Power in Brazil

The Federal Law no 10.848/2004, which resulted from the conversion of the Provisional Measure no 144/2003, marks what is commonly known as Brazil’s new legal framework for the electricity sector, following other crucial initiatives implemented in the 1990’s, such as the de-verticalisation of utilities, allocation of core activities – including the grid operation – to non-governmental entities, major privatisations, and the adoption of the price cap regime for distribution utilities, to name a few.

According to the explanatory memorandum attached to the Provisional Measure no 144/2003, one of the pillars on which the new legal framework was based was the necessity to stimulate investments in the electricity sector, a measure deemed strategic for its expansion and modernisation, making it more competitive.

One of the instruments set forth to encourage investments within the generation segment was guaranteeing that transmission restrictions would receive proper treatment in the regulation (Article 1, item VII, Federal Law no 10.848/2004).

The Law, in that respect, followed what had already been recommended in 2000 by both Brazilian and foreign consultants that contributed to the creation of the first set of rules that guided the operation of the Wholesale Electricity Market (MAE), later succeeded by the Electric Power Trading Chamber (CCEE). Those rules already provided for the payment of compensation for generation frustration resulting from transmission restrictions to holders of thermoelectric plants (thermos).

Nevertheless, the regulation for thermos was not replicated for other sources, nor did it follow the pace of the development of renewable generation technologies, notably wind and solar power, which already represent roughly 15% of the power capacity in the country.

The delay persisted even after the Federal Law no 13.360/2016 specified that market rules should establish the payment of a charge aimed at covering the costs of system services, including transmission restrictions.

In fact, wind power generators struggled for years to have recognised by the Brazilian Electricity Regulatory Agency (ANEEL) their right to be compensated for financial losses arising from curtailments due to transmission system unavailability or other grid operational limitations – known as constrained-off restrictions, in the technical jargon.

The regulation concerning the matter was only issued last year, reaffirming wind power generators’ rights and establishing the new methodology for calculating their loss compensation – ANEEL’s Normative Resolution no 927/2021. This was motivated by a preliminary injunction obtained by an entrepreneur who filed a lawsuit demanding that the agency conclude a public hearing that had been going on since 2019 discussing the norm. The market agrees that those rules still need improvements in many aspects, including the exclusion from events prior to October 2021 of generators who operate in the free market.

As to the solar source, this year, also after a preliminary injunction was obtained by a company harmed by unfair losses, ANEEL approved a temporary rule to calculate constrained-off compensation, but the definitive regulation is still pending.

Instead of continuing to challenge the generator’s legal rights due to the fear of tariff repercussions, it is important to understand the strategic importance of not allocating risks over those who cannot manage it, such as transmission risks to generators.

In the long run, as anticipated by the government in 2003 and confirmed by the Congress in 2004, adequate risk allocation is essential to stimulate investments and competitive prices – leading to the ultimate goals of tariff affordability and sustainable development.