Power in Brazil

Editor’s note: Julião Coelho is highly recognised as an expert in Brazil’s dynamic power sector. He was ranked in Chambers for the first time in 2018 and quickly ascended to Band 1 this year after demonstrating an enviable profile of high-stakes mandates and getting applause from clients and peers. In the article below, Coelho and his partner Pedro Henrique Maciel Fonseca set out the major trends and challenges around the Brazilian power sector.

The Brazilian electricity market is organized into two trading environments, separated by a load limit: the free and the regulated environments, each one with its unique type of consumer. These environments are the result of a radical market restructuring in the 1990s, when Federal Laws No. 8.987/1995 and 9.074/1995 ended the vertically integrated state-owned utilities monopoly and introduced competition into the electricity generation sector. The competition among generators was based not only on the creation of Independent Power Producers (IPPs), no longer vertically integrated, but also on the establishment of the Free Trading Environment (ACL, in the Portuguese acronym), which currently accounts for 34% of the market, in addition to the Regulated Trading Environment (ACR), which represents 66% of the market.

Electricity procurement and types of consumers 

In the Regulated Environment, electricity is traded in public auctions, in which the Regulatory Agency (ANEEL) gathers distribution companies willing to buy and generators willing to sell. ANEEL matches their bids and settles a regulated price, and all other conditions of the contract. Distribution companies will then supply electricity for their captive consumer, who will pay the regulated rate approved by ANEEL and cannot have a different supplier other than the local distributor.

According to Federal Law No. 9.074/1995, the Free Trading Environment consists of free consumers, who can procure electricity from any supplier, not only the local distributor. Besides the price, parties may negotiate flexibility, contract length and other contract terms. An important consequence of being able to choose the supplier is that the consumer is no longer dependent on the distributor’s portfolio, meaning that they may procure 100% renewable electricity if they wish to do so.

The boundary that separates captive consumers from free consumers (and therefore the regulated environment from the free one) is a load limit. Captive consumers have a load smaller than 500 kW, while free consumers have a load greater than 2,000 kW. The former are mainly residences and small businesses, and the latter are mostly medium or big businesses and industries.

The gap between the two categories (load from 500 kW to 2,000 kW) identifies the special consumer, a third category created by Federal Law No. 9.427/1996. The law provides that consumers with a load greater than 500 kW (mostly medium businesses) are free to procure electricity from specified renewables sources: solar, wind, biomass, and hydro. In other words, the special consumer is a free consumer, but with comparatively limited (and cleaner) choices.

Consumer choice expansion: challenges and opportunities ahead

From the supplier’s perspective, the special consumers’ demand represents a reserved market share, in which renewables compete only among themselves and fossil-fuelled generators are excluded.

This market design is under changes that pose new challenges and opportunities.

The Ministry of Energy’s Order No. 514/2018 expanded the special consumer’s choice in the Brazilian electricity retail market by gradually reducing the load limit beyond which they become free consumers. In short, the Order turns special consumers into free consumers.

This means renewables lose their reserved market share. This means competition is increasing, and generators are seeking to reduce costs, including regulatory costs, which commonly leads to litigation. For example, in recent cases the Federal Court ruled that ANEEL should regulate special tariffs for renewables, breaking long years of inaction over the matter.

The electricity retail market expansion also increases the political debate and litigation over subsidies. Recently, Federal Law No. 14.120/2021 ended the discount on transmission and distribution tariffs (respectively TUST and TUSD) for new renewable projects, in exchange for the promise to value their environmental attribute (but no effective valuation has been done yet).

The reason is that renewables have reached both price parity (i.e. competitive prices without subsidies) and grid performance parity (i.e. they perform as well as other energy sources). Prices are declining and technologies are improving for renewably generated electricity, so it is becoming the default choice for free consumers, regardless of their broad range of choice.

In addition, the private sector is taking the lead on guiding the economy towards a cleaner path. Recent investment flows and the expected electricity capacity demonstrate that capital is moving towards renewables. For instance, companies are taking the lead and setting voluntary environmental goals that go beyond governmental standards. In 2019, global investments in new renewable capacity were almost three times higher than in fossil fuels and nuclear combined. In Brazil, investments in renewables grew 78% in 2019 compared to 2018.

In this new scenario that is being shaped in the Brazilian electricity market, investors must understand the legislative and regulatory structure, so they can benefit from the vast opportunities in this field.