December 15, 2023

Mapping Uncertainties in Energy Tariff Projections

Paulo Steele			Rodrigo Mota			Helder Sousa
TR Soluções			TR Soluções			TR Soluções

Summary

Residential electricity tariffs are expected to rise, on average, 7.61% in 2024. Behind TR Soluções' projection are mainly the increase in the Energy Development Account (CDE) and Reserve Energy Charge (EER), plus higher Basic Grid costs and the reduction in tax credits allocated to tariffs. In this last article of 2023, TR also introduces a new feature of the Energy Tariff Estimation Service (SETE) for the first 2024 release, whose tariff projections will now come with a dispersion of values obtained from hundreds of pre-simulated scenarios. Finally, the article presents a study on the tariff impact of the "riders" added by the Chamber of Deputies to Bill (PL) 11,247/2018. The situation is concerning: the additional average tariff increase due to the bill could reach 8.78% by 2030.

1. Introduction

Traditionally, at the end of each year TR Soluções shares its expectations for Brazil's average tariff projections for the upcoming year. On these occasions, we also cover the factors that, for the year in question, tend to have the greatest impact on tariffs, as well as those that generate the most uncertainty in tariff projections. This year will be a bit different, since the star of the show is precisely mapping the uncertainties in these projections, including the potential effects of Bill 11,247/2018.

2. Expectations for 2024

TR Soluções' projections indicate that Brazil's tariffs (TUSD+TE), for residential consumers, should show an average repositioning of 7.61% in 2024.

Source: TR Soluções' SETE Platform. Disregards taxes, as well as the effect of tariff flags.

The average repositioning results from the average of each of the 51 distribution concessionaires considered, weighted by each company's market. TR Soluções recognizes that simply presenting this figure falls far short of describing the sector outlook expected for prospective tariff repositioning. After all, as Delfim Netto once said, if a guy has his tail in the oven and his head in the fridge, you can't say he's at an ideal average temperature. To at least partly get around this "myopia" induced by the average figure, we also present the frequency distribution of expected repositioning. In Figure 1, we can see that, in 2024, most concessionaires' residential consumers should see a positive variation of up to 11.5%. Additionally, eight distribution companies' tariffs should fall compared to 2023, and nine should see repositioning above 14%.

Source: TR Soluções' SETE Platform.

The average variation in energy tariffs in 2024 can mainly be explained by a 27% increase in the Reserve Energy Charge; 13% in the Energy Development Account (CDE); a 15% increase in Basic Grid costs; and a 12% reduction in Tax Credits allocated to the Electricity Tariff (TE) and a 34% reduction in those allocated to the Distribution System Usage Tariff (TUSD). These variations aren't news for those who follow TR Soluções' regular, free publications: in February 2023, we published an article warning about the effects of reduced tax credits on tariffs. In May and September, respectively, TR Soluções published articles dedicated to the EER and the CDE. Additionally, in October we published an article explaining the rise in Basic Grid costs.

Source: TR Soluções' SETE Platform.

2.1 2024 Projection Dispersion

Under continuous development for 12 years, the SETE market-intelligence and tariff-projection platform has evolved steadily over that time, with more than 270 system versions made available to clients. The robustness this constant development provides doesn't, however, make users hostages to TR Soluções' figures and assumptions. On the contrary, they can adjust more than 140 parameters to define scenarios. All this flexibility invariably creates uncertainty about the possible variations in tariff scenarios. In an ideal world, the projection could be built considering every possible value across the full universe of factors considered. In reality, however, the time required for a calculation of that magnitude of scenarios would make the process unworkable. Given this, TR Soluções has innovated once again, and will roll out the Dispersion tool as early as the first 2024 release. This tool will allow quantifying the variability of annual tariff projections based on a sample from the universe of pre-simulated scenarios. In total, 729 scenarios are considered, resulting from combining different hydrology possibilities (factoring in the PLD, CMO, EAR, and GSF variables) and three possibilities for each of the macroeconomic variables (IPCA, IGP-M, SELIC, DOLLAR, and GDP). With the results from the 729 scenarios in hand, three statistical tariff values are determined, for projections of all tariff components, for each voltage level of the distribution company analyzed: the first quartile (Q1); the median (Q2); and the third quartile (Q3). For 2024, the values obtained from the 729 scenarios indicate the dispersion of Brazil's average application tariffs (TUSD+TE) for residential consumers under the conditions shown in Table 3, below.

Source: TR Soluções' SETE Platform.

3. Tariff Effects of Legislative Changes

As detailed above, uncertainty is inherent to the tariff-projection process, but it can be mapped from the expected scenarios for the factors that explain it. These uncertainties, however, don't stand alone: in reality, changes to power-sector legislation can be far more impactful. That's the case with the changes incorporated through riders¹ into PL 11,247/2018, which addresses harnessing the country's offshore wind potential and was recently approved by the Chamber of Deputies. Should it pass the Senate as currently written, the text could cause significant changes in tariff behavior over the coming years. Among the various riders sent from the Chamber to the Senate, the following provisions stand out:

• the mandatory contracting, in the form of Reserve Energy, of 9,700 MW starting in 2027, split among natural-gas thermal plants (with a change to the fuel-price criterion), liquid-hydrogen plants, Small Hydroelectric Plants (PCH) up to 50 MW, and wind plants in the South region. According to calculations by the Brazilian Association of Large Industrial Energy Consumers and Free Consumers, Abrace², this measure could cost consumers about BRL 28 billion per year.
• extending the operating window for coal-fired thermal plants from 2029 to 2050, contracted as Capacity Reserve in the form of energy. TR Soluções estimates this provision will result in additional costs to consumers on the order of BRL 7 billion per year.

The tariff impact of incorporating additional costs of BRL 35 billion per year should begin in 2027. Assuming these new costs are handled under the Reserve Energy Account (CONER), as a Reserve Energy Charge, the charge could rise more than 80% by 2031, once all the contracted capacity has been made available.

Source: TR Soluções' SETE Platform, assuming a PLD of zero.

To isolate the effect of these Congress-proposed provisions, we compared Brazil's average tariffs under two situations: one considering the current scenario (without the bill), and the other considering a scenario with additional costs on the order of BRL 35 billion per year to be felt starting in 2027.

Source: TR Soluções' SETE Platform.

It's important to note that the bill's effects were calculated on top of a projection that already factored in the effects of contracting the thermal plants covered by Law No. 14,182/2021, albeit under different conditions than those set out in the new legislative proposal. Another highlight: should the bill actually be enacted, the leading charge in tariffs will no longer be the CDE, which will lose that title to the EER starting in 2029.