Shift to free market and incentives for specific segments, such as distributed generation, pose threats to payment capacity
01/17/2024
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Luiz Eduardo Barata — Foto: Leo Pinheiro/Valor
In Brazil, the total subsidies on electricity bills have doubled over the past five years. From 2018 to 2023, the annual cumulative amount surged from R$18.8 billion to R$37.4 billion, according to data from the “subsidiômetro,” a National Electricity Agency (ANEEL) tracking tool. Such increase in subsidies, primarily levied through the Electricity Development Account (CDE), has been a concern for industry experts.
Recent warnings highlight the potential collapse of the payment system. Key among the sectoral charges, which are designed to subsidize electricity bill discounts, the CDE encompasses various initiatives, including the social tariff (a special discounted rate designed to make essential services more affordable for low-income households), universalization programs (initiatives aimed at ensuring that all citizens have access to basic services, regardless of their location or economic status), and the procurement of diesel or fuel oil for power plants not connected to the national grid. In 2023, the CDE’s budget sanctioned by Aneel was R$34.99 billion. The budget for the current year is yet to be approved, but an estimated figure of R$37.17 billion has been proposed.
The escalating subsidies are challenging the financial stability of the captive market, which primarily consists of traditional distributors, that is, consumers who do not have the option to choose their electricity supplier and are therefore “captive” to a single local utility provider. Luiz Eduardo Barata, president of the National Front for the Defense of Electricity Consumers, warns, “If comprehensive measures are not implemented soon, we could face a severe crisis by 2026 or 2027.”
In 2023, the highest subsidy allocation was for mitigating the operational costs of thermal power plants in isolated systems, amounting to R$10.3 billion. This was followed by expenditures for incentivized sources (R$10 billion), distributed generation (R$7.1 billion), and discounts for low-income households under the Social Tariff program (R$5.2 billion).
Experts are concerned about the imbalance in expenditure distribution within the sector and question the validity of maintaining certain benefits. They attribute many adverse effects to outdated regulations, recent market changes, and technical decisions made by Congress.
The same experts caution that the situation could deteriorate further with the introduction of new subsidies. Proposals for extending economic incentives for sector groups, potentially adding nearly R$30 billion annually to electricity bills, were included in the draft legal framework for offshore wind generation at the year’s end.
Mr. Barata, a former director-general of the Operator of the National Electricity System (ONS) and president of the Electricity Trading Chamber (CCEE), notes the trend of consumers shifting from distributor contracts to electricity traders in the free market, which allows them to choose their supplier. Due to legislative loopholes, this shift exempts consumers from paying certain obligatory charges in the captive market, some of which ensure supply quality.
Mr. Barata notes that in 2024, “almost everyone could choose the free market,” except for residential consumers. He warns that if a crisis arises, the government’s response must extend beyond localized actions, in contrast to the approach taken during the 2001 electricity rationing. That period was marked by strategic adjustments aimed at attracting investments to improve regional interconnections and expand thermal power plant contracts, vital for ensuring the reliability of the power supply. Mr. Barata now anticipates that the current perceived imbalances might necessitate broader restructuring, echoing the reforms of 1992. “The companies were on the brink of bankruptcy, and billions of dollars had to be injected into the sector, which led to the creation of the Eliseu Resende Act.”
In 2023, despite Congress making headway in discussions on modernizing the sector through Bill 414/21, the Minister of Mines and Energy, Alexandre Silveira, has committed to proposing a comprehensive sector reform through a provisional presidential decree. Economist Elena Landau, known for her role in privatizations during the Fernando Henrique Cardoso administration, argues for passing Bill 414 and deferring further improvements. She suggests the government should convene a sector-wide debate, resisting the urge to draft a new legal framework single-handedly “inside the cabinet.” Ms. Landau believes her suggested approach could protect the new law from becoming a “zombie project,” a term she uses for parliamentary amendments that attempt to establish substantial subsidies for financing gas pipelines through electricity bills.
Jerson Kelman, a former director of ANEEL and the National Water Agency (ANA), recently discussed the potential for a “bubble burst” in Brazil’s electricity market in an article on the Energia Brasil portal. He explains that this can happen in a “poorly regulated” sector that induces market players into a “euphoria of immediate gains.” Mr. Kelman points specifically to the advantageous position of DG (Distributed Generation) consumers, who generate part of their electricity, benefiting from reduced distributor consumption and a discount for contributing the excess to the power grid. He estimates that the subsidy for DG is, on average, 14 times higher than that for a family on the Social Tariff. Generally, DG is adopted by middle-class consumers or companies able to invest in solar panel systems.
In a statement to Valor, Mr. Kelman, who previously led Light and Sabesp, reaffirmed his stance. He draws parallels between Brazil’s electricity sector situation and the American mortgage bond market scenario that led to the 2008 financial crisis, where certain groups favored short-term gains at the expense of medium and long-term systemic consequences.
Marcos Madureira, president of the Brazilian Association of Electricity Distributors (ABRADEE), identifies at least two factors contributing to higher tariffs in the regulated market. One is the surplus power bought in long-term contracts, some lasting until 2050, which raises costs and encourages migration to the free market. The other is the increasing adoption of distributed generation under special conditions, without sharing the expenses for maintaining the distribution network.
“Distributors are burdened with more expensive electricity, which they cannot reallocate in the market. This results in higher electricity prices for the remaining consumers. It’s what we call a death spiral, as the increased cost is borne by an ever-decreasing group of consumers,” Mr. Madureira cautioned.
In response to inquiries, the Ministry of Mines and Energy stated that the “issue of subsidies is a critical one for the ministry, which is actively working to limit the growth of these costs for consumers.”
*Por Rafael Bitencourt — Brasília
Source: Valor International