End of quota system at Eletrobras plants could make free market more dynamic

Eletrobras power plants selling energy at free market prices will make Brazil’s power market more dynamic but may also increase energy prices, Alexei Vivan, CEO of the local ABCE association of electricity companies and a partner at CGM Advogados, told BNamericas.

Since the approval of provisional measure 579 in 2012, Eletrobras plants have operated under a quota system, selling energy at lower than market prices. With the end of the quota system, as stated in the company's privatization law, which should last until 2026, the company will be able to sell energy at free market prices.

"The more energy available for sale, the greater the dynamism and competition in the free market. The concern is that an agent with large volumes of energy can influence prices," said Vivan, who is also president of the energy industry association in São Paulo state (SindiEnergia SP). 

Eletrobras has a physical guarantee (i.e., the maximum amount of energy that can be sold) of around 7.5GWa (average gigawatts) under the quota regime. In order to prevent this volume from reaching the market all at once, it was decided that the quota would be reduced at a rate of 20% per year, starting in 2023. 

Vivan said the price of energy under the quota is usually much lower than the price of energy on the market because it takes into account depreciated generation assets. 

"However, given that energy prices on the free market are currently low, the impact might not be so significant for the 20% to be decontracted," said the lawyer. 

Among other factors, the price of energy in Brazil responds to variations in the water levels in hydroelectric reservoirs, which are currently favorable. Power sector regulator Aneel recently announced that the tariff flag for August will be green, which means that no additional costs will be charged to captive consumers, that is, those in the regulated market. 

In addition to the free energy market, Eletrobras can offer part of its decontracted energy to the regulated market through auctions held by Aneel. 

Some analysts believe that decontracting a large volume of energy such as that supplied by Eletrobras could exert downward pressure on energy prices, given the structural energy surplus in the country. 

LEGAL ACTION

Vivan said the talks in the federal government's conciliation and arbitration chamber (CCAF) to find a consensual solution regarding the increase in the government's voting power in Eletrobras have the merit of being a faster and less costly way of ending the allegation of unconstitutionality brought by the government against the company. 

In the lawyer's opinion, that allegation generates legal uncertainty and undermines the country's image and attractiveness to investment, given that the reduction of the government's voting power in Eletrobras was approved by congress. 

"It was a condition for the successful privatization of Eletrobrás," underscored Vivan.  

In addition to the government's participation in the Eletrobras board of directors and fiscal council, the ongoing negotiations address payment of funds owed by Eletrobras to the energy development account (CDE) and the company's divestment of its stake in Eletronuclear.