May 4, 2023
Reserve Energy Charge: Where Does It Come From, and Where Is It Headed?
Helder Sousa*
Summary
Contracting thermal plants under the Reserve Energy modality could double the cost of the Reserve Energy Charge (EER) billed to consumers in 2031, to BRL 46/MWh, compared to the figure projected for this year. This is the main finding of an analysis of the sector-wide impact of contracting the Simplified Competitive Procedure's (PCS) thermal plants and the 8 GW of natural-gas thermal plants whose contracting under this modality was required by the Eletrobras privatization law, plus other contracts made under this modality. In the article below, we detail the assumptions used in the calculations and present the concepts related to the topic, along with the analysis's other results.
Chart 1. Outlook for the Evolution of Reserve Energy's Fixed Revenue Through 2031
Source: TR Soluções, with contract data from the Electric Energy Trading Chamber (CCEE).
1. Reserve Energy: A Brief History
Reserve Energy is a long-term contracting modality, usually 15 to 30 years, in which projects are contracted through specific auctions aimed at increasing the security of energy supply in the National Interconnected System (SIN). The Reserve Energy Charge (EER) is meant to cover the costs arising from these contracts, allocated among all end users of electricity in the SIN.
Since 2008, eleven Reserve Energy auctions have been held. The most recent one took place in December 2016, but was canceled. Given this history, in 2023 the fixed revenue contracted through the 10th Reserve Energy Auction (LER) stands at BRL 9.9 billion per year.
Starting in 2022, expenses arising from contracting under the Simplified Competitive Procedure (PCS), detailed below, were added to the ordinary costs making up the EER. Other contracting of this type will also drive the charge up.
2. PCS: The New Emergency Thermal Plants
The water crisis faced in 2021 led to a series of developments, such as the creation of the Chamber for Exceptional Hydro-Energy Management Rules (CREG). Among the measures CREG adopted to tackle the water scarcity, Resolution No. 4, of September 9, 2021, deserves special mention, requiring that the PCS be carried out to contract capacity reserve, in order to guarantee the continuity and security of the electricity supply.
The auction was held on October 25, 2021, and resulted in contracting 778.2 average MW from a total of 17 generation projects, with 22.4 average MW from the quantity product, at an average price (updated to January 2023) of BRL 371.17/MWh; and the rest, 755.8 average MW, from the availability product, at an average price of BRL 1,729.76/MWh. Supply was contracted for 44 months, from May 1, 2022, through December 31, 2025.
Had all the PCS winning plants entered operation, this contracting would represent fixed revenue of BRL 12.7 billion in 2023 alone. However, a significant share of the projects failed to meet the auction notice's terms, and their contracts will likely be terminated.
Given this, the Ministry of Mines and Energy (MME) opened a public consultation to discuss ending PCS contracts, and last week the Federal Court of Accounts (TCU) published five orders allowing "amicable changes" to the contracts, even creating a "consensual resolution committee." Additionally, several proceedings are being discussed at the National Electric Energy Agency (ANEEL), although it has already rejected requests from the generators involved, such as one for exemption from liability.
Given these proceedings, the study chose to disregard the plants1 under review at the various venues. As a result, the fixed revenue tied to the PCS to be paid by free and regulated consumers this year should be about BRL 2.7 billion.
3. Eletrobras Thermal Plants
Also in 2021, Law 14,182/2021 required that 8,000 MW of capacity from natural-gas thermal plants be contracted across four regions of Brazil. Since these are plants with a high inflexibility factor (70%), this study assumes the auction modality adopted for these events will be Capacity Reserve Auctions in the Form of Energy (LRCE), as was the case with the first one, held last year. So the costs tied to this contracting should also be paid via the EER.
In 2022, 2,000 MW was offered, half in the North region and the other half in the Northeast. Factoring in inflexibility, in practice 1,400 average MW was offered, and only the North region saw contracting, of 700 average MW. Supply of this energy is expected to begin on 12/31/2026. In 2027, fixed revenue from this contracting alone should represent about BRL 3.2 billion, corresponding to 25% of total Reserve Energy fixed revenue projected for that year.
In the coming years, another 6,000 MW, or 4,200 average MW factoring in inflexibility, should still be offered: 1,050 average MW in the North region; 1,750 average MW in the Center-West; and 1,400 average MW in the Southeast. By 2031, once and if all contracted and to-be-contracted energy is being generated, fixed revenue from these LRCE thermal plants alone should represent 64% of total Reserve Energy fixed revenue, or an amount of approximately BRL 19.1 billion, as shown in the table below.
Table 1. Reserve Energy Fixed Revenue by Contract Type (in billions of BRL)
Source: TR Soluções, with CCEE contract data.
4. How Does the PLD Value Affect the Reserve Energy Charge?
All Reserve Energy is settled on the Short-Term Market (MCP), at the Settlement Price of Differences (PLD). The difference between the total fixed revenue each plant needs to operate and the revenue from settling that energy on the MCP is what actually becomes the charge. So, given the power sector's current hydrological situation, with hydroelectric reservoirs at levels not seen in a long time, and given the expectation that the PLD will stay at its regulatory floor at least through the end of the year, we can expect the EER to remain significant.
In 2023, factoring in the PCS's fixed revenue (excluding the plants under ANEEL review), of BRL 2.7 billion, total Reserve Energy fixed revenue to be paid to contracted generators should be BRL 12.7 billion.
Given this figure, and should the PLD stay at its minimum level of BRL 69.04/MWh, settling the contracted energy on the MCP should cover a bit less than 20% of Reserve Energy fixed revenue for the year. The rest, corresponding to BRL 10.2 billion, is what should be paid via the EER. In tariff terms, that's BRL 22.40/MWh.
In a simulation using a minimum PLD of BRL 15.05/MWh, as argued in a lawsuit challenging the formula ANEEL uses to set that value, the EER would be BRL 26.61/MWh. That means MCP settlement would cover a bit more than half a billion reais, or 4.23% of all Reserve Energy fixed revenue.
If, in 2023, the EER is expected to be quite high given the current situation, in which the spot price should stay at its regulatory floor through the end of the year, starting in 2027 Reserve Energy fixed revenue should grow significantly due to the entry into operation, by 2030, of all the energy to be contracted through the planned LRCEs.
In tariff terms, in 2031 the EER would be about BRL 46/MWh nominal, under a scenario where the PLD is at BRL 69.04/MWh. That would represent a 6% share of the average application tariff projected for Brazilian residential consumers for that year. It's worth remembering that, in 2023, the EER should represent 3% of these consumers' tariff.
Table 2. Reserve Energy Fixed Revenue and the EER, in Nominal Values
Source: TR Soluções, with CCEE contract data.
It's important to stress that this cost represents only Reserve Energy's fixed revenue. Depending on future energy-supply conditions, the thermal plants considered in this study could be called on to generate higher energy volumes beyond their inflexibility, making the EER's share of Brazilians' electricity bills even bigger.
On the other hand, TR Soluções' projected fixed revenue will only materialize if the auctions covered in this study are successful. In this regard, limitations on transmission-system access could be a relief for consumers. In a recent interview with Agência iNFRA, ONS director-general Luiz Carlos Ciocchi said that, if there's no room to connect new wind and solar plants, there's also no room for the 6 GW of gas-fired thermal plants under the Eletrobras Law that haven't yet gone to auction.
* Helder Sousa is Director of Regulation at TR Soluções.