Electricity regulation in Brazil: overview

The electricity market in Brazil is the largest in Latin America and plays an important role in the economy. The electricity sector represents almost 3% of Brazil's gross domestic product (GDP) and is fundamental to other important economic sectors, such as industry.

The electricity sector has an installed capacity of about 173.6 gigawatts (GW), divided among 9,013 power plants, including the following sources:

The Brazilian energy sector is structured and overseen by the Brazilian Federal Constitution. The Constitution states that the sector can be exploited directly or through authorisation, concession or permission.

Over the last 20 years, the energy sector has been restructured and opened up to foreign investment in power generation. In this context, the government passed Law No 8,987/1995 (Concessions Law) and Law No 9,074/1995 (Power Concessions Law).

These laws reshaped the electricity market by establishing that all concessions for major energy services must be granted through a public bidding process. This developed a free energy market, which became more competitive once some power consumers were allowed to purchase energy directly from suppliers.

To regulate and supervise this new dynamic, the government passed Law No 9,427/1996, creating the National Electric Energy Agency (ANEEL). Subsequently, a wholesale market was incorporated under Law No 9,648/1998, and power trading companies emerged.

Now, the power sector is composed of two markets:

The Brazilian government also actively participates in the regulation of the Brazilian power sector to:

The ANEEL has established several strategic objectives for the development of the industry:

Distributed generation. Brazil is experiencing exponential growth in distributed generation. From 2016 to 2020, the installed capacity of distributed generators grew more than 11,000%. By June 2020, the installed capacity of distributed generators had already reached 3,330 MW. ANEEL is taking measures to stimulate the implementation of this system by power consumers.

Renewable energy. Brazil is Latin America's largest renewable energy market. According to Bloomberg projections, 32% of Brazil's electricity will be generated from photovoltaic sources by 2040. In addition, calculations made by Cela (Clean Energy Latin America) indicate that, until then, investments in photovoltaic expansion will amount to BRL15 billion per year. This expansion will require investments of about BRL313 billion over the next few years, with BRL112 billion exclusively earmarked for generation enterprises. By 2040, these numbers will reach BRL685 billion.

Based on the data gathered by the Brazilian Wind Energy Association (ABEólica) (a non-profit institution that represents wind sector), Brazil expanded its wind power installed capacity by about 745 MW in 2019 (an increase of 5.07% compared to the expansion in 2018) with a growth projection of 19,918.40 MW by 2023. Brazil is also eighth in multiple international wind power installed capacity rankings, with 15.455 GW.

In 2015, Brazil signed an international commitment during COP 21 to expand its share of non-hydropower renewables to between 28% and 33%, and to expand its domestic use of non-fossil energy sources to at least 23% by 2030, including through increasing wind, biomass and solar resources.

Decentralisation. During the second half of 2018, six Eletrobras-controlled energy distribution companies were sold to the private sector by public auctions. A controversial but (according to Eletrobras) necessary measure due to an accumulated loss of over BRL22.1 billion in 2017. All six energy distribution companies were sold for a symbolic price of BRL50,000 with certain conditions, such as:

There is currently a preliminary auction procedure for the structuring and definition of the model for Eletrobras' going private. Further, on 23 February 2021, the President enacted the Provisory Measure 1031, which formally authorises the Brazilian Development Bank to initiate the necessary studies for Eletrobras' going private. It also allowed the government to reduce its stake at Eletrobras to less than 50%. President Bolsonaro himself presented the Provisory Measure 1031/21 to the Congress, which has 120 days to analyse it and eventually amend it and convert it into a Federal Law.

Eletrobras Holding has similar financial difficulties to its distribution companies, holding a debt of over BRL23 billion. A special commission at the House of Representatives is currently examining a Bill of Law (PL 9463/2018) to require the decentralisation of Eletrobras' Holding, which is still under discussion.

Energy auctions. ANEEL has planned three generation auctions related to larger plants that require a longer time to be implemented:

All auctions are related to the energy trade in the Regulated Contracting Environment (ACR). However, Generation Auction No. 2/2020, 3/2020 and 5/2020 have been postponed indefinitely due to the 2019 novel coronavirus disease (COVID-19).

ANEEL has successfully conducted Generation Auction No. 6/2020 (A-1).

Planned auctions for 2021 include:

ANEEL has also initiated the public consulting proceedings to release Generation Auction No. 8/2021 (A-5) and Generation Auction No. 9/2021 (A-6).

Regulation of the electricity sector is based on the Constitution, which sets out the general principles for the use and commercial exploitation of natural resources used in electricity generation. Other laws and rules are created and interpreted in accordance with Constitution, including:

In addition, ANEEL can issue specific rules for the development of business activities in the energy sector.

The main regulatory authorities include:

According to ANEEL's database (2019), the top ten energy generation companies in Brazil are:

According to the Brazilian Association of Large Power Transmission Companies (Associação Brasileira das Grandes Empresas de Transmissão de Energia Elétrica) (ABRATE) the largest high-voltage energy transmission companies are:

The top ten energy distribution companies with more than 400,000 consumers in Brazil are (taking into consideration revenues, energy consumed and number of consumers):

(ANEEL's satisfaction research (LASC).)

The power sector is made up of two markets:

With the advent of the new regulatory model for the electricity market, rules have been put in place to separate generation, transmission and distribution activities. These restrictions aim both to preserve the competitiveness of the power market and promote the lowest power rates for consumers.

Power generation concessionaires connected to the national interconnected transmission system cannot either be associated with or controlled by electricity distribution companies. Electricity distribution concessionaires cannot develop any activity relating to power generation, transmission of energy or energy trading. In addition, they can only acquire energy through auction based on the lowest price and sell energy to captive power consumers under the tariff set by ANEEL.

Companies must be located in Brazil and incorporated under Brazilian laws. There are no restrictions on foreign investments in the Brazilian energy sector, or on participation of foreign companies in local operating companies.

The main applicable law to corporate insolvencies and reorganisations is Federal Law No. 11,101/2005, known as the Brazilian Bankruptcy and Restructuring Law.

However, if an insolvent company is a concessionaire of public services of the electricity sector, the insolvency regime is ruled by Federal Law No. 12,767/2012. Under this Law, the bankruptcy of a concessionaire of public services implies that the respective concession will be automatically terminated by ANEEL.

Also, the insolvency of concessionaires of energy public services is subject to a specific regime, which provides for regulatory intervention by ANEEL (instead of a "regular" reorganisation and/or judicial recovery) and, in extreme cases, termination of the concession.

Therefore, a concessionaire of public services cannot avail itself of the usual regime of judicial recovery and reorganisation under the insolvency regime.

Under the insolvency regime, ANEEL can decide in favour of intervention (that is, intervene in the management of the concessionaire) if it considers that the economic and financial situation of a concessionaire is a threat to its operational continuity or the regular provision of a certain energy public service. During the intervention, the concessionaire's shareholders must prepare and present a recovery plan that is analysed by ANEEL. If the plan is accepted, the intervention is terminated and the concessionaire must periodically present evidence of compliance with the recovery plan. If the recovery plan is not accepted, ANEEL can terminate the concession or present a plan of corporate restructure.

According to recent information from ANEEL, Brazil imports energy from Argentina, Venezuela, Uruguay and Paraguay. The amount of imported energy represents 4.7% of installed capacity. Around 70% of imported electricity comes from Paraguay, which is the co-owner of Itaipú Binacional, one of the biggest power plants in the world.

Brazil is a signatory to various international agreements governing export of electricity to other countries in Latin America. In addition, part of Brazil's system is interconnected with the systems of Argentina, Uruguay and Venezuela, but there is still a memorandum of understanding with Argentina and Uruguay to establish the grounds for import and export. Energy is exported to those countries only occasionally.

Roraima is the only state not connected to the national interconnected system. It imports about 60% of its electricity from Venezuela. On 31 May 2019, ANEEL held a public auction specifically to grant concessions to new power plants (with generation capacity of 263.5 MW) to be constructed and to operate within Roraima's territory. These new power plants in Roraima are expected to be operational by mid-2021.

Brazil has a diverse generation matrix. In July 2020, the installed capacity was about 172 GW, divided among 8,973 power plants. Another 233 power plants are being built with a granted capacity of about 9 GW. In addition, 644 power plants have had their construction authorised by ANEEL, with a granted capacity of 24.1 GW.

According to ANEEL, Brazil has 2,462 power plants that use fossil fuels (charcoal, natural gas and oil) with an installed capacity of 24.1 GW and producing 13.99% of the electricity supply.

Brazil has two nuclear power plants in operation, producing 1.1% of power generation, with plans to build up to eight new plants by 2030. The Federal Government has the monopoly to operate nuclear power plants, which is undertaken by the state-owned company Eletronuclear (a subsidiary of Eletrobras).

Most of Brazil's electricity comes from hydroelectric sources (62.24%). About 82.7% of Brazil's power generation is composed of renewable sources, but Brazil signed an international commitment during COP 21 to:

Other sources of renewable energy include:

A Decennial Plan for Energy Expansion (Plan) is periodically issued by the Energy Research Company and includes strategies for expansion of the electricity sector. The Plan is not legally binding, it is advice on the measures to be taken to promote the sustainable expansion of the Brazilian energy sector. The Plan is aligned with the global purpose of promoting renewable energy sources.

In accordance with the latest Plan, Brazil expects to reduce up to 37% in greenhouse gas emissions by 2025, by making a commitment to have 91% of all energy generation be of renewable sources at that time.

Brazil has also committed to expand its share of non-hydropower renewables to at least 28% of its existing installed capacity and to expand its domestic use of non-fossil energy sources to at least 23% by 2030 (including by increasing wind, biomass and solar energy production). As an international commitment, this target is politically binding or sanctions will be imposed.

The Programme to Foster Electric Power Alternative Sources (PROINFA), provided under Decree No 5,025/2004 was created to increase the participation of wind, biomass and small hydroelectric plants (PCH) sources in the national interconnected transmission system and diversify existing and overexploited energy matrices. The main strategic objectives of PROINFA are to:

The contracts resulting from the auctions held for alternative sources under PROINFA contain special conditions such as discounts on the rate for using the electricity transmission system (TUST) or the electricity distribution system (TUSD).

There are certain tax benefits for renewables including a general regime for infrastructure development and exemptions from import tax and ICMS (state VAT). For the wind and solar energy market, ICMS Agreement No 101/1997 applies, which exempts from state VAT certain equipment for wind and solar energy projects. It is currently valid until 2028. There is also a Federal Government programme called the Special Regime of Tax Exemption for Infrastructure Development, which suspends federal taxes (such as social security contributions) levied on the import and sale of equipment, machines and services for infrastructure projects, including energy projects.

As a mechanism to stimulate the use of distributed generation, ANEEL established the Electric Power System Compensation for Micro Generation, which states that end users can produce and supply energy to the network to which they are connected if they comply with certain technical procedures. This enables end users to deduct the energy injected into the network from their own consumption, meaning that they only pay distributors the difference between their consumption and the power injected into the network.

The Brazilian National Bank for Economic and Social Development (BNDES) periodically announces financial programmes to support the development and implementation of wind and solar energy projects. These programmes are implemented by facilitating financing (directly or through loans) to companies headquartered in Brazil (controlled by local companies or foreign companies) that intend to develop wind and solar projects. For example, in late 2018 BNDES created a BRL2.2 billion credit line designed for the purchase of wind and solar equipment. Further, in December 2017, BNDES approved the financing for the largest photovoltaic power plant in Latin America, representing an investment of BRL529 million. Also, in February of the same year, BNDES financed a wind power plant in Bahia State, representing an investment of BRL824 million.

Auctions for feed-in tariffs promoted by the Brazilian government usually grant benefits to renewable sources, especially wind and solar. Some auctions are specifically targeted at alternative sources, such as wind and biomass. Projects based on solar, wind or biomass energy are entitled to a reduction of at least 50% when using the transmission or distribution systems provided that:

ANEEL has approved a further discount of 80% for solar plants that begin operations by 31 December 2017, with a reduction to 50% after the tenth year of operation.

ANEEL also encourages using co-generation to improve energetic efficiency. For example, thermoelectric power plants are characterised as "qualified co-generators" by ANEEL and are therefore entitled to receive economic benefits.

The Brazilian energy sector is already primarily composed of renewable sources and it is exploring the development of more non-water-based power generation.

The main obstacle to developing further wind, biomass and solar energy in the extremely high cost of power plants. Most major centres of energy consumption are located far away from the regions that produce it, resulting in very high transmission and integration costs.

The Angra 3 Power Plant will be Brazil's third nuclear plant, with an installed capacity of 1,405 MW. The plant will be able to generate more than 12 million Megawatt hours (MW/h) per year, which is sufficient energy to supply the cities of Brasilia and Belo Horizonte. It will also mean that nuclear energy will generate the equivalent of 50% of the consumption of the state of Rio de Janeiro.

The completion of the Angra 3 Power Plant is considered a priority for the new government, as it recently joined the Investment Partnership Programme (Programa de Parcerias de Investimentos) (PPI). The PPI is a programme that accelerates the partnership between the government and the private sector. The Ministry of Mines and Energy expects that the Auction Notice for the completion of Angra 3 Power Plant will be released on or before the end of 2019, and its operation is scheduled for January 2026.

In accordance with the Decennial Plan for Energy Expansion, Brazil expects to build and operate up to eight new nuclear power plants by the end of 2027.

Authorisation requirements vary and depend on the:

ANEEL is responsible for granting authorisations or concessions for construction and operation of the following power plants:

Authorisation is granted by ANEEL under simplified procedures, provided in the ANEEL Normative Resolutions No 343/2008, No 390/2009, No 391/2009 and No 0235/2006. For hydro power plants, concessions are granted by ANEEL through bidding processes.

Authorisations grant rights to generate electricity for a specified period, usually 20 to 30 years. Concessions grant rights to generate electricity for a specified period, usually 30 to 35 years.

In general, requirements to obtain authorisations or concessions are based on the technical, financial and legal capacity of the applicant.

Environmental licences are also necessary for constructing or operating power plants. To comply with environmental regulation, three different licences are needed:

There are no legal requirements for the development CCS technology.

The requirements for operating electricity generation plants are set out in the Authorisation Act and regulatory rules issued by ANEEL and other governmental authorities. For plants that were constructed under a concession agreement, operation must comply with the contractual terms.

Typically, the Authorisation Act determines the plant's schedule for implementation, output and conditions for payment of regulatory rates.

Non-compliance with the applicable rules can result in administrative penalties being imposed by ANEEL. These penalties vary depending on the severity of the deviation.

Environmental licences contain technical conditions that must be met (such as installation of certain equipment or the adoption of measures for pollution control purposes) and the licence can be revoked if the conditions are not complied with.

Access to the grid must be requested from either the:

The application must contain data, preliminary access studies and information about the energy project that the applicant intends to connect to the grid.

The document consolidating and establishing the conditions for grid access is called the "opinion access". It usually establishes:

As a general rule, Law No 9,074/1995 requires that energy concessions must have a sufficient term to enable the amortisation of all reversible assets. Reversible assets are the assets used by the concessionaire (exclusively and permanently) for the production of energy, arising from the investments that were made to guarantee the continuity of the public service performed.

In light of this, at the end of the contractual term (usually) the investments made by a concessionaire that were related to the mentioned reversible assets should have already been amortised. Therefore, at the end of the concession period, the reversible assets will be owned by the government as they will have been amortised by the profit earned by the concessionaire during the concession exploitation. At the end of the concession, the "non-reversible" assets will still be owned by the former concessionaire, who will be entitled to remove them from the power plant facilities.

If the concession term is not sufficient to amortise the investments made by the concessionaire, the general rules of Law No 8,987/1995 must be applied. Under this law, the decommissioning after the end of the contractual term must be made with an indemnity to the concessionaire. The indemnity refers to the part of the investment which directly relates to reversible assets that are not yet amortised or depreciated.

ANEEL runs a reverse auction as the bidding process for constructing, operating and maintaining transmission lines. The bid consists of the value of the permitted annual revenue desired by the companies participating in the auction. The winner is the company with the lowest permitted annual revenue.

The bidder must first comply with some qualifying requirements based on technical, financial and legal capacity by submitting a complete set of documents and certificates to demonstrate that the applicant:

After the auction, the successful bidder will be party to a concession agreement providing the conditions for construction, operation and maintenance of the transmission lines.

For environmental licence requirements, see Question 10.

Transmission network requirements are established in the concession agreement, construed and interpreted in accordance with the rules issued by ANEEL and the ONS. Compliance with the rules and contractual terms is supervised by ANEEL and supported by required periodic reports and documents to ensure continued quality of service.

Transmission concessionaires pay the annual part of the General Reverse Reserve (RGR) and apply 1% of their net operational revenue to research and development projects in the energy sector.

Non-compliance with the rules can result in administrative penalties that vary depending on the severity of the deviation.

Environmental licences contain technical conditions that must be met (such as installation of certain equipment or the adoption of measures for pollution control purposes) and the licence can be revoked if the conditions are not complied with.

The Transmission System Usage Rate (TUST) is the main charge for using the electricity transmission system. TUST is calculated by ANEEL and based on the costs incurred by the transmission companies, plus sector charges. The following entities pay TUST:

The ONS is responsible for co-ordinating and controlling the operation of electric power generation and transmission facilities in the national interconnected transmission system and planning the operation of the more isolated systems under the supervision and regulation of ANEEL. To perform its legal and institutional missions, the ONS undertakes a series of studies and actions carried out on the system and its proprietary agents to manage different sources of energy and the transmission network. This ensures a continuous supply throughout Brazil and a sustainable, secure and balanced supply/demand relationship. The ONS also:

Distribution concessionaires must maintain 100% of their contracted power demand and ANEEL will take necessary measures to enable the distribution companies to provide the energy they need.

ANEEL organises auctions of electricity distribution for public services. The bidders must submit a proposed annual revenue waiver and the successful bidder is be the one that submits the highest waiver proposal.

After the auction, the successful bidder will be party to a concession agreement providing the conditions for the provision of electricity distribution services.

Regarding the applicable environmental licenses, the procedures are similar to those applied to the construction of electricity generation plants.

For environmental licence requirements, see Question 10.

Distribution network requirements are established in the concession agreement, construed and interpreted in accordance with the rules issued by ANEEL.

Distribution concessionaires must provide a service that is adequate, regular, continuous, efficient, safe and accessible. They are liable for direct and indirect damage resulting from the inadequate rendering of electricity distribution services.

While also being subject to regulatory intervention to ensure adequate performance of services and full compliance with applicable contractual and regulatory provisions.

The Distribution System Usage Rate (TUSD) is the main charge for using the electricity distribution system. TUSD is calculated by ANEEL and is based on the costs incurred by the distribution and transmission companies plus sector charges. TUSD is paid by:

A potential energy trader must submit an application for authorisation to ANEEL, along with company certificates confirming:

Free end consumers are usually supplied by trading companies and/or power generators.

The legal entity authorised by ANEEL to carry out energy trading activities must comply with the CCEE (see Question 2) and be subject to any terms and conditions set out in specific trading procedures (Trading Convention).

The energy trading agent must comply with any provisions set out in the Trading Convention, bye-laws, rules and trading procedures issued by the Electric Power Commercialisation Chamber and authorised by ANEEL.

The power sector is composed of two markets (see Question 1). Each market has its own way of regulating the trade between generators and suppliers:

In addition to the rules of each market, the CCEE registers and processes the volume of all the energy contracted in the electricity power market. The CCEE is also responsible for calculating the clearance price for the difference in the contracted volumes in the short-term market and for conducting auctions for the sale of energy to distribution companies in the regulated market.

Electricity trading must be carried out in either in the:

In addition, there are A-6, A-5, A-4, A-3, A-2 and A-1 auctions that purchase electricity for new or existing generation projects that are underway before the start date for delivering electricity.

ANEEL fixes electricity rates, balancing both fair rates for the public and the economic and financial needs of the agents responsible for the delivering services. To establish the rates, ANEEL takes into account the following costs:

The rates on the power purchase agreement executed between generators and free consumers or between free consumers and traders are freely negotiable between the parties. The power purchase agreements must all be registered with the CCEE, but the price may be maintained confidential by the parties.

Companies involved in the generation, transmission, distribution or supply of electricity do not have any statutory powers to undertake work.

The main taxes levied on energy transactions are VAT and social contributions paid by the end users (free consumers and captive consumers). In addition to these taxes, the following sector charges are levied on energy transactions:

Up to date insurance policies are necessary under the concession agreements executed by electricity generation, transmission and distribution companies. The specific conditions required under the policy are established by ANEEL in its auction notices and concession agreements.

In March 2020, the final draft of the Law Project for the Modernisation and Expansion of the Free Market for Electric Power (Projeto de Lei de Modernização e Expansão do Mercado Livre de Energia Elétrica) was published and is pending appreciation by the Senate. The Law Project aims to attract investments and to make the free market more efficient to reduce electric power costs and increase the competitiveness of the Brazilian economy. Currently, the project is considered in a special commission at the House of Representatives.

The proposal provides: