Electricity regulation in Brazil: overview

A Q&A guide to electricity regulation in Brazil.

The Q&A gives a high level overview of the domestic electricity market, including domestic electricity companies, electricity generation and renewable energy, transmission, distribution, supply and tax issues. It covers the regulatory structure; foreign ownership; import of electricity; authorisation and operating requirements; trading between generators and suppliers; rates and conditions of sale and proposals for reform.

To compare answers across multiple jurisdictions, visit the energy and natural resources Electricity regulation Country Q&A tool.

This Q&A is part of the global guide to energy and natural resources. For a full list of content visit www.practicallaw.com/energy-guide.

Contents

Overview

Electricity market

1. What is the role of the electricity market in your jurisdiction?

Overview

The Brazilian Federal Constitution provides that the generation, transmission and sale of energy may be undertaken directly by the Brazilian Government or indirectly via concessions, permissions or authorisations. Over the last two decades, the Brazilian Government has undertaken several measures to remodel the Brazilian power industry, including:

  • Amending the Brazilian Federal Constitution in 1995 to authorise foreign investment in power generation. Prior to this amendment, all generation concessions could only be held by Brazilian individuals, or entities controlled by Brazilian individuals or by the Brazilian Government.

  • Enacting Law No. 8,987 on 13 February 1995 (Concessions Law), and Law No. 9,074 on 7 July 1995 (Power Concessions Law), which:

    • required that all concessions for energy services be granted through public bidding processes;

    • gradually allowed certain electricity customers with significant demand (free consumers) to purchase electricity directly from suppliers holding a concession, permission or authorisation;

    • created "independent power producers", who, with a concession, permission or authorisation, could generate and sell, for their own account and at their own risk, all or part of the electricity generated by them to free consumers, distribution concessionaries and trading agents, among others; and

    • granted free consumers and electricity suppliers open access to all distribution and transmission systems.

  • Creating the Brazilian Electricity Regulatory Agency (ANEEL) and the National Council for Energy Policy (CNPE) in 1997.

  • Enacting Law No. 10,848 on 15 March 2004 (New Industry Model Law) to:

    • restructure the power industry;

    • provide incentives for private and public entities to build and maintain generation capacity; and

    • ensure the supply of electricity in Brazil at moderate rates in competitive public electricity proceedings.

Despite the developments made since the enactment of the New Industry Model Law in 2004, the Brazilian power industry still lacks the infrastructure it needs and is subject to high tax costs, both of which are hindering further development.

The electricity sector represents 2.2% of the Brazilian gross domestic product (GDP), 8.7% of the collected ICMS (Brazilian value added tax (VAT)) and 5.2% of the collected PIS/COFINS (social contributions) in the country, all of which demonstrates its importance to the Brazilian economy and public budgets.

The total consumption of energy in Brazil is 550TWh, with a peak demand of 76GW, and an installed capacity of 125GW.

At the end of 2014, the Brazilian electrical energy generation matrix was comprised of:

  • 62.75% from hydroelectric sources.

  • 17.9% from fossil sources.

  • 8.6% from biomass sources.

  • 3.5% from wind sources.

  • 1.4% from nuclear sources.

  • 5.7% imported.

Recent trends

New transmission lines and power plants. Brazil's large geographic size has required substantial investment in transmission lines and supporting facilities. To cope with future economic growth, Brazil has invested in large hydroelectric facilities. The 14,000 MW Belo Monte dam along the Xingu River, expected to be finished in 2016, will become the second largest dam in Brazil, and the third largest dam in the world, at a projected cost of US$13 billion.

Reserves of fossil fuels. Although natural gas accounts for 8% of Brazil's total energy consumption only, the country boasts the second largest reserve in South America, located primarily offshore at the Campos Basin. Along with the potential to significantly increase oil production in the country, the pre-salt areas are estimated to contain sizable natural gas reserves as well.

National interconnected system. The national interconnected system (Sistema Interligado Nacional (SIN)) reached 98.3% of coverage. As a result, virtually all the power grid is now part of the SIN. The few isolated systems that are not covered are located in the northern part of the country, especially in the Amazon region, and account for 1.7% of the electricity consumed by the country.

Energy auctions. As a way to foster investment in the energy sector, the Brazilian Government has launched bids in which the winners are awarded long term power purchase agreements (for 20 to 30 years), for delivery of energy within three to five years.

Some of these bids specifically target alternative sources, such as wind, solar and biomass, but the bids generally allow for all sources to participate. Additionally, the National Bank for Economic and Social Development (BNDES) has set a financial programme for renewable energy projects.

On 30 September 2014, the first ever national solar specific energy auction A-5 was launched by the Brazilian Government. The A-5 offered 20-year availability agreements for solar power projects. A new national solar specific energy auction is expected for 2015.

The next energy auction will be held in April 2015. The following energy generation projects have already been registered for the auction:

  • Seven hydro power plants of 649 MW.

  • 27 small hydro power plants of 477 MW.

  • 22 biomass thermal power plants of 1,161 MW.

  • Four coal thermal power plants of 2,100 MW.

  • 31 natural gas thermal power plants of 15,439 MW.

The total output of energy will be 19,826 MW.

 

Regulatory structure

2. What is the regulatory framework for the electricity sector?

Regulatory framework

The main legislative framework for the electricity sector is set out in:

  • The Brazilian Federal Constitution of 1988, which sets out principles for the use of natural resources to generate electricity and assigns competence to the Federal Government to regulate the energy sector.

  • Law No. 8,987/1995, which sets out the main rules for the concession and permission for rendering public services.

  • Law No. 9,074/1995, which sets out detailed rules for the granting of extensions to public service concessions and permissions, as well as introduces the independent power producer.

  • Law No. 9,427/1996, which sets out the creation and organisation of the Brazilian Electricity Regulatory Agency (ANEEL), and establishes the economic and financial regime of electrical energy public service concessionaries.

  • Law No. 9,433/1997, which sets out the creation of the National Water Resources Policy and created the National System of Water Resources Management.

  • Law No. 9,648/1998, which sets out the restructuring of the Brazilian Electrical Power Company, Eletrobras and its subsidiaries, and establishes the wholesale energy market (Mercado Atacadista de Energia (MAE)) (further replaced by the Chamber of Electricity Energy Commercialisation (Câmara de Comercialização de Energia Elétrica (CCEE)), as well as the Operator of the National Electricity System (Operador Nacional do Sistema (ONS)).

  • Law No. 10.847/2004, which sets out the creation of the Energy Research Company (Empresa de Pesquisa Energética (EPE)), which focuses on research and development to support the energy sector with its medium and long term planning.

  • Law No. 10,848/2004 (further regulated by Decree No. 5,163/2004), which sets out the Brazilian electricity energy sector reform, providing for in-depth changes in energy trade between the various sector agents by establishing two markets for the negotiation of power purchase agreements (see Question 21).

Regulatory authorities

The institutional framework of the Brazilian energy sector consists of the following bodies:

  • Ministry of Mines and Energy (Ministério de Minas e Energia (MME)). The MME is the main body in the government responsible for the regulation and supervision of the power industry. Following the New Industry Model Law, the Brazilian Government, acting primarily through the MME, has assumed some of the authority previously undertaken by the Brazilian Electricity Regulatory Agency (ANEEL) (see below), such as the granting of concessions and issuance of guidelines regarding the bidding process for public services concessions.

  • Brazilian Electricity Regulatory Agency (ANEEL). The Brazilian power industry is also regulated by ANEEL, an independent federal regulatory agency, which follows the policy dictated by the MME. ANEEL is also responsible for:

    • administering concessions for electricity generation, transmission and distribution activities, including the approval of electricity tariffs;

    • supervising how services are provided by the concessionaries and imposing the applicable penalties if necessary;

    • enacting regulations for the power industry;

    • implementing and regulating the development of electricity sources, including the use of hydroelectric energy;

    • promoting the public bidding process for new concessions;

    • settling administrative disputes among agents of the power industry; and

    • defining the criteria and methodology for the determination of transmission and distribution tariffs.

  • National Council for Energy Policy (Conselho Nacional de Política de Energia (CNPE)). The CNPE is a governmental body that advises the President of Brazil on matters regarding the energy sector. The CNPE also formulates policies and guidelines for energy in order to develop the country's energy resources on a national basis.

  • Operator of the National Electricity System (ONS). The basic role of the ONS is to co-ordinate and monitor generation and transmission operations in the national interconnected system (Sistema Interligado Nacional (SIN)), subject to regulation and supervision by ANEEL. Its institutional mission is to ensure users of the SIN of the continuity, quality and cost-efficient supply of electric energy. It also proposes expansions of the network and reinforcement of existing systems to be considered in planning extensions of transmission systems as well as rules for operating transmission installations in the SIN grid, subject to approval by ANEEL.

  • Chamber of Electricity Energy Commercialisation (CCEE). The CCEE is a private non-profit entity, regulated and monitored by ANEEL, whose purpose is to enable the sale of electricity over the SIN grid. One of the CCEE's main roles is to hold public auctions on the regulated market. In addition, the CCEE is responsible for:

    • registering energy trading contracts on the regulated market;

    • registering contracts resulting from contracting adjustments;

    • registering contracts made on the Free Market;

    • calculating and settling short-term transactions.

  • Energy Research Company (EPE). The EPE was created in August 2004 and is responsible for conducting strategic research in the electric sector including research related to electricity, oil, gas, coal and renewable energy sources. Research conducted by the EPE is used to support the MME in its role of devising programs for the Brazilian energy sector.

  • Energy Industry Monitoring Committee (CMSE). The New Industry Model Law authorised the creation of the Energy Industry Monitoring Committee (Comitê de Monitoramento do Setor Elétrico (CMSE)), which acts under the direction of the MME and is composed of representatives from ANEEL, the National Petroleum Agency (Agência Nacional do Petróleo (ANP)), the CCEE, EPE and ONS. The CMSE is responsible for:

    • monitoring the activities of the energy sector;

    • evaluating the supply and demand of the energy market; and

    • presenting preventative and corrective actions for the maintenance and recovery of energy supply and demand to the CNPE.

See box, The regulatory authorities.

 

Electricity companies

Main companies

3. What are the main companies involved in electricity generation, transmission, distribution and supply?

Generation

According to Brazilian Electricity Regulatory Agency (ANEEL) the top ten largest generation companies in Brazil are:

  • Companhia Hidro Elétrica do São Francisco (CHESF).

  • Furnas Centrais Elétricas S.A.

  • Centrais Elétricas do Norte do Brasil S.A.

  • Tractebel Energia S.A.

  • CESP - Companhia Energética de São Paulo (CESP).

  • Petróleo Brasileiro S.A. (PETROBRAS).

  • CEMIG GT - Geração e Transmissão S.A.

  • COPEL GT Geração e Transmissão S.A.

  • AES Tietê S.A.

Transmission

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

  • Companhia Estadual de Geração e Transmissão de Energia Elétrica (CEEE GT).

  • Geração e Transmissão S.A. (CELG GT).

  • CEMIG Geração e Transmissão S.A.

  • Companhia Hidro Elétrica do São Francisco (CHESF).

  • Copel Geração e Transmissão S.A. (COPEL).

  • Companhia de Transmissão de Energia Elétrica Paulista.

  • Centrais Elétricas do Norte do Brasil S.A.

  • Eletrosul Centrais Elétricas S.A. (ELETROSUL).

  • Furnas Centrais Elétricas S.A. (FURNAS).

  • State Grid Brazil Holding S.A.

Distribution

The top ten largest distributors in Brazil in 2014, according to the Brazilian Association of Power Distributors (Associação Brasileira de Distribuidores de Energia Elétrica (ABRADEE)) were:

  • Geração e Transmissão S.A. (CEMIG).

  • Eletropaulo Metropolitana Eletricidade de São Paulo S.A.

  • Companhia de Eletricidade do Estado da Bahia (COELBA).

  • Companhia Paranaense de Energia (COPEL).

  • Light Serviços de Eletricidade S.A.

  • Companhia Paulista de Força e Luz (CPFL PAULISTA).

  • Companhia Energética de Pernambuco (CELPE).

  • Companhia Energética do Ceará (COELCE).

  • CELG Distribuição S.A.

  • Centrais Elétricas de Santa Catarina S.A. (CELESC).

Supply

There are two energy trading markets:

  • The Regulated Market (Ambiente de Contratação Regulada (ACR)).

  • The Free Market (Ambiente de Contratação Livre (ACL)).

See Question 21 for a brief explanation on these markets.

Distribution companies sell the energy directly to end-users (captive consumers) in the Regulated Market where the rates are defined by the regulatory agency ANEEL.

The purchase of energy in the Free Market is exclusive for those end-users whose demand of electricity is higher than or equal to 500 kW. The captive consumers can only purchase energy from distribution companies and pay the regulated rates.

According to the Association of Electricity Energy Traders (ABRACEEL), in Brazil there are more than 150 energy trading companies acting in the Free Market.

Unbundling requirements

Unbundling in the electricity sector was implemented in Brazil in 1995 and involved all regulated companies which were vertically integrated. The purpose of the process was the separation of generation, transmission and distribution activities.

Distribution companies and energy generation companies are subject to specific restrictions.

Distribution companies. Distribution companies that are connected to the National Grid are not allowed to develop the following activities:

  • Power generation.

  • Electricity energy transmission.

  • Electricity energy sale to:

    • consumers (except the consumers located inside its concession area) of 10,000 kW or more of energy, and which the electricity is sold at the voltage of 69 kV or higher; or

    • consumers of 3,000 kW or more and which the electricity energy is sold at any voltage.

  • Participate in other companies, directly or indirectly, except to capture, implement or manage financial resources necessary to provide the distributors' own services under the concession agreement.

  • Develop any other activity beyond the distribution company's purpose, except as provided by law or under the concession agreement.

Energy generation companies. Generation companies connected to the National Grid must not be related companies (coligadas) or be controlled by distribution companies connected to the National Grid.

 

Foreign ownership

4. Are there any restrictions concerning the foreign ownership of electricity companies or assets?

There are no restrictions on the foreign ownership of electricity companies or assets in Brazil, provided, however, that a regulated company (that is, the company with rights to generate, distribute or transmit energy) must be incorporated under Brazilian laws.

 

Import of electricity

5. To what extent is electricity imported?

Part of Brazil's system is connected with the systems of Argentina, Uruguay and Paraguay. These interconnections are used in case there is excess energy generation in one country and a lack of energy supply in another, or to attend to emergency cases. International agreements define the rules regulating the procedures for each case.

 

Electricity generation and renewable energy

Sources of electricity generation

6. What are the main sources of electricity generation?

According to the Brazilian Electricity Regulatory Agency (ANEEL), Brazil has 3,613 energy generation projects in operation, totalling over 134 million kW of installed capacity on 22 February 2015. ANEEL expects an addition of over 36 million kW in the country's generation capacity over the next few years, from the 212 projects currently under construction and 571 under development. Hydroelectricity accounts for more than 89 million kW of generating capacity, fossil fuel sources contribute with 25 million kW, and wind, solar, biomass and nuclear make up the rest.

Fossil fuels

In January 2015, fossil fuels (that is, charcoal, natural gas, petroleum and other fossil fuels) were responsible for about 18% of the installed capacity of electricity energy.

Nuclear fission

Brazil has two nuclear power plants, the 640 MW ANGRA 1 and the 1,350 MW ANGRA 2. The Federal Government has the monopoly to operate nuclear power plants, which is undertaken by concessions to the state-owned Eletronuclear, a subsidiary of the state-owned Eletrobrás (Centrais Elétricas Brasileiras S.A. (Eletrobras)).

Renewable energy

Brazil is a global leader in the generation of energy by renewable sources, with a matrix composed of approximately 80% of renewable generation sources (66.51% hydroelectric, 9.82% biomass, 3.82% wind, 0.01% solar), with large potential for growth.

Hydroelectric power generation. According to the Brazilian Power Decennial Plan for 2030, Brazil has a potential for hydroeletric power generation of 126,000 MW. 70% of this capacity is located in the Amazonas and Tocantins/Araguaia basins.

Biomass generation. Sugar cane is a resource with great potential among the biomass sources for power generation in Brazil. According to Unica (the sugar cane industry union), in 2020 the energy produced by the sector will likely achieve 14,400 MW, based on an expected 1 billion tonnes of sugar cane production. According to the National Energy Plan, the greatest potential sources for biomass energy are located in the states of São Paulo, Paraná and Minas Gerais.

Wind power generation. The wind in Brazil is characterised as being twice as strong as the world average, with a volatility of 5% (or oscillation speed), which provides greater predictability for the quantity of energy to be produced. In addition, as the wind speed is usually higher in periods of drought, it is possible to operate the wind farms to complement the hydroelectric plants in order to conserve water in the reservoir during these periods. The Brazilian Wind Potential Atlas of 2001 indicates a potential for wind power generation of 143,000 MW in Brazil, which exceeds the current total installed capacity of the country.

Solar power generation. Brazil benefits from a large availability of solar radiation, with the north east region equalling the best regions of the world, such as the city of Dongola in the Sudan desert and the Daggett region in the Mojave Desert, California. Despite this potential, the participation of solar generation in the national energy matrix is still very low.

 
7. Are there any government policies, targets or incentives in place to encourage the use of renewable or low carbon energy?

The Brazilian government is providing incentives for the development and use of renewable sources in the country, especially wind and solar sources.

Government policies/incentives

Incentives include:

  • Discounts on the Transmission System Usage Rate (TUST) and on the Distribution System Usage Rate (TUSD). These are:

    • an 80% discount on the TUST and on the TUSD for solar energy generation projects where the injection of power into the transmission or distribution systems is less than, or equal to 30,000 kW and which are entering into commercial operation until 31 December 2017;

    • a 50% discount on the TUST and on the TUSD from the 11th year of operation of the solar power plant and for solar energy generation projects starting to operate from 1 January 2018;

    • a 50% of discount on the TUST and on the TUSD for wind power generation projects where the injection of power into the transmission or distribution systems is less than or equal to 30,000 kW.

  • Electric Power System Compensation for Micro Generation. This was established by the Brazilian Electricity Regulatory Agency (ANEEL) under the Normative Resolution No. 482/2012 which states that:

    • end-users may produce and supply energy to the network in which they are connected if they comply with the technical procedures established by ANEEL;

    • end-users may deduct the energy injected into the network from their own consumption, that is, only pay the distributors the difference between the consumption and the power injected into the network;

    • the energy projects must have a maximum output of 1 MW.

  • Special Regime of Tax Exemption for the Infrastructure Development (REIDI). This tax exemption regime stipulates:

    • the suspension of social contributions (PIS and COFINS) levied on the sale or importation of machines, instruments, new equipment, construction materials and services used for infrastructure works, including the construction of power plants;

    • the project must be approved by the Ministry of Mines and Energy (MME);

    • the benefit is valid for a period of five years counted from the date of register of the project owner in the regime.

  • Special Financing Programmes. On 12 August 2014, the National Bank for Economic and Social Development (BNDES) announced the support of solar energy projects in Brazil by facilitating financing (directly or through loans) to companies headquartered in Brazil (controlled by local companies or foreign companies) and that are winners of bidding processes in 2014 relating to solar energy. The resources for the financing may be obtained either through a product of BNDES called BNDES Finem1 or through the Fundo Clima Programme, with resources from the National Fund for Climate Change.

  • Feed-in tariff. Brazil has a policy mechanism that is similar to the feed-in tariff adopted in Europe. For the last ten years, the Brazilian Government has been holding yearly electricity energy auctions, as a way to foster investment in the energy sector. Some of these auctions specifically target alternative sources, such as wind and biomass, but there is generally room in the competition for all major sources to participate (see Question 1).

Renewable energy targets

The Decennial Plan for Energy Expansion provides important guidance on the future strategy for the power sector, which is focused on the balance between economic growth projections and the necessary expansion of energy supply.

The plan forecasts the continued strong presence of renewable sources in the Brazilian energy matrix, which will be equal to 86% in 2023.

See box, Renewable energy sources.

 
8. What are the main obstacles to the development of renewable energy?

The Brazilian energy matrix is already primarily composed of renewable sources.

One of the obstacles for the development of new renewable energy power plants is the location of these plants, which are far from the larger consumption centres, requiring huge investments in transmission and distribution capacities. Most of the potential for hydroelectric, wind and solar generation is located in the north and north east of Brazil, while the largest cities such as São Paulo and Rio de Janeiro, are in the south east.

Another obstacle is the cost and time it takes to obtain the environmental licences required for the development of new power plants, especially new hydropower plants.

 
9. Are there any plans to build new nuclear power stations?

Angra 3 Power Plant, with an installed capacity of 1,405 MW, is scheduled to start commercial operations in June 2018, increasing the current nuclear power generation by 71% (1,990 MW to 3,395 MW).

 

Authorisation and operating requirements

10. What are the authorisation requirements to construct electricity generation plants?

The requirements to construct electricity generation plants vary depending on the type of energy (hydro, wind, solar, thermic), the size of the plant (installed capacity) and the end-users of the energy produced.

The Brazilian Electricity Regulatory Agency (ANEEL) is responsible for granting the authorisation, or a concession, for the construction and operation of the following types of power plants:

  • Small hydro (hydro generation up to 30 MW), thermo, co-generation and alternative sources (wind, solar and biomass) plants. Authorisation is granted by ANEEL under a simplified procedure. The procedures are set out in the ANEEL Normative Resolution No. 343/2008, No. 390/2009, No. 391/2009 and No. 0235/2006.

  • Hydro power plants. Concessions are granted by ANEEL under a bidding process. The procedures are set out in Decree No. 4,970/2004 and in Decree No. 4,932/2003.

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

Generally speaking, the requirements for obtaining the authorisations or concessions are based on the technical, financial and legal capacities of the applicant.

Environmental licences are also needed, as they are a requirement for obtaining the authorisations or concessions for the construction and operation of generation power plants.

Under federal and state environmental laws and regulations, companies that use natural resources, operate facilities or perform activities with actual or potential polluting effects are required to obtain environmental licences to install and operate their production facilities.

The process of obtaining an environmental licence follows three phases:

  • Previous licence (licença prévia). The previous licence is granted during the preliminary phase of planning the enterprise or activity and approves its location, attests to the environmental feasibility and sets out the basic and conditioning requirements to be met during the subsequent phases of its implementation.

  • Installation licence (licença de instalação). The installation licence authorises the setting up of the enterprise or operation according to specifications in the approved plans, programmes and designs, including measures of environmental control and conditions.

  • Operating licence (licença de operação). The operating licence authorises the operation of the activity or enterprise, after effective compliance with the installation licence and when the environmental control measures and conditions determined for the operation have been checked.

 
11. Are there any requirements to ensure new power stations are ready for carbon capture and storage (CCS) technology, or requiring a plant to retrofit CCS technology once this is ready?

No, there are no requirements in this respect.

 
12. What are the authorisation and main ongoing requirements to operate electricity generation plants?

The ongoing requirements that the authorised company must comply with are set out in the Authorisation Act and regulatory rules issued by the Brazilian Electricity Regulatory Agency (ANEEL), and other governmental authorities.

In general terms, the Authorisation Act determines the schedule of implementation of the electricity generation plant, the output of the power plant and any benefits of the payment of regulatory rates.

Non-compliance with the Authorisation Act or any other rules imposed by ANEEL may result in the application of penalties by ANEEL inspectors, which may vary depending on the severity of the deviation.

The environmental licences usually determine the technical conditions to be met, such as the installation of equipment or the adoption of measures for pollution control purposes. An environmental licence may be revoked in the event of non-compliance with the required conditions.

 
13. What requirements are there concerning connection of generation to the transmission grid?

The application to access the grid must be submitted to the National Electricity System (Operador Nacional do Sistema (ONS)) or to the transmission company or to the distribution company, as applicable, accompanied by data, preliminary studies of access, and information about the energy project that the applicant intends to connect to the grid.

The access to the grid must be requested from the ONS or from the transmission company that enables physical access (if the generation company intends to connect to the basic network), or from the distribution company (if the generation company intends to connect to the distribution network or to any other transmission facilities).

The document that consolidates and establishes the conditions of access is the "opinion access" issued by the ONS, the transmission company or the distribution company, as the case may be.

The opinion access usually establishes:

  • The conditions related to the expansions and improvements needed in the power grid to accommodate the requested access.

  • The time required for its implementation.

  • Limitations.

  • Restrictions.

  • The technical requirements to be observed for measurement, protection, tele-surveillance, operational relationship, and any other technical issues.

The opinion access is one of the requirements for the issuance of the Authorisation Act by the Brazilian Electricity Regulatory Agency (ANEEL).

 

Electricity transmission

Authorisation and operating requirements

14. What are the authorisation requirements to construct electricity transmission networks?

The Brazilian Electricity Regulatory Agency (ANEEL) is responsible for organising auctions for the expansion of transmission lines. The regulatory agency adopts a reverse auction as the bidding process for defining the awarded bidder to be responsible for the construction, operation and maintenance of the transmission lines. The submitted bid is the value of the Annual Revenue (RAP) desired by the companies participating in the auction. The lowest RAP presented in the bid is awarded.

The qualifying requirements for the auctions are based on the technical, financial and legal capacities of the applicant. The applicant interested in participating in the auction must make available to ANEEL a complete set of documents and certificates to demonstrate that the applicant:

  • Is complying with its tax obligations before the federal, state and municipal tax authorities.

  • Is regularly incorporated as a company or consortium of companies.

  • Has technical capabilities to construct and operate the transmission lines.

  • Is financially capable and can provide to ANEEL financial guarantees that are necessary to implement the transmission line.

The awarded bidder executes a concession agreement with the conditions for the construction, operation and maintenance of the transmission lines, usually with a period of 18 to 26 months to the start of the commercial operation.

In relation to the environmental licences, the procedures are similar to the ones for the construction of electricity generation plants.

 
15. What are the authorisation and main ongoing requirements to operate electricity transmission networks?

The concession agreement executed by the transmission company establishes a set of obligations, including:

  • The obligation to operate the transmission installations according to the rules issued by the Brazilian Electricity Regulatory Agency (ANEEL) and by the National Electricity System (ONS).

  • The transmission company's submission to ANEEL's inspections and the obligation to provide to ANEEL annual accounting reports.

  • The obligation to keep all technical documentation related to the equipment and transmission installations available for inspection by ANEEL and by ONS.

  • Payment of the annual part of the General Reverse Reserve (RGR) (see Question 23).

  • The obligation to apply 1% of its net operational revenue in research and development projects in the energy sector.

Non-compliance with the concession agreement or any other rules imposed by ANEEL and ONS may result in the application of penalties by ANEEL, which may vary depending on the severity of the deviation.

The environmental licences usually determine the technical conditions to be met, such as installation of equipment or adoption of measures for pollution control purposes. An environmental licence may be revoked in the event of non-compliance with the required conditions.

 

Transmission charges

16. How are the charges and conditions for the transmission of electricity regulated?

The following are subject to the payment of the Transmission System Usage Rate (TUST):

  • Any agent that connects to the Transmission System, such as distribution companies.

  • Generation companies centrally dispatched by the National Electricity System (ONS).

  • Free consumers of energy (see Question 1).

  • Potential free consumers directly connected to the basic grid.

The TUST is calculated by the Brazilian Electricity Regulatory Agency (ANEEL) and is based on the costs incurred by the transmission companies plus the sector charges.

 

Electricity distribution

Authorisation and operating requirements

17. What are the authorisation requirements to construct electricity distribution systems?

The Brazilian Electricity Regulatory Agency (ANEEL) is responsible for organising auctions for the distribution of energy for public services. The bidders must submit a proposed Revenue Annual Waiver and the awarded bidder will be the bidder who submits the highest waiver proposal.

The requirements for qualifying in the auctions are based on the technical, financial and legal capacities of the applicant. To participate in the auction the applicant must make available to ANEEL a complete set of documents and certificates similar to the ones needed for operating electricity transmission networks (see Question 14).

Environmental licences are also required in the same way they are needed for operating electricity transmission networks (see Questions 10 and 14).

 
18. What are the authorisation and the main ongoing requirements to operate electricity distribution systems?

The obligations of the distribution companies are set out in the concession agreement. The concessionary company:

  • Must render adequate, regular, continuous, efficient, safe and accessible service.

  • Is strictly liable for direct and indirect damages resulting from the inadequate rendering of electricity distribution services, such as abrupt supply interruptions and disturbances arising from the generation, transmission or distribution systems.

  • Is subject to regulatory intervention to ensure the adequate performance of services and full compliance with applicable contractual and regulatory provisions.

The environmental licences usually determine technical conditions to be met, such as the installation of equipment or the adoption of measures for pollution control purposes. An environmental licence may be revoked in the event of non-compliance with the required conditions.

 

Distribution charges

19. How are the charges and conditions for the distribution of electricity regulated?

The Distribution System Usage Rates (TUSD) are calculated and defined by the Brazilian Electricity Regulatory Agency (ANEEL) and charged for the use of the distribution grid by:

  • Free consumers.

  • Generators connected to distribution systems.

  • Distribution companies connected to other distribution grids.

The TUSD is calculated by ANEEL and is based on the costs incurred by the distribution companies plus the sector charges.

 

Electricity supply

Authorisation and operating requirements

20. What are the authorisation and the main ongoing requirements to supply electricity to end consumers?

The potential energy trader must submit an application for an authorisation to the Brazilian Electricity Regulatory Agency (ANEEL), accompanied by the company certificates stating:

  • The compliance with its tax obligations before the federal, state and municipal tax authorities.

  • That it is regularly incorporated as a company.

  • That it is financially solvent.

The legal entity authorised by ANEEL to carry out energy trading activities must adhere to the Chamber of Electricity Energy Commercialisation (CCEE) according to the Trading Convention, and must be subjected to the terms and conditions set out in specific trading procedures.

The energy trading agent is also obliged to comply with the provisions set out in the Trading Convention issued by the CCEE, in the bye-laws of the CCEE and in the rules and trading procedures issued by the CCEE.

 

Trading between generators and suppliers

21. How is electricity trading (between generators and suppliers) regulated?

The regulated and free markets

The purchase and sale of energy in Brazil must be carried out in two markets:

  • The Regulated Market (Ambiente de Contratação Regulada (ACR)), which is where the purchase of energy by distribution companies through public energy auctions takes place.

  • The Free Market (Ambiente de Contratação Livre (ACL)), which is where the purchase of energy by non-regulated agents, such as free consumers and energy traders, takes place.

Public energy auctions on the ACR. The power sector model foresees two main types of energy auctions:

  • Regular new energy auctions, which contract an amount declared by the distribution companies in order to meet demand growth in the Regulated Market.

  • Reserve energy auctions, which are used to contract supplementary energy to increase the system's reserve margin. Demand for reserve energy is entirely determined by the government following its own criteria of security of supply and energy policy, and the costs of these contracts are split among all consumers by means of a system charge.

    While the energy contracted in regular energy auctions is essential to meet demand, and therefore must be backed up by a certain amount of firm generation (with a firm energy settlement), reserve energy contracts do not provide firm energy to the system and therefore may have much more flexible terms.

A-5, A-3 and A-1 auctions on the ACR. Auctions for the purchase of electricity for new generation projects underway are held:

  • Five years before the date of initial delivery of electricity (A-5 auctions).

  • Three years before the date of starting delivery (A-3 auctions).

  • Auctions of energy from existing generation plants take place:

    • in the year prior to starting of delivery of energy (A-1 auctions) and;

    • about four months prior to the delivery date (market adjustments).

Official announcements of auctions are drafted by the Brazilian Electricity Regulatory Agency (ANEEL), in compliance with guidelines set by the Ministry of Mines and Energy (MME), including the use of the lowest tariff criteria to determine the winner of the auction. Each generation company bidding in an auction executes an electricity purchase and sale agreement with each distribution company, in proportion to their estimated needs.

ACL. In the ACL, the trading of energy occurs through free negotiations and prices and conditions are freely agreed on by the parties. In the ACL, competition exists between power generation concessionaries and permit holders, trading companies and energy importers. The terms of the contracts, contracted volumes, initial date for delivery of electricity and mainly the price are also freely negotiated between the parties.

Short-term market

The short-term market is managed by the Chamber of Electricity Energy Commercialisation (Câmara de Comercialização de Energia Elétrica (CCEE)) and is the market place where the differences between the amount of energy that is physically produced and consumed and the energy set out in the contracts held by each participant (generators and consumers) are accounted for and settled.

 

Electricity price and conditions of sale

22. How are the price for electricity and conditions of sale regulated at the consumer and wholesale level?

Consumer

The Brazilian Electricity Regulatory Agency (ANEEL) has the duty of fixing electricity rates to promote fair rates for both the public interest and economic-financial balance of the agents responsible for the energy services.

The rates fixed by ANEEL take into account the following:

  • Energy costs.

  • Transmission costs.

  • Distribution costs.

  • Energy sectors charges.

  • Taxes.

The energy sector charges are part of the Brazilian government policy for the energy sector. See Question 23.

Wholesale

The power purchase agreement executed between generators and free consumers or between free consumers and traders must be registered with the Chamber of Electricity Energy Commercialisation (CCEE). The rates are freely negotiated between the parties.

 

Tax issues

23. What are the main tax issues arising on electricity generation, distribution, transmission and supply?

The main taxes levied on energy transactions are VAT (ICMS) and social contributions (PIS and COFINS) paid by the end-users (free consumers and captive consumers).

In addition to these taxes, the following sector charges are levied on energy transactions:

  • Reserva Global de Reversão (RGR). This is intended to provide resources for the reversal, expropriation, expansion and improvement of the public electricity service to fund alternative sources of electricity, and to put towards inventory and feasibility studies of hydraulic potential usages, and the development and implementation of programmes and projects intended to combat waste and the inefficient use of electricity.

  • Fuel consumption account. This is intended to absorb the costs related to electricity generation in "isolated systems" that are higher than the average cost of electricity sold in the Regulated Market connected to the national interconnected system.

  • Electricity energy services supervisory rate. This is levied on the annual economic benefit accrued by the concessionary or authorised company of public electricity services. Its annual amount is established by the Brazilian Electricity Regulatory Agency (ANEEL) to cover ANEEL's own costs.

  • Incentive programme for alternative sources of electric energy (Programa de Incentivo a Fontes Alternativas de Energia Elétrica (PROINFA)). The purpose of this is to increase the renewable alternative sources in the energy matrix, such as wind, biomass and small hydroelectric plants.

  • Energy development account (Conta de Desenvolvimento Energético (CDE)). The purposes of CDE are to promote:

    • energy development in the states;

    • the competitiveness of the energy produced from wind power, small hydroelectric plants, biomass, natural gas and domestic coal in the areas served by the interconnected systems;

    • the universal use of electricity throughout the national territory;

    • secure resources to meet the economic subsidy for an affordable electricity supply price to low income consumers.

  • Financial compensation for the use of hydroelectric resources. The purpose of this is to compensate the municipalities affected by the loss of productive land, caused by flood areas in the construction of hydroelectric reservoirs.

  • Research and development and electricity efficiency. Resources are allocated to the Ministry of Science and Technology, and the National Fund for Scientific and Technological Development (Fundo Nacional de Desenvolvimento Científico e Tecnológico (FNDCT)), the Ministry of Mines and Energy (MME) and agents, to be invested in projects approved by ANEEL. The Ministries of Science and Technology and of Mines and Energy, as well as ANEEL, Eletrobras and the agents themselves are all involved in its management.

  • System services charge. The purpose of this is to cover the costs of system services, including ancillary services, provided to the users of the national interconnected system (Sistema Interligado Nacional (SIN)).

  • Energy reserve charge. The purpose of this charge is to cover all the costs of hiring the energy reserve to increase the security of supply of electricity to the SIN, from plants especially contracted through auctions for this purpose, including the administrative, financial costs and tax, which are apportioned among the end users.

  • Operator of the National Electricity System (Operador Nacional do Sistema (ONS)). The purpose of this charge is to cover ONS costs and expenses.

Issues.Brazil is a high tax jurisdiction with a complex tax system, especially given the several VATs that apply at federal, state and municipal levels. The main challenge is in the area of construction of power plants in what relates to the taxation of engineering, procurement and construction contracts, which is not specifically addressed by the tax legislation. The recovery mechanism of the state and federal VATs (ICMS and PIS/COFINS) also triggers several controversies surrounding what type of expenses and inputs may be creditable or not. The ICMS immunity (exemption) granted on interstate transactions involving electric power only applies to the seller, not reaching the purchaser in the other state, who is generally compelled to pay the tax.

 

Reform

24. What reform proposals are there for the regulation of the electricity sector?

In the Brazilian Congress there are more than 200 projects related to the energy sector. Some significant projects are:

  • Bill of Law No. 8,129/2014. This was presented on 20 November 2014, and it aims to amend Law No. 10,847 and 10,848 (both enacted on 15 March 2004, to establish the mandatory need to obtain environmental licences for hydroelectric generation and electricity transmission for participation in the energy auctions). The bill of law aims to avoid delays in the projects presented in the bidding stage, due to a failure to obtain environmental permits during the construction of the projects.

  • Bill of Law No. 41/2015. This was presented on 2 February 2015 and aims to amend Law No. 9,074 (enacted on 7 July 1995, which provides the rules for public service concessions and permissions) to set out a minimum indemnification of 20% of the value of the real estate property in cases where there is a compulsory use of the property for the installation of transmission and distribution systems.

 

The regulatory authorities

Ministry of Mines and Energy (MME)

Address. Esplanada dos Ministérios Bloco "U"
Brasília, DF, Brazil, 70065-900
+55 61 2032 5555
www.mme.gov.br

Main responsibilities. The MME is in charge of executing national energy policies, energy planning and monitoring.

Brazilian Electricity Regulatory Agency (ANEEL)

Address. SGAN 603, módulo J
Brasília, DF, Brazil, 70830-110
+55 61 2192 8600
W www.aneel.gov.br

Main responsibilities. ANEEL is an independent federal agency in charge of supervising and regulating the electricity sector in accordance with the guidelines of the MME.

Operator of the National Electricity System (ONS)

Address. Rua da Quitanda, 196
Rio de Janeiro, RJ, Brazil, 20091-005
T +55 21 2203 9400
+55 21 2203 9444
www.ons.org.br

Main responsibilities. The ONS is a non-profit organisation supervised by ANEEL that is in charge of co-ordinating and controlling the transmission grids.

Chamber of Electricity Energy Commercialisation (CCEE)

Address. Alameda Santos, 745, 9º andar
São Paulo, SP, Brazil, 01419-001
0800 10 00 08 (toll free number)
W www.ccee.org.br

Main responsibilities. The CCEE is a non-profit organisation responsible for registering all commercial energy contracts executed in the regulated and free networks.

Energy Research Company (EPE)

Address. SCN, Qd. 01, Bl. C, nº 85, Sl. 1712/1714
Brasília, DF, Brazil, 70711-902
+55 61 3022 2724
www.epe.gov.br

Main responsibilities. The EPE is in charge of strategic research and studies related to the energy industry, including studies and projections concerning Brazilian energy supply and energy efficiency.



Online resources

www.brasil.gov.br

Description. Official and updated information related to the power sector.

www.planalto.gov.br

Description. Official and updated information on all Brazilian legislation, maintained by the federal government.

www.aneel.gov.br

Description. Official and updated information on the electricity sector and applicable rules, maintained by the Brazilian Electricity Regulatory Agency.

www.ons.org.br

Description. Official and updated information on the co-ordination and control of the generation and transmission of electrical energy in the national interconnected system (SIN).

W www.mme.gov.br

Description. Official and updated information on the energy market and plans for expansion and improvement, maintained by the Ministry of Mines and Energy.

www.ccee.org.br

Description. Official and updated information on the purchase and sale of energy and related prices, maintained by the Chamber of Electricity Energy Commercialisation.

www.epe.gov.br

Description. Official and updated information on the electric sector and bids for the trade of energy as well as reports on the electricity market, maintained by the Energy Research Company.



Contributor profiles

Fabiano Gallo

Campos Mello Advogados

T +55 11 3077 3574/+55 21 3262 3019
F +55 11 3077 3501
E fabiano.gallo@camposmello.adv.br
W www.camposmelloadvogados.com.br

Professional qualifications. Brazil, Attorney, 1998

Areas of practice. Corporate; mergers and acquisitions; listed companies and corporate governance; foreign investment; energy and infrastructure.

Languages. Portuguese, English

Professional associations/memberships. Brazilian Bar Association (São Paulo, Rio de Janeiro and Pernambuco).

Eduardo Lopes Lobianco

Campos Mello Advogados

T +55 21 3262 3044
F +55 21 3262 3011
E eduardo.lobianco@camposmello.adv.br
W www.camposmelloadvogados.com.br

Professional qualifications. Brazil, Attorney, 2004

Areas of practice. Infrastructure; energy; M&A; corporate.

Languages. Portuguese, English

Professional associations/memberships. Brazilian Bar Association (Rio de Janeiro and São Paulo).


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