Possible Effects of Free Market Expansion
on Energy Tariffs
Paulo Steele*
The prospect of expanding the opening of the free energy market has raised questions in the Brazilian power sector about the risk of increased subsidies related to wire-tariff discounts for projects aimed at serving special consumers. This scenario is particularly concerning in a context of already-pressured tariffs.
Given the importance of the topic, TR Soluções assessed the potential effect of migration growth on the Energy Development Account (CDE), detailed below. Calculations were based on public data and the Energy Tariff Estimation Service (SETE).
The main conclusion is that, if 80% of Group A consumer units that haven't yet migrated opt for the free market by 2028 as special consumers, the subsidy should rise from BRL 13.23 per MWh to BRL 20.59 per MWh. The study also flags the tariff impact of this increase and estimates the possible effects of opening the market to low-voltage consumers.
1. Wire Discounts Encourage Incentivized-Source Projects
Law No. 9,427, of December 26, 1996, established that ventures from certain sources — small hydroelectric plants, solar, wind, biomass, and qualified cogeneration — could be entitled to a discount on Transmission (TUST) and Distribution (TUSD) System Usage Tariffs. These discounts apply to production and consumption of energy sold to special consumers in the Free Contracting Environment (ACL).
Under National Electric Energy Agency (ANEEL) Normative Resolution No. 1,031/22, TUST/TUSD discounts can range from 50% to 100%, depending on the type of venture and the power injected, among other factors. In 2021, the average discount observed in consumption across the country's 53 electricity distribution concessionaires ranged from 50.23% to 54.27%, as shown in the table below.
Table 1 - Average Wire-Tariff Discount for Group A
Source: TR Soluções, with data from the Electric Energy Trading Chamber (CCEE).
The discounts are offset with funds from the Energy Development Account (CDE). As shown in ANEEL Technical Note No. 061/2022, which presents the evolution of Distribution Tariff Discounts1 from 2013 to 2022, in the 2022 budget 37% of distribution subsidies covered with charge funds are associated with TUST/TUSD discounts for incentivized-source consumers.
Figure 1 - Evolution of Distribution Tariff Subsidies
Source: TR Soluções, with data from ANEEL Technical Note 061/2022.
In recent years, this system has ensured significant growth in the national generation fleet, mainly based on wind and solar plants, as shown in the chart below.
Figure 2 - Incentivized-Source Plants That Started Operating Since 2018
Source: TR Soluções, with ANEEL data.
2. Deadline for the Discount to End
Provisional Measure No. 998/2020, converted into Law No. 14,120/21, determined that agents interested in TUST/TUSD discounts for incentivized-source plants had to submit their grant-request registrations by March 2, 2022. Additionally, to receive the discount benefit, projects must start operating within 48 months of the grant date.
Given this deadline, as of August 2022 there were 68 GW of already-granted capacity for incentivized-source ventures whose construction hadn't yet begun, of which 84% of that capacity is photovoltaic plants and 14% wind, plus another 218 GW of capacity with published grant-request registrations.
To give a sense of scale, that amount is far larger than the entire average capacity allocated in 2022 to serving consumption in the Regulated Contracting Environment (ACR), of about 43 average GW, which includes distribution losses.
Figure 3 - Explosion of New Grants for Incentivized-Source Projects (Construction Not Started)
Source: TR Soluções, based on ANEEL data.
ANEEL Normative Resolution No. 876/2020 established the requirements and procedures for obtaining an authorization grant to operate EOL, UFV, UTE, Hybrid (UGH), and other alternative-source generating plants.
The resolution provides that grant requests to operate EOL, UFV, UTE, UGH, and other alternative-source plants submitted to ANEEL will be subject to publishing a Grant Request Registration Order (DRO). The resolution also clarifies that the DRO doesn't create any right of preference, exclusivity, or guarantee of obtaining authorization to operate the ventures.
To request an authorization grant to operate a generating plant, the interested party must submit, among other documents, access information issued by the National Electric System Operator (ONS) or the Energy Research Company (EPE).
Decree No. 10,893/2021 provided that ventures requesting a grant by March 2, 2022 were exempt from the requirement to issue access information regarding the feasibility of the venture's connection, and that the Ministry of Mines and Energy (MME) would begin running a competitive procedure to contract outflow margin for access to the National Interconnected System (SIN).
According to data from ANEEL's generation information system, from January 1, 2020, to March 1, 2022, 218 GW of DRO were issued for new EOL, UFV, and UTE plants.
Figure 4 - Explosion in Grant Request Registrations for Incentivized-Source Projects
Source: TR Soluções, based on ANEEL data.
All this shows the market's interest in offering incentivized-source energy with TUST/TUSD discounts. The fact is that, in reality, Law No. 14,120/2021 was unable to directly limit the granting of the discount benefit from the supply side.
On the other hand, outflow-margin contracting auctions could, to some extent, delay the supply of this kind of energy. But everything points to the speed of consumer migrations to the ACL as what will dictate the growth in the volume of distribution tariff subsidies tied to contracting incentivized-source energy.
3. Impact of Incentivized Sources on Distribution Tariff Subsidies
Distribution tariff subsidies make up part of CDE expenses, with the charge billed from the energy component of free and captive consumers' TUST and TUSD transport tariffs, except for consumer units classified as low-income2 and self-producers. In the CDE's 2022 budget, the total volume of subsidies related to granting the wire-tariff discount for incentivized sources totaled BRL 6.2 billion, 21% higher than what was projected for the previous year.
The characteristics of the consumer units demanding this energy also explain the subsidy volume, while the tariff charge associated with the subsidy depends on the connection's voltage range and the submarket where the consumer unit is located. As the table below shows, in the CDE's 2022 budget the charge ranged between BRL 5.00 and BRL 19.10 per MWh, averaging BRL 13.23/MWh across Brazil.
Table 2 - Share of Incentivized-Source Subsidies in the CDE's 2022 Budget
Source: TR Soluções, based on ANEEL data.
4. Opening the Free Market to All of Group A
In a scenario like the one presented above, with no restriction on the supply of incentivized-source energy, the increase in subsidy volume depends solely on the expected evolution of demand for this energy.
In this context, 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.
In this study, we adopted as an assumption3 a market-liberalization scenario at the pace of the growth rate for the number of new special-consumer connections seen over the last 12 months, based on CCEE data. It's worth noting this scenario can be considered conservative.
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 CCEE's July 2022 Monthly InfoMercado data.
Figure 5 - Evolution of Incentivized-Source Subsidies and Tariff Impact from Opening the Market to Group A
Source: TR Soluções, via SETE.
If the migration trajectory follows this scenario, we can expect that, by 2028, 80% of the 178,000 Group A consumer units that haven't yet migrated will have exercised their right to migrate.
Under this condition, the incentivized-source subsidy would rise from the BRL 13.23/MWh projected in the CDE's 2022 budget to BRL 20.59/MWh, on average. The subsidy's impact on the TUSD would rise from 4.11% to 6.53%, while its impact on the total tariff (TUSD+TE) would rise from 2.17% to 3.29%.
5. Possible Effects of Opening the Market to Low-Voltage Consumers
In parallel with the process of opening the market to Group A consumers, the Brazilian power sector is discussing expanding free-market access to all low-voltage (LV) consumers. A public consultation on this was opened through Ordinance No. 690/GM/MME, of 9/28/2022 (PTR 690).
Since there's no migration track record for the ACL in this tariff grouping, we chose to quantify the isolated effect on CDE expenses for incentivized-source consumers under scenarios with different universes of Group B energy-volume migrations, excluding, however, energy destined for consumer units classified as low-income from the eligible pool.
Figure 6 - Evolution of Incentivized-Source Subsidies With Market Opening for Group B
Source: TR Soluções, via SETE.
Using the economic tariffs published in 2021 for subgroup B, for each of the 53 electricity distribution concessionaires, and adopting an average discount of 52% on distribution transport tariffs, we found that for every 10% of subgroup B's market that migrates, BRL 2.9 billion per year, or BRL 6.49 per MWh, will be added to CDE expenses. That amount would have an average impact of 2.35% on the TUSD, or 1.18% on the Total Tariff (TUSD+TE) for all captive consumers in the country.
It's worth remembering that the average monthly consumption in 2021 for a low-voltage consumer unit, excluding those classified as low-income, was 235 kWh. This means that, on average, 10% of subgroup B's market would represent an additional 7.5 million consumer units in the ACL.
* Paulo Steele is managing partner at TR Soluções.
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