Series C-2: Overview of Brazil Electricity System (2)

Organization structure

History

Before the 1990s reforms, Brazil’s electricity can be characterized by 3 phases[1]:

private ownership with minimal regulatory control (until 1930);
private ownership with poor regulation (from the 1930s to the1940s);
state ownership with centralized control (from the 1950s to the first half of the 1990s)

In the early 1990s, the Brazilian electric sector was characterized by: (i) centralization of operation and planning; and (ii) vertically integration of transmission, distribution and generation of the sector[2].

Privatization: 1990s reforms

In 1995, a major transformation of the existing regulatory framework entered into effect to foster competition10:

Private participation in the electricity sector
Creation of a new market model in generation and commercialization. The figure of Independent Power Producer and the concept of Free Consumer, was created.

From 1996 – 1998, a project to restructure the sector defined the new conceptual and institutional framework to be implemented for the Brazilian Electric Sector10:

De-verticalization of the electric power companies.
Competition in the segments of generation and commercialization.
The State will keep under control distribution and transmission of electric power, considered to be natural monopolies.
Creation of a regulating agency, ANEEL (1996).
Creation of an operator for the national electric system, ONS (1998).
Creation of an operator for the commercial market, MAE (1998).

The energy crisis of 2001 – 2002[3]

Whilst the reforms of the late 1990s were a bold attempt to overhaul the failing system which preceded it, serious issues remained in the sector which the initial reforms failed to address. Growth in capacity continued to lag far behind growth in demand, and the country relied heavily on hydroelectric generation for 80 per cent of its electricity. Delays continued in the expansion of the sector due in part to the uncertainty in the definition of pass-through prices which complicated pricing mechanisms. After a few years in which average rainfall had been significantly lower than expected, reservoirs were depleted, and strict demand reduction programs had to be implemented by the Crisis Management Board, established and led by President Cardoso in June 2001. The Board had powers to implement emergency measures such as special tariffs, compulsory rationing and blackouts. Additionally, the government established a quota system based on historical and target consumption levels, and a corresponding bonus and penalty scheme whereby consumers were rewarded or penalized according to whether they fell within or exceeded their quota.

The government’s goal to reduce consumption by 20 per cent was achieved, and the quota system proved so effective that the government paid out over US$200 million in bonuses to residential, industrial and commercial consumers. Additionally, the government succeeded in avoiding blackouts and brownouts during the crisis. The response to the crisis was successful in reducing consumption and conserving resources. The biggest losers in the crisis were generators and distributors who inevitably experienced significantly reduced revenues.

The 2004 model

Following the energy crisis in 2001-2, and the election of the new administration led by Luiz Inàcio Lula de Silva in 2003, there was some speculation that the initial reforms of the late 1990s might be rolled back. As the reforms of the 1990s were so closely followed by the energy crisis, there was widespread criticism and skepticism of the new model, and some expectation that the sector would be fully regulated and effectively returned to government control. However, contrary to these expectations, the new administration continued to seek long-term private investment into the sector, and to introduce more competition into the market to drive efficiency that would protect the interests of captive consumers. The institutions established by the reforms of the 1990s were preserved and in many cases strengthened, and further reforms were implemented, including the introduction of energy auctions, to consolidate and improve the new model11.

In 2004, the Brazilian government implemented a new model for the electricity sector. One of the main components of the new electricity model was the creation of two energy trading markets, as showed in the figure: a Regulated Contracting Environment (RCE) where a pool of distributors buys power from generators in public auctions under set prices and a Free Contracting Environment (FCE) where free consumers and generators can freely negotiate their own bilateral contracts[4].

This hybrid approach to government involvement splits the sector into regulated and unregulated markets for different producers and consumers. This approach allows for both public and private investment in new generation and distribution projects. Under the plan, Eletrobrás was formally excluded from privatization efforts. In August 2017, the Brazilian government announced its intention to divest its controlling stake in Eletrobrás. The sale will not include Eletronuclear (a nuclear power company owned by Eletrobrás) or the Itaipu hydroelectric dam6.

According to a Reuters report in Feburary 2019, Eletrobrás manages power plants that generate about a third of Brazil’s electricity needs. It also controls power transmission lines that account for half the electricity transported throughout the country. The privatization likely will happen through a capitalization plan in which new shares would be offered to investors in a process that would dilute the largest shareholder, the Brazilian government, to such a level that it will no longer hold a controlling stake[5].