The electricity generation segment includes the prospecting, implementation, operation and maintenance of generating facilities. Investors who wish to explore electricity generation facilities in Brazil must be granted a concession through a bidding process, authorization or permission for self-generation projects, if applicable.
Given its vast territorial extension with a tropical climate and river basins in plateau areas, hydroelectric power was prioritized in Brazil’s energy matrix. Currently, hydroelectric generation accounts for around 70% of the country‘s installed electricity capacity. Until the 1990s, a number of plants with large reservoirs were built. Due to the pressure from society against social and environmental damage caused by the flooding, the government has opted to implement run-of-the-river hydroelectric plants, which are subject to oscillations in energy production depending on the rainfall patterns where they are located.
In recent years, the government has concentrated its efforts in the diversification of the energy matrix, mainly through the construction of thermal power plants and wind farms, without impacting incentives to hydroelectric and small hydroelectric plant projects, which are still the main investment opportunities in the sector.
All phases of a generation project – from studies through the project development to the operation – must be authorized and/or supervised by National Electric Power Agency (ANEEL). Since the construction of hydroelectric and small hydroelectric plants involve the exploration of a natural resource considered an asset of the union, according to the Brazilian Constitution, a hydroelectric inventory study – which must be authorized by ANEEL, as well as its results – must be conducted beforehand.
After the inventory study, in the case of hydroelectric power plants, a feasibility study for 50 MW installed capacity plants or a basic project for 30-50 MW installed capacity plants must be conducted. At the same time, an environmental license and water resource reserve must be obtained. After this, the above 50 MW installed capacity projects are allowed to be bid through auctions for anticipated sale of energy to be produced. The entrepreneur that made the feasibility studies is not necessarily the winner of the auction, although the studies provide greater knowledge in the project’s implementation conditions. The investor to win the auction is that who offers the lowest price per MWh at the regulated market. The regulated market is exclusive for generators and distributors. Regarding hydroelectric power plants, auction is defined as the percentage that the concessionaire is obliged to sell through the regulated market and the percentage that can be traded in the free market, in which generators, traders, importers, exporters and free consumers are participants. The construction of small hydroelectric power plants – with installed capacity of up to 30MW and reservoir not greater than 3 km², which can reach 13 km² provided that the characteristics of a small hydroelectric power plant are observed, does not requires neither the feasibility study nor the bidding. After the inventory study and the basic project, Aneel selects the entrepreneur based on previously defined criteria, evaluates plant’s basic project and grants authorization for the construction. There is no energy sale requirement in the regulated market, although the enterpreuner can also participate in it. After 30 years, the assets are transferred to the Federal Government.
The generators whose projects were bid are allowed to sell their energy to distributors only through public auctions conducted by ANEEL and operated by the Electric Energy Trade Chamber (CCEE). In the free market, generators can sell their energy at prices freely established in common agreement with the traders, distributors below 500GWh/year and free consumers.
Due to the significant hydrologic differences among the Brazilian regions, that is, some places under dry periods while others are under wet periods, a compensation mechanism was implemented among the hydroelectric power plants to mitigate hydrologic risks. The Energy Reallocation Mechanism (MRE) was developed to share among its participants the financial risks associated to the sale of energy by the hydroelectric power plants dispatched in a centralized manner and optimized by ONS. The MRE is composed of hydroelectric power plants subject to ONS’s centralized dispatch. Small hydroelectric power plants can participate in this mechanism at their own discretion. MRE reallocates energy in the plants’ accounting books, transferring the excess of those who generate beyond its physical guarantee to those that generated below their physical guarantee. Thus, the main risks associated to hydroelectric power generation in Brazil consist of the projects’ environmental and construction risks.