Spotlight: The political risks in Brazil’s energy sector

In addition to structural, technological and environmental challenges, Brazil’s energy sector is facing serious political, legislative and regulatory risks.  

One of the main points of concern relates to the autonomy of regulators. 

At the end of October, federal deputy Danilo Forte, a member of the União Brasil party in Ceará state, presented a proposal for a constitutional amendment (PEC) to make regulatory agencies subject to oversight by the lower house.

For the electricity (Aneel), mining (ANM) and oil, natural gas and biofuels (ANP) regulatory agencies, supervision would be the responsibility of the mines and energy committee.

In the meantime, the uncertainties caused by bills in the pipeline or recently approved are piling up, which could have a positive or negative impact on investments in electricity and oil and gas. 

BNamericas heard from three local lawyers who specialize in the energy sector. Their contributions are transcribed below: 

Thiago Luiz Silva, energy partner at Vieira Rezende Advogados 

We’re at a very delicate moment for the energy sector in general.

The PEC emerged as a reaction by a parliamentary group to the crisis at Aneel, which worsened after the latest blackout in São Paulo [in the concession area of Italian electric power distributor Enel].

But it's not the first initiative of this kind put forward by Forte, who in 2023 proposed the creation of a council, linked to ministries and regulatory agencies, to deliberate on normative activities.

Nor is this the first congressional reaction to the agency's role in the Enel crisis: the lower house recently approved bill 1.272/2024, which gives municipalities an active role in overseeing and controlling energy distribution tenders and contracts.

Criticism of Aneel's role in the crisis has been corroborated by the government itself. The mines and energy minister, Alexandre Silveira, raised the possibility of a change in the length of the terms of directors and advisors of regulatory agencies in order to coincide with changes of government.

Silveira also said that he is in favor of resuming management contracts between the government and the regulatory bodies.

Meanwhile, agency directors and representatives of the private sector have come out in defense of the autonomy and independence of the regulators.

Another point that worries me a lot is how strangled the ANP is in terms of manpower.

In the oil and gas exploration and production (E&P) segment, the ANP's permission to review ongoing development and production plans in order to re-evaluate the amount of gas reinjected has caused a lot of discomfort in the industry. After all, the declaration of commerciality of many fields is linked to the profitability of oil production, which requires the reinjection of gas.

Another point of discomfort for the oil companies is the fact that the flow [pipelines] and processing assets are now subject to transparency rules (regulatory asset base) that are characteristic of monopolistic markets, i.e. they are no longer considered assets of competitive markets. Petrobras and its partners want to continue charging freely for the use of these infrastructures, while the industry and other players are arguing for the charging of rates for the use of essential infrastructures to be regulated.

The agents interested in using the infrastructure want transparency in the rates and not to pay the price of new assets for the use of assets whose costs have long since been amortized. As this is essential infrastructure, rates need to be modest.

Everyone is looking for culprits (except themselves) to justify the high cost of gas in Brazil. However, there is no single culprit or villain: several factors are at play, and the market alone will not solve the problem without state intervention.

To guarantee energy security and natural gas at competitive prices in the long term, all Brazilian sectors need to share the costs. I believe it is essential for Brazil to develop the natural gas industry, whether for thermoelectric use, in order to sustain the rapid growth of intermittent renewable sources, or for industrial use.

Juliana Melcop, partner in the energy, infrastructure & projects practice at Veirano Advogados

The country is going through a highly serious institutional crisis in the electricity sector. There is a mismatch between the actions of the [mines and energy ministry] MME and Aneel – it is no longer news that the minister and the agency’s directors have been publicly disagreeing on the most diverse subjects, including questions about the limits of each entity's competence. 

The crisis takes on new proportions with the attempt to subvert Aneel's autonomy. If a rule is approved that reduces the agency's powers, I consider it a technical, legal and political setback, with important repercussions, including for future projects and investments in the electricity sector.  

The electricity sector is coming from a more difficult year in financial terms. For most of the year, the average market price (PLD) was at its lowest, which doesn't make new [generation] projects attractive. There’s little demand with plenty of supply. More recently, the operation of the sector has undergone changes, making it necessary to dispatch thermoelectric generation at peak times, from 6pm onwards, due to the withdrawal of distributed generation solar sources and the fall in [levels of] hydroelectric reservoirs.

Even so, we’re experiencing difficulties in defining public policies that value projects that can act and solve this situation – see the MME's delay in publishing the definitive guidelines for the backup capacity auction and announcing rules for the use of batteries.

In addition, centralized wind and solar power plants are experiencing technical and financial difficulties, with the most intense application of curtailment, with no prospect of a solution before the government and sector entities. Renewable projects, which until recently were the flagship of investments in the sector, are suffering from a sudden reduction in revenue, with no expectation of a solution in the near future. 

One regulatory change that has been announced for a few years is the modification of the self-production by equivalence regime, which currently allows companies with voting capital participating in energy generation companies to enjoy rate benefits. Any restriction on this regime will have consequences for investments in the electricity sector, because today, with the absence of regulated auctions and the proliferation of DG, self-production has ended up being the great mobilizer of new projects. 

DG has been gaining momentum, with more and more power installed in the country. The spread of this source deserves attention from a technical point of view, as we don't have a fully adequate distribution grid for the proportion that DG has taken on, and also from a rate point of view, as this modality has a lot of benefits that end up burdening other users of the local distributor. 

As DG has already proven to have great political influence, it’s not uncommon for news to emerge that yet another rate or regulatory benefit will be proposed in congress. This proliferation of new benefits can worsen the attractiveness of investments in centralized generation.  

Leonardo Dib Freire, partner in the energy practice at RMMG Advogados

The green agenda in the national congress is in full swing, now driven by COP29, which began on November 11 in Baku, Azerbaijan. Recently, the bills for low-carbon hydrogen, the low-carbon hydrogen development program (PHBC) and the fuel of the future were approved. However, all these issues depend, to a greater or lesser extent, on infra-legal regulation, which requires caution on the part of investors.

At the end of October, the ANP's prior consultation on its regulatory agenda for the 2025-26 biennium came to an end, and the topic of hydrogen was not included. On the other hand, the agency paid attention to topics such as the regulatory framework for sustainable aviation fuel (SAF), the introduction of new fuels in the chain, the regulatory framework for anhydrous ethanol, experimental fuels, and innovative regulatory experiences.

Therefore, investments in advanced fuels and biofuels are currently less risky from a legal point of view than those in low-carbon hydrogen.

There are high expectations that the regulated carbon market bill will be approved soon. For investors, it would be interesting if congress made the concepts of REDD+ [the UN scheme to reduce emissions from deforestation and forest degradation in developing countries] clearer and did not make it compulsory to export these credits within the regulated market, which reduces Brazil's competitiveness on the global stage.

Another highlight is the offshore wind bill, which will have a significant impact on the electricity sector. However, this bill contains several jabutis (inclusion of issues outside the scope of the bill), which causes legal uncertainty, scares off investment and makes it difficult or delays its approval.

There are several other bills on the energy agenda, such as the energy transition acceleration program (Paten), green lithium and the expansion of the free energy market (PL 414/2021), adding to the complexity and uncertainty of the energy sector.

Investors need to pay close attention to all these legislative and regulatory changes underway.

One of the main risks arising from these legislative changes – often without proper debate and based on purely political decisions by the executive branch in the energy sector – is the technical and economic unfeasibility of projects due to the lack of prior impact studies.