Energy Sector in Brazil

CNPE – National Council for Energy Policy

The CNPE was created in August 1997 to advise the President on the creation of a national policies and measures for the Brazilian energy sector. The CNPE is composed of the Minister of Mines and Energy, who is its chairman, and eleven members of the federal government administration: eight ministers and three representatives appointed by the President.

MME – Ministry of Mines and Energy

The MME is the government’s primary institutional agent. Following approval of the law establishing the new electricity sector model, the MME assumed certain obligations that used to be the responsibility of ANEEL, including the wording of the guidelines that govern the granting of concessions and the issue of instructions for bids related to concessions of public services and assets. Mixed-capital companies, such as Petrobrás and Eletrobrás, as well as the Brazilian Electricity Regulatory Agency (ANEEL) and the National Agency for Oil, Natural Gas and Biofuels (ANP) are linked to the MME.

CMSE – Electricity Sector Monitoring Committee

The CMSE was created in 2004 to constantly monitor and assess electricity supply continuity and security nationwide. It is composed of four members of the MME and representatives of the following institutions: the Brazilian Electricity Regulatory Agency (ANEEL), the National Agency for Oil, Natural Gas and Biofuels (ANP), the Electric Energy Commercialization Chamber (CCEE) and Electric System National Operator (ONS).

ANEEL – Brazilian Electricity Regulatory Agency

ANEEL is a federal agency whose main responsibility is to regulate and oversee the electricity sector in accordance with the policy determined by the MME and respond to issues delegated to it by the latter and the federal government. ANEEL’s current responsibilities include (i) regulating the production, transmission, distribution and commercialization of electricity; (ii) overseeing electricity concessions, permissions and services; (iii) implementing the federal government’s policies and guidelines related to exploration of electricity and the use of hydroelectric power; (iv) promoting activities related to the granting of concessions, permissions and authorizations for electricity projects and services; (v) resolving administrative litigation between sector agents and between sector agents and consumers; and (vi) defining the criteria and methodology for determining tariffs.

ONS – Electric System National Operator

The ONS is a non-profit organization that coordinates and controls electricity generation, transmission and distribution companies, as well as other private agents, such as importers, exporters and free consumers. Its main role is to supervise generation and transmission operations in the SIN (interconnected system) in accordance with ANEEL’s regulations and under its supervision. The ONS‘s main objectives and responsibilities are: (i) planning the operation and the centralized dispatch of generation so as to maximize the SIN; (ii) supervising and controlling the use of the SIN and international connections; (iii) contracting and managing transmission services and the respective access to the transmission network by all the sector’s agents in a non-discriminatory manner; (iv) proposing rules for the operation of the transmission facilities of the SIN’s basic network through a public and transparent process; (v) presenting proposals to the granting authority for the expansion of the basic network and reinforcement of the SIN, to be considered in the planning of the transmission system expansion.

CCEE – Electric Energy Commercialization Chamber

The CCEE, created in 2004 to replace the MAE, is a non-profit organization maintained by the sector’s agents and subject to ANEEL‘s authorization, oversight and regulation. The CCEE handles energy purchase and sale activities nationwide. The institution calculates and discloses the Difference Settlement Price – PLD, used to value energy purchase and sale transactions. Among other matters, it is responsible for: (i) implementing and disclosing commercialization rules and procedures; (ii) managing contracts in the regulated (ACR) and free (ACL) markets; (iii) keeping a record of energy generated and consumed; (iv) conducting auctions in the regulated market, under ANEEL; (v) conducting reserve energy auctions, under ANEEL, and settling the amounts contracted in these auctions; and (iv) investigating any violations by the sector’s agents and calculating penalties.

The electricity transmission business segment includes the installation, operation, and maintenance of the transmission facility lines that link the activities of electricity generation and distribution.

The Basic Network of the National Interconnected System (SIN) is made up of all of the substations and transmission lines operating at tension levels equal or superior to 230kV. Its planning is overseen by institutional entities – the MME, ONS, and EPE – which assess the need to hold energy auctions at which market agents bid for the right to build and operate new transmission lines by means of 30-year concessions.

Winning groups are determined through the criteria of greatest discount on Annual Permitted Revenue (RAP) from service provision. RAP refers to the revenue obtained as a result of the transmission bidding process and is paid to the transmission companies once their facilities commence commercial operations.

Concessions can be divided into three categories: Category I – Concessions granted prior to 1998. Their RAP is adjusted annually in accordance with variation in the IGP-M index. Contracts expire in 2015. Some of these concessions are subject to tariff revision.

Category II – Greenfield projects auctioned between 1999 and November of 2006. Their RAP is adjusted annually in accordance with variations in the IGP-M or IPCA indices. Their RAP is reduced by 50% beginning in the 16th year of their commercial operations, and their concessions expire 30 years after the signing of contracts.

Category III – Greenfield projects auctioned after November of 2006. Their RAP is adjusted annually in accordance with variation in the IPCA index. These concessions are subject to tariff revision in years 5, 10, and 15 of their contracts. Such revisions only take into account changes in the cost of capital, in order to reflect modifications to the long term interest rate – TJLP, the main financing index for BNDES funding. Their concessions expire 30 years after the signing of contracts.

Service quality for electricity transmission concessionaires is measured in terms of transmission system availability. The transmission unavailability index determines the Variable Portion (VP) to be deducted from the transmission company’s RAP for failure to provide adequate public transmission service. Supplementary RAP may also be allocated to reward excellent operational performance or as a result of contract renegotiation due to additional investments in the granted system (system reinforcement).

Because Brazil is such a large country, transmission lines here must cover long distances, since power generation facilities, the majority of which are hydroelectric plants, are usually located far from major areas of consumption.

The interconnected electricity system allows for energy to be shifted among different regions when one or more of them face a reduction in hydropower generation due to seasonal changes in rainfall. Since rainy seasons occur at different times in the Brazilian south, southeast, north and northeast regions, high-voltage transmission lines (500 kV or 750 kV) allow for sites with insufficient power output to be supplied by generation facilities in other regions.

The SIN is almost completely interconnected, serving the needs of 98% of the electricity market. With the new hydroelectric plants – Belo Monte, Jirau, and Santo Antonio -as well as other hydro energy projects in the North, the country will need to make substantial investment in transmission in order to connect these regions to the SIN. The expansion of the SIN to the north region brings with it the opportunity to invest in new transmission systems and will allow hydroelectric energy to be exploited for small-, medium, and large-scale projects, converting the north region into Brazil’s new energy frontier.

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.