October 6, 2022
Market Opening Without Electricity Over-Contracting
Paulo Steele and Helder Sousa*
Opening the free energy market to all consumers starting in 2028 shouldn't result in distribution companies becoming over-contracted. That's the main conclusion of an analysis considering the continued growth of consumer migrations under the rules already set and the proposals put out for public consultation by the Ministry of Mines and Energy. The analysis factored in energy-consumption growth outlooks and the duration of existing energy contracts, as well as projections for the evolution of the free market and of micro and mini distributed generation (MMGD) connections.
The conclusion is that, from the standpoint of the average energy balance across the 53 Brazilian concessionaires, even if new migrations to the Free Contracting Environment (ACL) happen faster than projected in this study, the existing contractual-reduction mechanisms would be able to deliver the balance needed to mitigate the risk of an eventual over-contracting charge. But for that to happen, it's crucial that distribution companies don't expand their energy contracting.
1. Energy Contracting in the ACL
The ACL reached 27,900 connections in July 2022, most of them special consumers (24,500), with consumption of 17,597 GWh, as detailed below.
Figure 1 - Expected Evolution of Group A Consumption in the Captive and Free Markets
Source: TR Soluções, with CCEE data.
This group of consumers already includes 81% of consumer units (CU) connected at voltage levels between 69 kV and 138 kV (subgroups A3 and A2). However, of the total universe of CUs connected at high voltage (Group A), which corresponds to 210,000 CUs, only 14% of the CUs connected at voltage levels between 2.3 kV and 44 kV (subgroups A4 and A3a) migrated to the ACL.
Table 1 - Characteristics of ACL Connections
Source: TR Soluções, with CCEE data.
Over the last five years, the average growth rate for the number of CUs participating in the ACL was 28% per year, going from 7,898 CUs (Dec/2016) to 26,715 CUs (Dec/2021). In other words, over this period, the migration speed among eligible captive consumers was 2.3% per year, corresponding to an average of 3,816 new ACL connections joining each year.
2. Energy Contracting in the ACR
The composition of distribution companies' energy-contract portfolios varies from company to company, with nearly 50% of the portfolio's volume having been contracted through regulated auctions organized by the government, known as Electricity Trading Contracts in the Regulated Environment (CCEAR).
Additionally, energy from Firm Capacity Quota Contracts (CCGF) and Nuclear Energy Quota Contracts (CCEN), Itaipu quotas, and the Incentive Program for Alternative Sources of Electric Energy (Proinfa) are allocated to distribution companies on a mandatory basis, by force of law. On top of that, bilateral energy-purchase contracts, mostly signed before the auction regime was established (Law 10,848/2004), round out distribution concessionaires' energy-contract basket.
For both quota-holding and non-quota-holding distribution companies, most of the contract portfolio comes from CCEAR energy. Since 2004, this has been the mandatory model for replenishing existing energy contracts, which can happen through Quantity-based auctions (mostly hydroelectric, but also wind and solar) or Availability-based auctions (thermal plants).
Figure 2 - Average Composition of the Contract Basket of Itaipu Quota-Holding Distribution Companies
Source: TR Soluções with CCEE and ANEEL data.
In the first modality, although hydrological risk was originally assumed by generators, the vast majority renegotiated it under Law No. 13,203/2015, allocating almost all of it to captive consumers. In the Availability modality, meanwhile, costs from hydrological risk are assumed by the purchasing agents, and any financial exposure on the short-term market, whether positive or negative, is assumed by distribution agents.
Still regarding hydrological risk, it's important to note that the costs arising from it for Itaipu energy and CCGF are also assumed by distribution agents.
Distribution companies' energy-purchasing portfolio under the ACR has various characteristics, and most contracts have a well-defined duration. However, some energy-contracting modalities in the ACR have no set term. Itaipu, Quota Energy1, Angra 1, and Angra 2 are examples of these contracts. Energy supply to permission holders, and to some isolated systems, also has no set duration.
Figure 3 - Evolution of the Existing Energy-Purchasing Portfolio
Source: TR Soluções, based on the Energy Tariff Estimation Service (SETE).
3. Legacy Contracts
Distribution companies are required to contract enough energy to serve 100% of their captive market. As it happens, certain market movements, such as migrations to the free market and the growth of distributed generation, along with cyclical effects on energy consumption (as was the case with the Covid-19 pandemic), cause distribution companies to have more energy contracted than needed to serve their captive market.
Currently, there are various mechanisms for distribution companies to rebalance their contract positions in response to these market changes, such as selling surpluses. Either way, these mechanisms haven't been enough, and today a significant share of concessionaires find themselves over-contracted. As the chart below shows, even without new migrations to the ACL and new increments in MMGD, energy surpluses should persist through 2024. This scenario assumes average market growth of 3% per year.
Either way, starting in 2025, distribution companies' contracting position would already show contractual exposure — that is, a need for new energy contracting to serve their markets.
In other words, considering the current contracting level, with no change to the current allocation of Itaipu (6 average GW), CCGF (12 average GW), nuclear (2 average GW), and Proinfa (1 average GW) energy among distribution companies, the expected evolution of surpluses and exposure across Brazil's 53 distribution concessionaires indicates there would only be room for a reduction in captive-market energy consumption starting in 2025.
Figure 4 - Evolution of Surpluses and Exposure WITHOUT New Migrations to the ACL and WITHOUT New MMGD Increments
Source: TR Soluções, SETE system.
However, migrations to the ACL, changes in energy consumption, MMGD growth, the end of existing contracts, or energy reallocations can change distribution companies' energy balance, with knock-on effects on surpluses and the need for new energy contracting, as shown below.
3.1. MMGD Evolution
The greater the growth in MMGD, the lower the need for distribution companies to contract energy to replace expiring contracts or to serve their market's growth.
Using the micro and mini distributed generation market model2 (4MD), developed by the Energy Research Company (EPE) and adapted by TR Soluções to reflect MMGD growth alongside load, deployed in residential, commercial, and rural consumer units by distribution concession area, we get the expected cumulative photovoltaic generation capacity for the country shown in Figure 5.
Figure 5 - Evolution of Cumulative Photovoltaic Generation Capacity Through MMGD Projects
Source: TR Soluções, based on SETE.
In this MMGD-growth scenario, holding other parameters constant (that is, considering the contracting level in force in 2022, market growth of about 3% p.a., and no new migrations to the ACL), the trajectory for the evolution of energy surpluses and exposure would be as shown in Figure 6.
Figure 6 - Evolution of Energy Surpluses and Exposure WITHOUT New Migrations to the ACL and WITH New MMGD Increments
Source: TR Soluções, SETE system.
Comparing Figure 4 with Figure 6 — surpluses and exposure with and without MMGD growth — shows that, with MMGD growth, surpluses would increase by about 4 average GW as early as 2024. In other words, as expected, deploying these projects directly impacts distribution companies' energy balance, pushing back to 2027 the point at which contracting shows energy exposure.
3.2. Evolution of ACL Migrations
The reasoning presented in the previous section also applies to the future scenario of market liberalization — that is, the more consumers leave the regulated market and migrate to the free energy market, the greater the contractual surpluses distribution companies may face.
Normative Ordinance No. 50/GM/MME, of 9/27/2022 (PTR 50), establishes that all consumers classified as Group A will be able to migrate to the free market starting January 1, 2024. There are currently about 178,000 consumer units in this group that haven't yet migrated to the ACL, of which 99% are connected at 13.8 kV, tariff subgroup A4.
Based on this data, we analyzed a market-liberalization scenario in which the growth rate for the number of new special-consumer connections seen over the last 12 months, based on CCEE data, is projected forward. This can be considered a conservative criterion.
For the energy volume per connection, we used the average demand for special consumers over the last 12 months, which was 211 kW, based on July 2022 data made available by the CCEE in its Monthly InfoMercado report.
Under these conditions, we can expect that, by mid-2026, total connections in the ACL will double relative to the current level.
In subsequent years, this movement should accelerate. That's because Ordinance No. 690/GM/MME, of 9/28/2022 (PTR 690), opens a public consultation proposing to lower the load threshold for contracting energy in the ACL, also for low-voltage (LV) consumers.
Figure 7 - Percentage Share of Tariff Subgroups Within Group B – Brazil 2021
Source: ANEEL, SAMP system.
Under the proposal, starting in January 2026, consumers served at LV, except those in the Residential and Rural classes, will be able to opt to buy energy in the ACL. Starting in January 2028, consumers in the Residential and Rural classes will also be able to migrate.
4. Conclusion
Comparing the expected annual evolution of energy exposure, in the MMGD-growth scenario, against the evolution of distribution companies' captive market, we can quantify a trajectory for liberalizing the captive market into the ACL, shown in Figure 8, which, if it plays out, wouldn't result in contractual energy surpluses for distribution companies.
Given that the typical profile expected for new ACL entrants, coming from medium-voltage connections, should resemble the profile of current special consumers, and given that historically the migration option has occurred at an annual rate of 2.3% p.a. among eligible consumers, we can expect that the reduction in distribution companies' captive market resulting from the publication of PTR 50 will be fully absorbed into the energy-contract portfolio by 2027.
Figure 8 - Annual Capacity for Liberalizing the Captive Market Into the ACL
Source: TR Soluções, SETE system.
Additionally, from the standpoint of the average energy balance across the 53 Brazilian concessionaires, even if new migrations to the ACL happen faster than projected in this study, the existing contractual-reduction mechanisms would be able to deliver the balance needed to mitigate the risk of an eventual over-contracting charge. For that to be possible, however, it would be crucial not to increase existing contracting.
Finally, it's worth noting that this analysis was carried out considering the country's full set of concessionaires and specific assumptions about the pace of migrations. Individual company figures may vary depending on the intrinsic characteristics of each distribution concession, including its energy contracts and the specific volume of migrations to the ACL or MMGD.
* Paulo Steele and Helder Sousa are, respectively, managing partner and director of regulation at TR Soluções.
Note: The chart data in this document is available for download by clicking the icon 