The Brazilian congress is already analyzing total liberalization

PRESS RELEASE from Acen
November 28, 2022

(Machine translation of the original release, issued in Spanish)

Latin America has been looking for a scheme to guarantee the expansion of generation supply, minimizing risks for energy sellers and at the same time offering consumers price protection to stabilize the end-user rate. The country that started this discussion was Colombia at the end of the 1990s and this model was implemented in Brazil, a country in which "an energy contract is tendered where through a single price the generator has to be fully remunerated, there is no payment for power or capacity" commented Luiz Barroso, President Director of PSR, in the webinar organized by ACEN "How to reconcile energy tenders with commercialization?".

In Brazil, he added that there are two types of tenders, the first is the tender commanded by the distributors who report the demands they want to contract in the future and the Government basically adds the amounts and makes a tender for the purchase of the total amount. “The Government defines the ceiling price and the product. The distributor is the recipient of the result of this tender and the volumes of the contracts are distributed to all the distributors in proportion to the volumes declared for the regulated clients. The contracts auctioned in Brazil are take or pay for the generators who do not take the risk of energy volume, but rather the distributor”.

In addition to that, the Government has an additional mechanism that is known as a reserve energy auction to contract any technology or generation for all users, whether they are captive or free. That energy, in theory, is the government's last resort to guarantee that the country will have enough generation if regular auctions plus the expansion of the free market do not work or fail to deliver new generation capacity.

Auctions in Brazil began in 2004 when the regulated market was responsible for more or less 85% of the country's total energy demand, while 15% was attributed to the free market, that is, to those users who could choose your supplier, basically the large industries with self-production schemes. Fifteen years later, it was observed that the free market began to grow exponentially and more and more users exercised their regulatory right to leave their distributor and go to the free market. "They left for reasons of better visibility of costs, greater competitiveness in energy costs, products more adjusted to the different consumptions, more flexibility, shorter-term contracts, or getting out of the risk of the indexation of the auction contracts by the inflation. The free market then grew and the demand from distributors at auctions decreased”.

In addition, Barroso pointed out that there was an accelerated increase in distributed generation, where solar and photovoltaic sources increased too much, which in turn withdrew demand from distributors. “Today Brazil has 15,000 megawatts of distributed generation. That is more than the installed capacity of the Itaipu hydroelectric plant. In addition, the demand or consumption of energy in Brazil has grown little in the last 8 years. We were a country that grew 4, 5 or 6% and in the last 6 years no more than 3% annually. Throughout the last years, the volume of demand that goes to the auctions is less and less”.

In Brazil, if the ceiling price of the tender established by the Government is not self-sufficient to attract competition, the auction is deserted. "The key point is that Brazilian auctions have historically always had a lot of competition, the ratio between registered generators versus auction demand is usually 10 to 1."

FREE MARKET

Currently, in Brazil, consumers with a demand greater than 500 kilowatts have the right to the free market. “Fifteen years ago the free market represented 15% of the demand and it grew until today reaching 35% leveraged by the growing competitiveness of the costs of renewables. Contrary to what many people thought, the free market has managed to guarantee its expansion of supply. Marketers have a very important role as risk managers, but above all as definers or creators of products. Many times the final consumer wants a product that the generator cannot supply, but the marketer makes it feasible”.

Right now in Brazil there is a fairly broad debate about giving the right to the free market to all customers, including residential ones. A phased migration curve is being discussed in Congress where full retail would reach the final consumer from the year 2026. “The free market has managed to guarantee its expansion, banks are financing these projects and that is why the clients of the distributors are fewer and fewer. Basically, 84% of the generation that is being built in Brazil to start operations in 2023 or 2024 is to supply the free market”.

According to Barroso, “the path of liberalization is a path of no return because it will happen in Chile as well, the market is already liberalized with distributed generation. In Chile, a consumer who today has the option of choosing his own supplier has a right that brings him nothing more than efficiency, but for that to be possible, the transition must be carefully considered. Brazil's experience should bring Chileans what they should not do, such as too many cross-subsidies or inefficiencies."