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    The new regulatory framework for energy and energy generation project financing

    The new regulatory framework for energy and energy generation project financing

    Carlos Augusto Tortoro Jr., partner of Tortoro, Madureira & Ragazzi Advogados responsible for energy and strategic litigation

    Chairman of the Federal Senate’s infrastructure services committee, Senator Marcos Rogério (DEM-RO) delivered his final report on the bill that amends the regulatory framework of the Brazilian electricity sector. The document willbe reviewed by the committee responsible by early 2020, for voting in other government agencies.

    The new proposal has some methodological changes, in addition to terms and wording of certain devices, in order to avoid distortions that could cause controversies between market agents and institutional and regulatory entities. However, besides correcting the route of the legislative technique in drafting standards, the new electricity legislation in the Brazil must be discussed with greater methodological strictness, in order to prevent the new rules from leaving unresolved dilemmas existing by the exhaustion of a cycle, or even worse, ending up aggravating them.

    The construction of the current model of the sector was based on three dimensions: supply reliability, sliding-scale ratesand universality. Whereas, future modeling is based, in principle, on two pillars: sliding-scale rates and full opening of the energy market to the final consumer.

    When the regulatory cycle that is in the process of completion is analyzed, it is possible to state that at least one of the purposeshas been achieved, that is, the security of supply no longer allowed Brazil to live with the specter of rationing, to the extent that there was a considerable increase in the generation and transmission park, in addition to the effective planning work of the EPE (Energy Research Company) and ONS (National Operator of the Brazilian Electrical System).

    However, the universality and sliding-scale rates did not reach the same success. Although there is no doubt of the increase in the capillarity of the electricity distribution system in much of the national territory, which was still going through the total lack of infrastructure, the lack of resources for this continuous task is still penalizing a considerable portion of the population.

    On the other hand, due to the financially weakened government, there is a clear lack of investment and public policy specifically focused on sliding-scale rates that has led to a multitude of subsidies added to the electricity tariff. This change has become a source of resources not only for expansion of the system, but also for other economic activities and therefore, the balance weighs too much on the final consumer.

    Therefore, it is not surprising that this element remains one of the factors in the new regulatory model of the electricity sector; which reinforces the need for a change in the structure of cross subsidies, because the current structure only inflates the price of the energy paid by Brazilians. Although we must acknowledge that the subsidy granting is a development inducer, this only occurs when there are well-designed public policies that envision economic and social gains in certain segments. Or, there is a risk of causing an evil financial dependence on free initiative and the sustainability of the economy.

    Another task that will not be easy is the opening of the electricity sector market to the consumer in general, such as an attempt to cheapen the tariff paid. This is because no more robust discussion has been carried out so far to enable migration, where there will be freedom to buy energy from any supplier. It is worth remembering that the autonomy in hiring will generate obligations related to the sale of the “product” that is full of rules and conditions of monthly settlement under the CCEE (Chamber of Commercialization of Electric Energy), in addition to the costs of using the distribution network infrastructure that still remains a natural monopoly of concessionaires.

    A greater price competition in the generation and commercialization of electricity will be healthy to the sector and for a possible drop in the final cost. Although this is the desired scenario, the overall opening of the electricity-free market must be well structured, because distribution concessionaires will have a lower load predictability, currently represented by the consumer market of their concession area. This can generate a problem for financing new and structuring energy enterprises, in addition to impacting the price of the tariff at a later time, creating insecurity in Brazil’s supply in the long term.

    After all, given the instability of increase for hiring new energy, distributors would not take risks in the auctions held by the Government, and without these contracts to supply the consumer market, the generation entrepreneur will hardly obtain economically viable long-term financing.

    In this regard, one of the choices to mitigate this risk is the separation of physical guarantee and energy, a subject that has been dealt with by several agencies, specially by CCEE. With the obligation to hire physical guarantee for trade agreements in the regulated and free market, large generation ventures can be made possible with long-standing financing and competitive interest.

    Finally, the evolution of the regulatory framework of the electricity sector is good and brings more encouragement to find that the legislative has been engaged in this task, highlighting the analysis and discussion of its billas a priority.

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