary to apply for environmental licences. Municipal permits and interaction with other incumbents, such as natural gas and cable TV, which require intense and constant interaction with the city hall and other local authorities.

Distribution systems normally have low environmental impact but may cause major disturbances in populated areas and interference with the urban regulations of certain sites and as a result, this type of construction may require public hearings. To acquire an existing distribution concession or to bid for a renewed concession from the conceding authority in a competitive process, the prospective investor will have to submit evidence of their legal, technical, economic, financial and tax qualification. It is also necessary to present a guarantee equivalent to 5% of the project CAPEX.

Concession and permission agreements specify several obligations of concessionaires and permissionaires regarding the regularity, continuity, safety, efficiency and quality of the public services provided, as well as the universalisation or accessibility rights of consumers, and the affordability of tariffs.

Power distribution concessionaires and permissionaires are subject to regulations established by ANEEL. The quality and continuity of the services are regulated by the Procedures for Distribution of Electricity in the National Electrical System (Procedimentos de Distribuição de Energia Elétrica no Sistema Elétrico Nacional or PRODIST) approved by ANEEL Normative Resolution 794/2017. Interruptions in the power supply are assessed by two indicators called DEC (Duração Equivalente de Interrupção por Unidade Consumidora) and FEC (Frequência Equivalente de Interrupção por Unidade Consumidora) that measure the duration and frequency of the interruptions, respectively.

ANEEL Resolution 414/2010, as amended, establishes the directives related to the general conditions of the supply of power to consumers by distribution companies.

In relation to power generation and transmission facilities, if the proponent fails to reach an amicable agreement with landowners over compensation for the construction and operation of power distribution facilities on their land, the proponent may request the issuance of a DUP by ANEEL, in accordance with ANEEL Normative Resolution 740/2016.

Energy distributors have the monopoly to provide energy in certain geographical areas. The areas subject to monopoly are detailed in the concession agreement.

Distribution services, as well as distribution charges and terms of service, are provided for by the following:

  • Law 8,987/1995;
  • Law 9,074/1995;
  • Law 9,427/1996;
  • Law 9,648/1998;
  • Law 10,848/2004; and
  • Law 12,783/2013.

Calculating Tariffs

ANEEL adopts the WACC methodology to review distribution tariffs. The definition of remuneration base considers only the value of the assets which are effectively rendering services to the customers, compared to referential models established by ANEEL, specific for each company, which reflect the economic and geographic conditions of their respective concession or permission areas and the efficiency levels in services.

In 2018 and 2019, the rate of return of distribution companies was 8.09% as defined by ANEEL.

Adjustment of Tariffs

Power distribution tariffs are subject to adjustments and reviews as provided for in the concession or permission agreements.

In the annual tariff adjustments, non-manageable costs are fully passed on to the consumers and manageable costs are adjusted in line with inflation, based on the IGP-M or IPCA, reduced by a factor – the so-called "X Factor" – determined by ANEEL so that distribution companies can share the gains of productivity with their consumers.

Periodic Tariff Revisions

Every four or five years, there is a periodic tariff revision to ensure the necessary revenues to cover efficient operational costs and adequate compensation of investment. There is also an extraordinary tariff revision, on a case-by-case basis, to compensate for unpredicted costs, including taxes and charges which significantly change the cost structure of the distribution company.

In the process of reviewing tariffs, ANEEL takes into account the costs and the companies' markets, comparing them and other similar companies abroad, the company's efficiency, and the need for fairer tariffs and appropriate return to shareholders. The tariff revision process follows a procedure of public hearing, where the company, consumers and any other party may submit contributions to ANEEL prior to calculation of the new tariffs.

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Trends and Developments


Authors



Souza, Mello e Torres is a law firm committed to rendering personalised legal services based on high technical quality and efficiency. Regarding its infrastructure, the firm comprises eight lawyers in its only office, located in the city of São Paulo. It has a team of highly qualified experts, most of whom have international experience acquired in postgraduate courses in well-known foreign universities or working as international associates in important law firms in major financial centres around the world. The lawyers apply optimum strategies to assist their clients in project finance, corporate finance, infrastructure projects and other sophisticated transactions, both in Brazil and abroad. In these often-complex procedures, the team's focus is always on what really matters to its clients.

The Autonomous Generation of Sustainable Energy in Brazil

By enacting Normative Resolution No 482/2012, Brazilian ANEEL (National Agency of Electric Power/Agência Nacional de Energia Elétrica) has adopted policies to promote the autonomous generation of sustainable energy in Brazil (the so-called distributed generation). ANEEL’s objective when pursuing distributed energyrecognises the advances in technology for renewables which also allow for some optimisation in investments in transmission and distribution, lesser concerns with environmental impacts, smoother operation of the grid with significant flexibility and reduction of losses and diversification of the energy matrix (which still relies heavily on hydropower plants and therefore can suffer from droughts). The distributed generation allows consumers to generate and access their own generated-energy, and doing so on their own or acting with multiple parties by means of a consortium or any other associated form permitted by the regulations, they can inject the energy which exceeds consumption in the local grid to receive credits of energy to set off energy accounts with the local energy incumbent.

Agreement with Germany

Along with the efforts being made through the distributed generation, the Department of Mines and Energy (Ministério de Minas e Energia – MME), which oversees ANEEL, has also executed an agreement with the German Department of Economic Cooperation and Development (BMZ) for the creation of the Program for Energy Systems of the Future (Programa Sistemas de Energia do Futuro – PSEF). The PSEF has the main objective of improving the general conditions for the integration of renewable energy sources and electric efficiency in the electric system. The project has four phases, which are:

  • electric planning and system coordination;
  • regulation;
  • dissemination; and
  • professionals for future energy.

The first phase was concluded at the end of 2018 and currently we are on phase two, which is predicted to end in 2021.

Proposed Changes

The MME, in the beginning of 2019, also proposed a change in the current regulation to make mandatory that special consumers (those who can buy energy in the free market) with power consumption equal to or lower than 1 MWbuy its energy though a broker (as opposed to direct acquisition) to act as aggregators. The proposed change was required by the Chamber of Commerce of Electric Power (Câmara de Comercialização de Energia Elétrica – CCEE) aiming at the evolution of the current method of access to the free market in a way to simplify and bring more safety to the transactions. This change is highly relevant because it could decrease significantly the risks associated with purchasing in the free market (as the brokers are buyers of larger loads) and it could speed it up the creation of an energy exchange and clearing house in Brazil.

The proposed changes are based on the understanding that, although the brokers activities already exist in the regulations, there is a very low participation of this type of agent in the transactions within the free energy market. As previously said, this would improve the free energy market as it would divide the market in retail and wholesale, with different characteristics in accordance with the size of the consumers and is in line with the free market in the United States, Spain and England.

Players in the market have received this proposed change with good reactions but stated that it needs further regulations and need more expansive deadlines for consumers that already purchase energy directly in the free market and would have the alternative restricted by the introduction of brokers under the change of regulation proposed by ANEEL.

Conclusion

To summarise, Brazilian regulators can be seen to be promoting efforts through multiple fronts to decentralise the Brazilian energy market, specially to guarantee good prices of energy, generalised access and steady supply. These efforts are also accompanied by the promotion of sustainable energy generation methods, with benefits for those who generate energy through these sources. Also, there are major efforts to improve the free energy market as today is a very limited, obscure and insecure market.

More recently, after the Pandemics we see a sentiment growing among investors which is averse to risks and new investments what may disincentivise further developments in solar and wind and bring back old plans to complete unfinished nuclear, revamp coals and re-potentialise hydro plants when tanked market eventually comes back. However, there is also the possibility that the lower demand of electric energy caused by the pandemic is a key factor regarding the diminishing demand made to coal plants, due to the high energy cost and sufficient energy being generated by other sources.

The market participants see that there is time for a shift to low cost renewable energy, or at least a low cost energy, given that there will be some time until the energy demand goes back to what it was in December 2019.

Souza, Mello e Torres

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São Paulo, SP.
Brazil

+11 96641 7537

marcello.alves@souzamello.com.br www.souzamello.com.br
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Law and Practice

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Souza, Mello e Torres is a law firm committed to rendering personalised legal services based on high technical quality and efficiency. Regarding its infrastructure, the firm comprises nine partners in its office located in the city of São Paulo. It has a team of highly qualified experts, most of whom have international experience acquired in postgraduate courses in well-known foreign universities or working as international associates in important law firms in major financial centres around the world. The lawyers apply optimum strategies to assist their clients in corporate restructurings, M&A, project finance, corporate finance, infrastructure projects and other sophisticated transactions, both in Brazil and abroad. In these often-complex procedures, the team's focus is providing its clients with well-structured legal transactions.

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Souza, Mello e Torres is a law firm committed to rendering personalised legal services based on high technical quality and efficiency. Regarding its infrastructure, the firm comprises eight lawyers in its only office, located in the city of São Paulo. It has a team of highly qualified experts, most of whom have international experience acquired in postgraduate courses in well-known foreign universities or working as international associates in important law firms in major financial centres around the world. The lawyers apply optimum strategies to assist their clients in project finance, corporate finance, infrastructure projects and other sophisticated transactions, both in Brazil and abroad. In these often-complex procedures, the team's focus is always on what really matters to its clients.

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