Energy Sector in Brazil

Institutional Model of the Brazilian Electric Sector

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.

Transmission Segment

The electricity generation business segment includes the exploration, deployment, operation, and maintenance of generating facilities. Investors intending to exploit electricity generation facilities in Brazil must obtain concession grants through a bidding process, authorization, or permission for self-generation projects, as applicable.

The country has an installed generation capacity of approximately 200,000 MW, with about 55% coming from hydro sources, the primary source, along with exponential growth in wind and photovoltaic solar sources, at 15% and 6%, respectively.

Due to its vast tropical climate and hydrographic basins in plateau areas, Brazil has prioritized the use of hydroelectric power in its energy matrix. Currently, around 70% of the installed power capacity in the country comes from hydroelectric generation. Until the 1990s, several plants with large reservoirs were built. Due to societal pressure against the environmental and social damage caused by flooding, the government has since opted for run-of-the-river hydroelectric plants that are subject to significant fluctuations in energy production according to the rainfall regime in which they are located.

In recent years, government efforts have focused on diversifying the energy matrix, mainly through the construction of thermal power plants, wind farms, and photovoltaic solar plants, without neglecting the encouragement of hydroelectric plants and small hydroelectric plants, which still represent the main investment opportunities in the sector.

All stages of the life cycle of a generation project – from project development studies to its effective operation – are authorized and/or supervised by ANEEL. The construction of large hydroelectric plants (UHEs) and small hydroelectric plants (PCHs), involving the exploitation of a natural resource that, according to the Constitution, is considered a federal asset, must be preceded by a hydroelectric inventory study – whose execution depends on ANEEL authorization and whose results must also be approved by the entity.

For UHEs, the stage following the inventory study is the feasibility study for plants with an installed capacity above 50 MW or the basic project for plants with an installed capacity between 30 MW and 50 MW. Simultaneously, environmental licenses and water resource reservations must also be obtained. Once this stage is completed, projects with a capacity above 50 MW are eligible to be auctioned through auctions for the advance sale of the energy to be produced. The entrepreneur who conducted the feasibility studies does not necessarily win the auction, although the studies allow for greater knowledge about the conditions for project implementation. The auction winner is the investor who proposes to sell production in the Regulated Contracting Environment (ACR) for the lowest price per MWh. The ACR is an exclusive environment for generators and distributors. In the case of UHEs, the auction determines the percentage that the concessionaire must obligatorily sell in the ACR and the percentage that can be commercialized in the Free Contracting Environment (ACL), where generators, traders, importers, exporters, and large consumers participate. On the other hand, the construction of PCHs – with a capacity of up to 30MW and a reservoir not exceeding 3 km², which can reach 13 km² provided they respect the characteristics of a PCH – does not require either a feasibility study or a bidding process. After the inventory study and the basic project, ANEEL selects the entrepreneur according to predefined criteria, evaluates the basic project of the plant, and grants authorization for installation. There is no requirement to sell energy in the ACR, although the entrepreneur can also participate in this contracting environment. After 30 years, the assets are reverted to the federal government.

Generators of auctioned projects can only sell their energy to distributors through public auctions conducted by ANEEL and operationalized by the Chamber of Electricity Trading (CCEE). In the Free Contracting Environment (ACL), generators can sell their energy at freely negotiated prices with traders, distributors with a market of less than 500GWh/year, and large consumers.

Given the significant hydrological differences between Brazilian regions, with non-coincident dry and wet periods, a compensation mechanism between hydraulic plants was implemented to mitigate hydrological risk. The Energy Reallocation Mechanism (MRE) was designed to share among its members the financial risks associated with the sale of energy by hydroelectric plants dispatched centrally and optimized by ONS. The MRE covers hydroelectric plants subject to ONS centralized dispatch. Small Hydroelectric Power Plants (PCHs) can participate optionally. The MRE reallocates energy accounting-wise, transferring the surplus from those that generated beyond their physical guarantee to those that generated below. Thus, the main risks associated with hydroelectric power generation projects in Brazil consist of the environmental and construction risks of the ventures.

SIN

Electricity Generation Segment