June 30, 2021
Tariff Impact of Provisional Measure 1,031/2021
Paulo Steele*
Summary
The power-sector changes brought by Provisional Measure 1,031/21 could produce an average reduction of 2.94% in electricity tariffs nationwide next year. Starting in 2027, however, that trend should reverse, with the MP's effects resulting in relatively substantial increases, particularly from 2028 onward, reaching 7.31% in 2030. These projections are among the main results of TR Soluções' simulation of the MP's effects. But the end of diesel and fuel-oil thermal-plant contracts, combined with the end of Itaipu debt payments and the other conditions factored into the Energy Tariff Estimation Service (SETE), could partly offset these increases.
1. Introduction
The power-sector guidelines set out through Provisional Measure 1,031/2021 (MP 1,031), which has just been approved by Congress, affect, among other things, electricity application-tariff projections. The MP's knock-on effects will hit both distribution system usage tariffs (TUSD) and electricity tariffs (TE).
Changes to the Incentive Program for Alternative Sources of Electric Energy (Proinfa), and setting an agenda for contracting thermal plants to form the Capacity Reserve Power Charge (ERCAP), directly affect how the TUSD's energy component is formed. Defining new revenue sources for the Energy Development Account (CDE) and removing Eletrobras' plants with Firm Capacity Quota Contracts (CCGF) from quota status, meanwhile, change the expected trajectory for the TE.
To quantify MP 1,031's possible impact on average application tariffs nationwide, TR Soluções set up a scenario with a nine-year tariff-projection horizon factoring in MP 1,031's possible effects.
2. TUSD: Impact on Usage Tariffs via Sectoral Charges
Regarding usage-tariff composition, MP 1,031 changed the expected trajectory for Proinfa; the composition of CDE revenue; and set an agenda for contracting capacity-reserve energy.
a. Proinfa
The cost of generating electricity from Proinfa, quantified1 at BRL 406.95/MWh in 2021, should evolve to BRL 283.63/MWh starting in 2022. This is because, per MP 1,031's requirement: "contracts resulting from the extension referred to in item I of this caput will have a price equal to the price ceiling of the 2019 A-6 Auction, adjusted by the IPCA through this Law's publication date."
Since the program is funded via a sectoral charge, in the energy component of the Transmission (TUST) and Distribution (TUSD) System Usage Tariffs, and not in the Electricity Tariff (TE), this cost doesn't directly explain the average price of energy contracts, although the energy volume factors into distribution companies' energy balance for calculating surpluses and deficits.
Source: TR Soluções with ANEEL data and MP 1,031
Figure 1 - Composition and Average Price of Proinfa Energy
Beyond changing the amount paid to different generation sources, there were changes to the index and the term. Proinfa contracts' current cost, which used the IGP-M as its index, now uses the IPCA. Contracts that would originally end in about 7.5 years were renewed for another 20 years.
Source: TR Soluções
Figure 2 - Proinfa Charge Projection
b. CDE
An additional economic revenue of BRL 2.1 billion per year is expected in the CDE, thanks to allocating, for tariff moderation, part of the funds from Eletrobras' plants' grant fees. This figure will be adjusted annually by the IPCA. This calculation used the preliminary amount2 of BRL 25.5 billion related to 50% of the grant revenue allocated to the CDE, calculated as an annual series over 30 years.
However, the benefits of this new CDE revenue source will only be felt, for tariff-moderation purposes, by captive consumers in the Regulated Contracting Environment (ACR).
Although MP 1,031 also indicates that 75% of any economic surplus arising from the review of Annex C to the Itaipu Treaty should be allocated to the CDE, that change wasn't factored into the calculations.
c. ERCAP
MP 1,031 set a five-year agenda for the granting authority to contract 8,000 MW of natural-gas thermal generation, with expected commissioning in:
- 2026: 1,000 MW;
- 2027: 2,000 MW;
- 2028: 3,000 MW;
- 2029: 1,000 MW;
- 2030: 1,000 MW.
The plants will be contracted through a capacity-reserve auction. This modality was regulated as capacity reserve in the form of power by Decree No. 10,707, of May 28, 2021, which establishes that costs arising from contracting under this modality will be allocated among all end users of electricity in the National Interconnected System (SIN).
Regarding the estimated energy cost, the Ministry of Mines and Energy's explanatory note3 states the following: "Using as a basis the text approved by the Chamber of Deputies, which provides for adopting the 2019 A-6 Auction's price ceiling adjusted by parameters tied to both fuel price and the inflation index, there's an adjustment of approximately 26% in the maximum contracting price for thermal plants, moving from BRL 292.00/MWh to something close to BRL 368.00/MWh."
Additionally, in the MME's most optimistic scenario4, a contracting discount of up to 35% is indicated relative to the 2019 A-6 Auction's price ceiling, adjusted by the IPCA.
Source: TR Soluções
Figure 3 - Possible Evolution for the ERCAP
In the simulation, TR Soluções adopted an intermediate scenario of a 15% discount on these thermal plants' contracting price ceiling, something close to BRL 312.00/MWh, and, like the MME, also considered a 70% capacity factor for the ventures, obtaining the expense and tariff trajectory associated with the ERCAP shown in Figure 3.
3. TE: Impact on Energy Tariffs Due to Removal From Quota Status
Currently, distribution companies' average electricity contract price is BRL 217.95 per MWh.
Source: TR Soluções
Figure 4 - Composition of Distribution Companies' Energy-Contract Basket
The composition of distribution companies' energy-contract portfolio varies from company to company. Generally speaking, about 50% of the purchasing portfolio's volume was contracted through government-organized regulated auctions, known as Electricity Trading Contracts in the Regulated Environment (CCEAR). Additionally, energy from Firm Capacity Quota Contracts (CCGF) and Nuclear Energy Quota Contracts (CCEN), plus Itaipu quotas and the Incentive Program for Alternative Sources of Electric Energy (Proinfa), are allocated to distribution companies by force of law. On top of that, bilateral energy-purchase contracts, mostly signed before the auction regime was established in 2004, round out concessionaires' contract basket.
Eletrobras' plants under the quota regime totaled 7,451 MW of firm capacity. That volume represents 63% of the total firm capacity under CCGF.
MP 1,031 provides for gradually and uniformly decontracting CCGF electricity, over a minimum of five years and a maximum of ten years.
In the simulation, TR Soluções considered a five-year scenario for the "removal from quota status" process, starting in January 2022. It's worth remembering that the cost tied to hydrological risk related to the de-quotified energy also stops being part of the Tariff Flag Centralizing Account's (CCRBT) expenses.
In the MME's most optimistic scenario4, de-quotified energy starts being offered in energy auctions at a value of BRL 155/MWh; in the most pessimistic scenario, the price would reach BRL 200/MWh.
TR Soluções adopted an intermediate scenario of BRL 167/MWh for re-contracting this energy in Existing Energy A-1 Auctions.
4. Tariff Impact of Provisional Measure 1,031/2021
As expected, MP 1,031 changes the trajectories initially expected for the TUSD and TE.
In the TUSD, although we see a downward trajectory for values in the short term, in the medium and long term there's a cost increase, resulting from the combined evolution expectations for the Proinfa and ERCAP tariff charges.
Since the legal provision requires that the benefits of the new CDE revenue source, arising from sharing gains from the grant fees, be felt only by captive consumers, for tariff-allocation purposes TR Soluções factored these benefits into the TE.
With this allocation, despite these plants' removal from quota status via MP 1,031, we see a tariff reduction in the TE, even in the short term.
These effects and their sum are shown in Figure 5, below.
Source: TR Soluções
Figure 5 - Impacts of MP 1,031 on Energy Tariffs
5. Tariff Impacts of CCEAR and Itaipu Decontracting
In the expected trajectory for average application tariffs, MP 1,031's knock-on effects add to other factors unrelated to the provisional measure, which contribute to a downward bias in the value of Regulated Environment (ACR) contracts over the coming years. Declining bilateral-contract and CCEAR volumes for fuel-oil and diesel-oil thermal plants, plus the expected drop in the cost of Itaipu energy due to the end of amortizing the plant's construction financing, explain this trend.
a. CCEAR: Fewer Contracted Thermal Plants
Considering the auctions already held through 2020, energy from fuel-oil and diesel-oil thermal plants will practically stop being part of distribution companies' CCEAR basket. This move should reduce these contracts' average energy price by up to 11%5.
b. Itaipu: Tariff Relief With the End of the Debt
The simulations in this article assume that, holding constant other cost factors unrelated to Itaipu financing, such as the GSF (81%) and the dollar exchange rate (BRL 5.00), the total value of electricity from the plant will stabilize around BRL 250/MWh once the plant's construction-debt cost payments end in 2023, as shown in Figure 6.
Source: TR Soluções with ANEEL data
Figure 6 - Evolution of Itaipu Energy Cost Composition
However, the benefits from paying off the plant's construction-debt cost are limited to captive consumer units served by the 22 distribution companies currently holding Itaipu quotas.
6. How Should Tariffs Evolve Through 2031
Figure 7 describes the expected average evolution of the TUSD and TE nationwide, as well as the tariff repositioning expected for the coming years, factoring in the set of assumptions adopted in this study's scenario.
Source: TR Soluções
Figure 7 - Brazil Tariff Projection With MP 1,031
It's always worth remembering that this analysis was carried out considering the country's full set of 53 electricity distribution concessionaires. Additionally, in general, tariff-value impacts should vary depending on each distribution concession's intrinsic characteristics.
Given how relevant these calculations are for companies specifically and for the power sector in general, TR invites users of its systems to check the online information already available in the Energy Tariff Estimation Service (SETE) to improve their own analyses on the topic for decision-making.
* Paulo Steele is managing partner at TR Soluções, a technology company specializing in electricity tariffs