April 9, 2020
Refining Market-Growth Projection Criteria
From the narrow standpoint of the tariff universe, a reduction in consumption, for whatever reason, drives up electricity tariffs.
Energy consumption throughout the year is usually influenced by temperature (greater or lesser use of cooling equipment), economic activity (more or less industrial and services activity), and social factors (major events, school vacations, holidays, consumption habits, and equipment ownership).
Beyond the current, specific epidemiological problem, the growing installation of photovoltaic distributed generation (GDFV) systems can also be flagged as a factor affecting the tariff calculation. For this reason, TR started tracking, in SETE: monthly data on energy supply to the captive market, as made available by ANEEL1; monthly free-market data; monthly data on new MMGD connections; plus historical and projected temperature and GDP data.
The goal is to keep correcting the captive- and free-market course as information becomes available, mitigating any errors in short-term market projections.
Up to now, TR used, as the basis for SETE's tariff calculations, the last known reference market. This is the parameter the regulator uses to obtain the final tariff that recovers both the fixed and variable costs that are consumers' responsibility.
Impact of Adding GDFV to Tariff Projections – Installed micro and mini distributed generation (MMGD) capacity grew 235% in 2019 compared to the previous year, totaling 1.85 GW in 2019. Per ANEEL's report on Consumer Units With Distributed Generation2, 96% of these new installations are GDFV.
Considering only the potential market of consumer units connected at low voltage, in subgroups B1 and B3, and the 4MD methodology3, described in NT DEA 016/2019, TR Soluções assesses, through a tool made available in SETE, that, keeping current electricity compensation rules set by ANEEL Normative Resolution No. 482/2012 unchanged, total installed capacity could reach 33 GW by 2026.
Figure 1 – Annual Projection of Installed Photovoltaic Distributed Generation Capacity
Source: TR Soluções
It's important to note this scenario is subject to uncertainty due to various factors, such as: regulatory changes; the price the end consumer pays per installed watt (BRL/Wp); how electricity tariffs evolve; the number of consumer units; household income; and parameters describing the GDFV technology's diffusion model.
The effect of the pandemic caused by the new coronavirus is already being felt in MMGD additions in the first quarter of 2020. While 169 MW in additions were recorded in January 2020, additions totaled 123 MW in February, dropping to 78 MW in March.
Figure 2 – New Distributed Generation Additions
Source: TR Soluções
Since, in the tariff-projection exercise, factoring in GDFV growth or not changes both the Distribution System Usage Tariff (TUSD) and the Electricity Tariff (TE), TR Soluções incorporated the 4MD methodology and began factoring in the drivers behind GDFV market growth into its tariff-calculation model.
Generally speaking, the main changes to the TUSD and TE expected across different distribution concessions show similar behavior. However, how intense these changes are will depend on each concession's intrinsic characteristics.
Changes to required-energy projections that alter the distribution company's energy balance directly affect the TE. With greater GDFV adoption, the need for regulated-environment (CCEAR) contracting is reduced, for both existing and new energy. This makes Base Energy (bilateral contracts, Angra, quotas, and Itaipu) carry more weight in the distribution company's energy-purchasing portfolio. As a result, besides changing the average energy-purchasing price, which explains the TE, the pricing of TUSD's technical and non-technical losses is also affected.
Attention: Regarding energy from the quota regime, it's important to note that 65% of this energy volume currently comes from Eletrobras' hydroelectric plants. A possible privatization would let Eletrobras exit the quota regime, which would raise the average price currently charged under that contracting modality (PL 9463/2018). Additionally, when fully or partially replacing de-quotified energy in a replacement auction, the price of the energy to be re-contracted would likely be higher.
In the TUSD, the biggest impact is on the Fio B tariff, mainly due to the shrinking size of the market paying for wire usage. This happens because, as a result of market-shrinkage effects on the T and Pd components of the X Factor, the regulatory values for Annual Asset Costs (CAA) and Administration, Operation, and Maintenance Cost (CAOM), which make up Portion B, tend to rise. Since tariffs are basically formed by a ratio between regulatory costs (numerator) and market (denominator), this dynamic drives the Fio B tariff up.
The CDE quota tariff component is also affected. Although TR Soluções understands that CDE-account expense projections aren't changed by GDFV market growth, the charge's quota value is changed, since that value is inversely proportional to the market paying for wire usage.
Attention: The price-cap regulation model allows annual market variations to affect distribution companies' results from providing grid-usage service — that is, the distribution company is exposed to market risk. The smaller the market paying for wire usage, the smaller the annual gains observed. This last aspect regarding price-cap regulation doesn't directly change tariff projections, but it does change concessions' results.
Impact of Climate and Economic Factors on Tariff Projections - The changes to captive- and free-market consumption projections TR Soluções factored into SETE will also help avoid surprises like the one seen with Light's 2020 tariffs, where climate factors had a significant effect on short-term market behavior.
ANEEL itself expressed surprise in describing the reference-market calculation in the distribution company's tariff-proceeding technical note4, noting that: "in January 2020, billing dropped, mostly driven by lower temperatures compared to January 2019 — from 29.9°C to 26.6°C — with a bigger impact on the residential market, due to widespread air-conditioner use."
Given these facts, changes were made to SETE's captive- and free-market projection methodology. For consumption projections, Group B consumer units were separated from other consumer units.
For Group B units, functions were established correlating 36 months of historical consumption, temperature, and GDP data. With these functions in hand, and knowing temperature5 expectations for 117 cities and GDP expectations, consumption data is projected for Group B consumer units.
Cities served by each concession were grouped6 based on proximity criteria. Within each group formed, the most populous cities closest to that group's centroid were selected.
To quantify each concession area's temperature, the selected cities' temperatures are weighted by the sum of the populations of the cities in the groups they belong to.
For projecting consumption for other consumer units (Group A), TR is keeping its current methodology: load-growth expectations projected by the ONS are factored in, along with known seasonal consumption patterns by tariff subgroup.
Free-Market Opening – Even though a scenario of full free-market opening is possible within SETE's projection horizon (considering PLS 232/2016), TR Soluções isn't changing the criterion used to project that market's growth. In this regard, it's important to remember that, unlike the other developments mentioned, changes to the free-market-opening scenario only affect the energy tariff, not usage tariffs (wire or charges). It's also worth remembering that SETE lets users build countless free-market-opening scenarios.
Changes to SETE – With the changes implemented in SETE, users can track the captive and free market's monthly evolution, and also assess the impact of adding GDFV under their own tariff-projection scenarios. In system version 13.00, released April 9, 2020, the following changes were made:
- The page showing consumption data by tariff group was renamed from "Consumption" to "Net Consumption," since it now reflects the combined result of market evolution (captive and free) with distributed-generation evolution. When accessing the distribution company of interest, under Adjustment/Distribution Company/Net Consumption, users still have the option to project tariffs without factoring in new GDFV additions.
- Two new pages were added: "Gross Consumption," highlighting only market evolution (captive and free); and "Distributed Generation," showing micro and mini distributed generation's evolution.
- A new page specific to distributed generation was added under Home/Cost Elements/Market: the "MMGD" page shows monthly data on installed DG capacity's evolution.
- A new tool is available under Tools/Tariffs/DG Payback. It shows GDFV payback data for subgroups B1 and B3, and provides results from the Greener7 company's quarterly survey on end-client prices (BRL/Wp) and PV systems' average productivity in each concession area.
- Regarding market evolution, under Home/Cost Elements/Market, pages were added to track the captive and free market monthly, distribution-concession-area temperature, and Brazil's GDP evolution, available under Home/Indexes and Quotes/GDP.
1 Source: https://www.aneel.gov.br/relatorios-de-consumo-e-receita
2 Source: http://www2.aneel.gov.br/scg/gd/VerGD.asp
3 Source: [EPE, Micro and Mini Distributed Generation Market Model (4MD): Methodology – PDE 2029 Version](http://www.epe.gov.br/sites-pt/publicacoes-dados-abertos/publicacoes/PublicacoesArquivos/publicacao-423/topico-488/NT_Metodologia_4MD_PDE_2029.pdf
4 Source: Technical Note No. 027/2020-SGT/ANEEL
5 TR Soluções started contracting a temperature-forecasting service from Somar Meteorologia
6 K-Means clustering technique
7 Source: https://www.greener.com.br/pesquisas-de-mercado-energia-solar-fotovoltaica-brasil/