July 10, 2024
Where Are Tariffs Headed Under Provisional Measure No. 1,232/2024?
Summary
Provisional Measure No. 1,232/2024 (MP) significantly changes the Fuel Consumption Account's (CCC) budget and power sector's spending on the Reserve Energy Charge (EER). This study analyzes these changes and presents projections of their impact on distribution companies' application tariffs, calculated using TR Soluções' Energy Tariff Estimation Service (SETE). In short, the analyses indicate impacts ranging from a reduction of BRL 5.79/MWh to an increase of BRL 4.35/MWh.
This wide range in results is mainly due to the fact that, although the CCC tends to decrease with the legislative changes set out in the MP, the EER should rise, but its behavior is directly tied to how the Settlement Price of Differences (PLD) evolves. Additionally, as this article will show, the actual results depend on the consumer's geographic region and connection voltage level, among other aspects that add uncertainty to the forecasts.
1. Context
The provisions set out in the MP, published on June 12, 2024, significantly change the CCC's budget and the power sector's EER spending. Below, we present the recent evolution and current conditions of these charges.
1.1. CCC
The CCC is one of the most significant items in public-policy subsidy spending related to the power sector, covered by the Energy Development Account (CDE). The budget proposed by the National Electric Energy Agency (ANEEL) for this year projects it will account for 31% of the total CDE Usage.
CDE Usage is the portion of the account split among all consumers, free and regulated, except those benefiting from the social tariff and energy self-producers, through the Distribution (TUSD) and Transmission (TUST) system usage tariffs, and should total BRL 34.2 billion this year. That's equivalent to BRL 92.98/MWh in residential consumer tariffs in the South, Southeast, and Center-West regions, and BRL 48.68/MWh in tariffs for those in the North and Northeast regions1.
In percentage terms, these figures correspond to 5% to 16% of application tariffs, depending on supply voltage levels, as well as the consumer's location within the National Interconnected System's (SIN) submarkets. So the CCC represents, on average, between 2% and 5% of electricity bills.
The CCC's recent expense trend can mainly be explained by legal changes implemented in recent years, listed below:
Decree No. 7,246/2010, which regulated Law No. 12,111/2009, expanded the account's reimbursements by establishing that the full cost of energy over-contracting for the beneficiary distribution companies would be borne by the charge for a period of three years following their respective interconnection to the SIN. So, through December 31, 2018, Amazonas Energia's (AmE) short-term market (MCP) results would be allocated to the CCC. Later, Decree No. 10,050/2019 changed that period to five years.
Law No. 14,146/2021 expanded the criteria for passing energy over-contracting costs on to the charge, establishing that, between January 2021 and December 2026, the financial effect of these costs, under certain conditions2, would also be borne by the CCC. Besides AmE, the measure affected the accounts of Roraima Energia (RR Energia) and Companhia de Eletricidade do Amapá (CEA).
The same law also relaxed, under certain conditions3, the regulatory treatment used to calculate loss expenses: in 2022-to-2025 tariff proceedings, calculating these expenses would be based on the difference between actual load and the regulatory market observed in calendar year 2020, factoring in an annual 25% reduction. This measure applied only to CEA.
Finally, also under specific conditions4, the law established an additional 100% discount on the value of the average ACR5, to be reduced by 20% annually, until it's phased out in December 2025. This measure applied to Equatorial Pará and, again, to CEA.
In total, the additional expenses arising from Law No. 14,146/2021's provisions imposed additional costs on the CCC's budget on the order of BRL 1.5 billion, expected to remain in the CCC's budget through 2026. Learn more about this topic in the article TR Soluções published on the topic in July 2023.
1.2. EER
Reserve Energy is a long-term energy-contracting modality, usually spanning 15 to 30 years, through specific auctions aimed at increasing the security of energy supply within the SIN. The EER is meant to cover the costs arising from these contracts, which are allocated among all end users of electricity in the SIN.
Since 2008, eleven Reserve Energy auctions have been held. In 2023, the fixed revenue contracted through the 10th Reserve Energy Auction (LER) was BRL 9.9 billion per year, and, starting in 2022, expenses arising from contracting under the Simplified Competitive Procedure (PCS) were added to the ordinary costs that made up the EER.
The charge's value is set based on the PLD. This is because all Reserve Energy is settled on the MCP, and the difference between the total fixed revenue needed to operate each plant and the revenue from settling that energy on the MCP is what actually becomes the charge. So, if the PLD rises, the charge's value falls, potentially even resulting in a positive balance. However, if the price falls, the charge may need to be billed to honor commitments to reserve-energy generators. To learn more about the EER, see the article TR Soluções published on the topic in May 2023.
2. Provisional Measure No. 1,232/2024 and Its Implications
TR Soluções analyzed the MP to incorporate its provisions into SETE, allowing service users to simulate the impact of these conditions on distribution companies' application tariffs. These changes' implications are discussed in the rest of this article.
The MP is basically made up of three articles setting out changes to Laws No. 12,111/2009 and No. 12,783/2013.
Article 1 adds Article 4-D to Law No. 12,111/2009, establishing that electricity purchase-and-sale contracts held by over-contracted distribution agents, backed directly or indirectly by thermal plants whose natural-gas pipeline transport infrastructure expenses are reimbursable by the CCC, may be converted into Reserve Energy Contracts (CER).
Article 2 adds Article 8-C to Law No. 12,783/2013, establishing that, in states whose capitals weren't interconnected to the SIN on December 9, 2009, if ANEEL concludes there are no economic, technical, or operational conditions for providing the granted service during the concession's grace period, the agency will approve a plan to transfer corporate control as an alternative to ending the concession. To ensure the concession's economic-financial rebalancing, the amendment may provide, for up to three tariff cycles (15 years), for the CCC to cover temporary relaxations in efficiency-related regulatory parameters and the extension of the timeline for the burden arising from the concessionaire's involuntary over-contracting.
Article 3 repeals articles of Laws No. 12,111/2009 and No. 12,783/2013 that capped the amount of energy to be considered for providing the public electricity-distribution service in Isolated Systems at the efficient loss level, per ANEEL regulation. As a result, that amount may now be set below what would be the efficient loss level.
2.1. CCC Contracts to Be Converted into CER
The thermal plants whose natural-gas pipeline transport infrastructure expenses are reimbursable by the CCC, which may be converted into CER under Article 1 of the MP, are served by the Urucu reserve in Amazonas, through the Urucu-Manaus gas pipeline. There are three groups of natural-gas-related costs making up the CCC's annual expenses, totaling, in 2023, about BRL 4.32 billion. They are:
Capacity and Energy contracts between Amazonas Energia (AmE) and Eletronorte6: the Coari, Caapiranga, Codajás, Anamã, Anori, Cristiano Rocha, Manauara, Ponta Negra, Tambaqui, and Jaraqui Thermal Power Plants (UTE), worth BRL 2.88 billion;
natural-gas fuel contracts benefiting Eletronorte, with UTE Aparecida, worth BRL 237 million, and with UTE Mauá 3, worth BRL 950 million;
ancillary-expense contracts benefiting AmE, worth BRL 255 million annually (net margin, ship-or-pay, and take-or-pay).
Among the thermal plants mentioned, UTE Mauá 3 (591 MW) deserves special mention, having won the 20th New Energy Auction (20LEN), in 2014, contracted under the availability modality for 25 years, through the end of 2043.
As a result of Amazonas Energia's de-verticalization process and the reimbursable-by-CCC term for natural-gas contracting (2030), Provisional Measure No. 855/2018 was issued, which in Article 4 states: "The Granting Authority, to ensure optimal use of natural-gas thermal plants that entered operation or converted from liquid fuel to natural gas, starting in 2010, as an alternative to replacing the energy sold by these thermal plants, may allow changes to the delivery profile and contract terms of energy contracts backed by other thermal plants under the same ownership, keeping the price and CCC-fund reimbursement conditions of those contracts unchanged, per Granting Authority regulation."
Decree No. 9,582/2018, which regulated the matter, allowed UTE Mauá 3 to negotiate its CCEARs for energy delivery through 2030. It also allowed advancing delivery of energy contracted via CCEARs from 2030 to 2043. This advance was allocated to thermal plants that already had contracts with Amazonas Energia and shared the natural-gas pipeline transport infrastructure. As a result, UTE Aparecida's contract was replaced (moving from the existing CCVE to CCEAR), with its grant extended through the end of 2030 and the same contracting conditions as UTE Mauá 3.
So the three groups of natural-gas-related costs have the following durations:
through May 2025, for the Cristiano Rocha, Manauara, Ponta Negra, Tambaqui, and Jaraqui plants;
through October 2030, for the Coari, Caapiranga, Codajás, Anamã, Anori, Aparecida, and Mauá 3 plants;
through December 2030, for the Urucu-reserve gas-supply contract.
Article 1 of the MP also determines that contracts converted into CER will end when the current natural-gas purchase-and-sale contract whose expenses are reimbursable by the CCC expires. Unit-price, quantity, and inflexibility conditions, among others, and expense-reimbursement conditions, including non-recoverable taxes, applicable to the original contracts using CCC funds, must be maintained throughout the supply term.
Since the Urucu-reserve natural-gas supply contract ends in December 2030, a possible interpretation would be that contracts converted into CER would also end in 2030. To model the duration of contracts converted into CER in SETE, TR Soluções assumed that all contracts converted into CER will end in December 2030.
The treatment to be given to UTE Mauá 3 remains an open question. Although the cost of its fuel and natural-gas transport is paid using CCC funds, it sold energy in the 20LEN to several SIN distribution companies. This raises the following questions:
Will UTE Mauá 3's BRL 950 million in fuel costs also be converted into new CER expenses?
Will UTE Mauá 3's 591 MW capacity be treated as Reserve Energy? If so, will the CCEAR contracts tied to the 20LEN be terminated?
The set of three natural-gas-related cost groups making up the CCC's annual expenses totaled about BRL 4.32 billion in 2023. Since 19% of these expenses were paid via the average ACR that year, the amount reflected in the CCC's 2023 annual expenses was about BRL 3.5 billion.
In 2024, CER's total cost is BRL 16.6 billion, so the impact on CER's annual budget, factoring in the transfer of CCC costs, depends on the volume of costs actually converted into that kind of expense.
Considering the set of natural-gas-related costs, depending on the treatment adopted for UTE Mauá 3, either BRL 4.32 billion or BRL 3.37 billion in contracts currently covered with CCC funds could be converted into CER.
In a scenario where the full set of three natural-gas-related cost groups making up the CCC's annual expenses were converted into CER, the EER would rise by about 26% (+BRL 4.32 billion). Once the conversion happens, these additional costs should remain as Reserve Energy expenses through December 2030, the end date for the natural-gas supply contracts, as shown in the chart below.
Figure 1 - Projection of Reserve Energy's Annual Fixed-Revenue Budget
Source: TR Soluções' SETE platform
Additionally, since all reserve-contract energy is settled on the MCP, the volume of energy under contracts to be considered in the conversion to CER is key to setting the fixed revenue to be recovered and, consequently, to billing the EER. The volumes could be explained based on the plants' average capacity:
the group of plants Coari, Caapiranga, Codajás, Anamã, Anori, Cristiano Rocha, Manauara, Ponta Negra, Tambaqui, and Jaraqui is associated with 313 average MW;
related to the natural-gas contracts benefiting Eletronorte, there's UTE Aparecida (145 average MW) and UTE Mauá 3 (484 average MW).
So, based on these average capacity figures, either 458 or 797 average MW could be converted into CER, depending on the treatment adopted for UTE Mauá 3.
2.2. CCC Expenses Arising From Losses, Contractual Surpluses, and Economic and Energy Efficiency
In the tariff proceeding that approved its 2024 tariffs, distribution company AmE reported an energy over-contracting volume of 4.5 GWh, that is, 43% over-contracting, with annual CCC costs on the order of BRL 1.1 billion. However, with the expiration of the bilateral contracts for the Cristiano Rocha, Manauara, Ponta Negra, Tambaqui, and Jaraqui plants, in May 2025, that over-contracting percentage would drop to 25%. It could also be said that, in 2026, AmE would normalize in terms of contractual surpluses, becoming nearly regulatorily balanced, since there would be a further reduction to 7%, due to the end of the bilateral contract with UHE Balbina.
Given the distribution company's conditions, it's worth highlighting the changes made to Law No. 12,783/2013 through Article 2 of the MP, as listed below:
§3 To ensure the concession's economic-financial rebalancing, the amendment referred to in §1 may provide, for up to three tariff cycles, at ANEEL's discretion, coverage from the Fuel Consumption Account – CCC for:
- temporary relaxations in efficiency-related regulatory parameters, such as operating costs, the X Factor, non-technical losses, and uncollectible revenue;
- temporary relief for applying the economic and energy efficiency parameters set out in Article 3, §12, of Law No. 12,111, of December 9, 2009; (Added by Provisional Measure No. 1,232, of 2024)
- not applying the loss-reduction factor to CCC reimbursement;
- extending the timeline for the burden arising from the concessionaire's involuntary over-contracting, covered by Article 4-C of Law No. 12,111, of December 9, 2009. (our emphasis)
So, although the MP requires maintaining economic coverage from the CCC for the burden of involuntary over-contracting, due to the volume of AmE's contracts converted to CER (2.8 GWh per year), the distribution company will no longer be over-contracted once the contract conversion happens. In practice, then, the costs for this expense item should be eliminated from the CCC's annual budget.
Finally, from Article 3 of the MP, we can highlight the change to Law No. 12,111/2009, repealing §16: "The amount of energy to be considered for providing the public electricity-distribution service in Isolated Systems will be capped at the efficient loss level, per ANEEL regulation. (Added by Law No. 12,783, of 2013)".
Based on these findings, the following adjustments were made in SETE for the distribution companies AmE, Energisa RO, Roraima Energia, Energisa AC, Energisa MT, Neoenergia PE, Equatorial PA, and Equatorial AP: 1) allocating the expense for actual non-technical losses above regulatory losses to the CCC's expense set at BRL 337 million/year; and 2) not applying the economic and energy efficiency cut factor to CCC reimbursement, which would raise the CCC's 2024 expenses by BRL 544 million/year.
Figure 2 - Projection of the CCC's Annual Budget Factoring in the MP's Changes
Source: TR Soluções' SETE platform
Finally, it's worth noting that, although Article 2 also established temporary relaxations in efficiency-related regulatory parameters, such as operating costs, the X Factor, and uncollectible revenue, the knock-on effects of these parameters weren't addressed in this article, since they're very sensitive to specific regulation ANEEL has yet to establish.
3. Potential Impacts on Consumer Tariffs
The tariff effects arising from converting contracts currently funded by the CCC into CER depend on several factors, as covered throughout this article. Either way, the main ones are tied to the consumer's geographic region, their connection voltage level, and the hydrological conditions affecting how the PLD is set.
Given the assumptions TR Soluções adopted, and starting from the fact that the economic signal applied in the CDE and, consequently, in the CCC, varies by region of the country and voltage level, and that the EER is allocated based on the consumer market and depends directly on the PLD, the tariff impacts of converting CCC to CER as set out by the MP are shown in Table 1.
Table 1 - Projection of the MP's Tariff Impacts (in BRL/MWh)
Source: TR Soluções' SETE platform
(A) Wet scenario: average annual PLD of BRL 66/MWh, corresponding to the 10th percentile of PLD figures recorded between January 2016 and May 2024. (B) Median scenario: average annual PLD of BRL 157/MWh, corresponding to the 50th percentile of PLD figures recorded between January 2016 and May 2024. (C) Dry scenario: average annual PLD of BRL 346/MWh, corresponding to the 90th percentile of PLD figures recorded between January 2016 and May 2024.
The impacts described in Table 1 result from a scenario in which UTE Mauá's fuel costs are also considered (BRL 950 million/year), but the plant's associated energy (484 average MW) isn't converted into CER. Under this scenario, there would be a BRL 3.71 billion reduction in the CCC and a BRL 4.32 billion increase in CER. In other words, only under relatively high short-term prices would some consumers see the advantage of the CCC reduction.
It's important to stress that consumers benefiting from the social tariff don't take part in CDE allocation, and therefore aren't burdened with CCC costs. However, once the contracts are converted into CER, they'll see this additional cost in their energy tariffs, between BRL 5.38/MWh and BRL 7.45/MWh, depending on the PLD, since they also take part in EER allocation.
We can conclude that the MP items considered in this study won't bring benefits to all consumers, even when the PLD is quite high. However, at moments like those seen in 2023, when the PLD stayed at its minimum every month, the benefit would only be felt by consumers in the South, Southeast, and Center-West regions connected at medium and low voltage. On the other hand, the consumers most affected by cost increases would be those connected at high voltage and served by distribution or transmission companies in the North and Northeast.
4. Final Considerations
In short, this study's analyses point to an expected 26% increase in reserve energy's annual fixed revenue and a 31% reduction in the CCC's budget, or 9.6% in the CDE Usage budget. Additionally, from the standpoint of the power sector's overall costs, and disregarding the relaxations that depend on future regulation, the changes set out in the MP could represent an increase of about BRL 600 million relative to 2024 figures.
The measure also changes how these costs are allocated, since CDE Usage carries a different economic signal by submarket and connection voltage level, while the EER is allocated proportionally to the amount of energy consumed.
Given the uncertainties involved in these projections, we invite SETE users to simulate their own sensitivity scenarios regarding how the MP is operationalized, being able to indicate, besides average capacity, the price and duration of contracts converted into CER. The tool is available to SETE users at: Menu/Cost Elements/Reserve Energy.