October 23, 2023

So, Who Actually Benefits from the Changes to Transmission Tariffs?

Paulo Steele			José W. Marangon			Luana Marangon			Helder Sousa
TR Soluções			MC&E			MC&E			TR Soluções

Summary

Incorporating the new locational signal into Transmission System Usage Tariffs (TUST) will result in gradual increases, but also reductions, in the Distribution System Usage Tariff (TUSD) for a large share of the country's energy consumers through the 2027/28 cycle, when the five-year transition period set by the National Electric Energy Agency (ANEEL) for the new locational tariff rules comes to an end.

Figure 1 - Expected variation in TUST_RB between the 2023/24 and 2027/28 tariff cycles due to the locational-signal transition

This study by TR Soluções and Marangon Consultoria & Engenharia (MC&E), which calculates the expected tariff variations resulting from changes to the locational methodology, shows that the change represents an improvement favoring the Brazilian power system's efficiency.

The locational signal, besides indicating the best sites for generation projects, also shows the grid points where there's more generation supply, and consequently where load demand should be located. This economic signaling tends to postpone the need for new system investments, which, in the long run, contributes to tariff moderation.

1. Introduction

The application tariffs to which captive electricity consumers are subject are basically made up of two components: the Distribution System Usage Tariff (TUSD), attributed to both captive and free consumers; and the Electricity Tariff (TE), attributed only to captive consumers. The TUSD is made up of regulatory cost elements related to grid usage, losses, and sectoral charges. The TE, meanwhile, relates to regulatory costs tied to distribution companies' energy-purchasing expenses.

Costs related to grid usage, or energy-transport infrastructure, are split into two groups: transmission costs (TUST) and distribution-specific costs. The cost-allocation criterion for calculating tariffs that remunerate the transmission service is the Long-Run Marginal Cost with locational signal, while the allocation of distribution-system costs is based on Marginal Capacity Cost.

The improvements to the locational methodology recently applied by ANEEL to transmission tariffs seek to allocate these costs fairly and efficiently, taking into account users' electro-geographic location and the complementarity of tariff revenue between load (consumption) and generation. It aims to signal the most suitable entry options for new transmission-grid users from an infrastructure standpoint, while also avoiding cross-subsidies among grid users, seeking efficiency across the energy production and transport chain.

Marginal Capacity Cost, used as the allocation criterion for distribution costs, allows these to be allocated according to typical users' responsibility, at each voltage level, for shaping distribution-grid expansion costs — in other words, distribution-system costs are set differently between groups (A; B); subgroups (A1; A2; A3; A4; AS; B1; B2; B3; B4); classes and tariff subclasses, taking tariff modalities into account.

Exactly ten years ago, the Brazil-average application tariff (TUSD + TE) was BRL 253.77/MWh, with a typical composition distributed as follows:

• 2% Transmission Grid;

• 29% Distribution Grid;

• 7% Losses;

• 4% Sectoral Charges;

• 58% Energy Purchase.

Currently, as of October 2023, the Brazil-average application tariff stands at BRL 619.45/MWh, with the following composition:

• 6% Transmission Grid;

• 27% Distribution Grid;

• 7% Losses;

• 12% Sectoral Charges;

• 49% Energy Purchase.

Over this period, against cumulative inflation of 80% as measured by the IPCA or 109% as measured by the IGP-M, and despite a significant rise in sectoral charges' share of the tariff composition, it was transmission grids that saw the largest average variation over the period: 721%, against 599% for sectoral charges, 137% for losses, 121% for distribution grids, and 106% for energy purchases.

This article analyzes, based on recent history, the main factors behind transmission costs' outsized role in tariff-composition trends. It also presents data and information indicating what can be expected for the segment's costs over the next five years given the adoption of the new locational signal in setting the TUST, covering both specific impacts on that tariff and on the application tariffs paid by consumers.

2. RAP Trends

The Permitted Annual Revenue (RAP) is the regulatory remuneration received by electricity transmission companies for the public "wholesale transport" service of electricity. It's defined according to concession or bidding contracts. For concessions awarded through bidding, the RAP is set based on auction results, with the lowest accepted bid winning. For grants not awarded through bidding, ANEEL calculates the RAP taking into account annual asset costs and operation-and-maintenance costs, plus charges and taxes. The period between transmission-segment tariff reviews ranges from four to five years, depending on when the contract was signed. The RAP is updated annually based on the inflation index set out in the contract.

Responsibility for this revenue is shared among all basic transmission-grid users, such as generators, distribution companies, free consumers, and electricity importers and exporters. It's used to remunerate transmission-service revenue, including the portion of the National Electric System Operator's (ONS) funding not covered by contributions from its member agents.

Over the last ten years, 54 transmission auctions were held and 365 new contracts signed, with cumulative investment on the order of BRL 227 billion, against average annual energy-demand growth of about 1.5%. As a result, over this period the RAP jumped from BRL 8.4 billion to BRL 39 billion per year, a 364% increase. The gap between consumer-market growth over the period — just 15% — and the increase in revenue explains why transmission tariffs for the consumption segment rose 721%.

Over the next ten years, according to the "Ten-Year Energy Expansion Plan Studies 2032" (Transmission Chapter), published in March 2023 by the Energy Research Company (EPE), BRL 158.3 billion in new transmission-grid investments are expected, against an expected average annual national-demand growth of 3%. Given this trend, it's clear there's a need for continuous improvement in the tariff-calculation model, especially for the TUST.

3. Regulatory Advances

The changes now being implemented began to be discussed in February 2018, when ANEEL opened Public Consultation No. 04/2018 (PC 04) to gather input on improving the TUST calculation. Given the volume of contributions received in the first phase of the process requesting a reassessment of the methodology for composing prospective RAP, used to calculate stabilized generation-segment tariffs, a second phase of PC 04 was opened, ending in May 2019.

These studies, conducted by ANEEL with input from market agents, indicated, among other things, the need to intensify the locational signal, in order to ensure higher tariffs for agents that put more strain on the transmission system, as well as to prioritize valuing any benefits from power generation located close to load. In light of this, ANEEL Public Consultation No. 39/2021 (PC 39) was opened in July 2021.

PC 39 was made up of three phases, with final results presented by the agency in September 2022. So, considering the studies that began in 2018, it can be said that for nearly five years, ways to improve the transmission-tariff calculation were technically debated with various agents. In the end, since one share of agents requested keeping the calculation regime with low locational-signal intensity, and another significant share requested the change, ANEEL opted for a gradual change to the TUST calculation methodology, as detailed below.

3.1 TUST Problems and Solutions

ANEEL Normative Resolution No. 559, of June 27, 2013 (REN 559), established the TUST calculation procedures, including using the Nodal methodology to calculate the locational Basic Grid TUST (TUST_RB) as a cost-allocation method based on power flow.

This rule took into account the fact that the locational portion of tariffs didn't fully recover the revenue needed to cover transmission-system costs, making it necessary to include an additive portion, commonly called the "cap" (postage-stamp component). So each connection point's (busbar's) TUST_RB was formed from the following equation: 𝑇𝑈𝑆𝑇𝑏 = 𝜋𝑏 + 𝐶𝑎𝑝, where πb is the nodal tariff derived from the calculation methodology for long-run marginal cost with locational signal at busbar b.

Regardless of the calculation formula, TUST tariffs have basically two primary functions:

• bringing load and generation closer together, attracting new users to points better suited for installation, promoting more rational use of the systems and minimizing expansion costs; and

• signaling the current cost situation, in order to ensure higher charges for whoever puts the most strain on the system.

The locational signal, under REN 559, was close to the average transmission-tariff value for most states, showing that the "cap" (postage-stamp) component predominated over the "locational" component in the transmission tariff. The "cap" component shows the same tariff value for all grid users regardless of location.

According to Regulatory Impact Analysis Report No. 02/2021-SGT/ANEEL, when analyzing the Transmission System Usage Amounts (MUST) contracted used in calculating the 2020/2021 cycle, between the generation and consumption segments, ANEEL observed that generation amounts stood out over consumption amounts in the North and Northeast submarkets, while in the Southeast/Center-West and South submarkets there was a degree of uniformity.

Source: TR Soluções and MC&E.

Intensifying the locational signal, therefore, would result in a reduction in values charged for the consumption segment in the North and Northeast submarkets, and an increase in the Southeast/Center-West and South submarkets. And, correspondingly, generation-segment tariffs should reflect exactly the opposite, in line with the assumptions set out in the legislation.

This is an important finding because it brings economic rationality, since the TUST, under such conditions, would be higher for the generation segment in regions with excess supply and lower for load, indicating, from a transport standpoint, greater rationality in using existing infrastructure, seeking balance and reducing the need for new transmission investments.

However, that's not what happened under the REN 559 procedures. According to ANEEL, most states had a locational signal close to the average value. In other words, for a generation investor, it made virtually no difference whether to build a project in the North or Southeast region — the cost of energy transport barely factored into their economic rationale.

Technical Note No. 71/2018/SGT/ANEEL (NT 71) noted that the proportional dispatch procedure by "submarket" adopted was the predominant factor behind the tariff outcome with little locational signal, pointing to a possible solution in what's called "unified" proportional dispatch at the national level.

In February 2021, EPE published a technical note with a sensitivity analysis on TUST calculation, Technical Note EPE-DEE-NT-014/2021-rev0. EPE pointed to "unified" proportional dispatch as a possible way to improve locational signaling, despite the need to revise the calculation tool so that flows on regional interconnections respect operating constraints. In that technical note, EPE also highlighted the importance of locational signaling for generation-project feasibility, for competitiveness among projects from different sources, and for indicative generation-system expansion. The idea would be to adjust the rules considering that, unlike generation projects from past decades, when small-scale generation at a low cost per kW basically didn't exist, today it's possible to implement new solar or wind generation projects in a short time and in different locations, which confirms the need to improve the methodology in order to intensify locational signaling.

In the first phase of PC 04, a proposal was initially presented to improve the methodology by changing the base-case dispatch from regional (Alternative 1) to national dispatch (Alternative 2). The essence of the nodal methodology didn't change, only how plants are dispatched to compose the flows used to assess how occupied the transmission grid's element capacities are. This change in dispatch form was more consistent with the increased connection capacity between Brazil's regions — that is, with the growing number of lines interconnecting the four subsystems (Northeast, North, Southeast/Center-West, and South), resulting in shorter electrical distances.

One of the issues raised by ANEEL during the discussions is that, when applying national dispatch, there would be an overestimation of power flows on regional interconnections resulting from using "Alternative 2" at levels far above operational reality. For this reason, given the contributions received in the first phase of PC 39, ANEEL proposed using "Alternative 2A," which consists of "Alternative 2" with flow attenuation through linear application of the Demand Factor (FD) to the MUST contracted by the consumption segment.

Under the "Alternative 2A" configuration, flows on regional interconnections would stay below operational constraints. This configuration would also intensify the locational signal relative to "Alternative 1." The intensity would be lower than that seen in "Alternative 2," though still enough to promote tariff complementarity between load and generation.

Given the contributions received in the third phase of PC 39 and other discussions, ANEEL settled on the understanding that the solution to the locational-signaling problem lay in combining "Alternative 1" and "Alternative 2A." It was also decided that the measure would actually be applied over five years, with gradual changes in how much weight the new locational signal carries in transmission-tariff composition: in the first cycle (2023/24), the share will be 10%, rising to 20% in the following cycle, and so on, until the desired locational signal is reached in the 2027/28 cycle.

• 90%/10% in the 2023/2024 cycle;

• 80%/20% in the 2024/2025 cycle;

• 70%/30% in the 2025/2026 cycle;

• 60%/40% in the 2026/2027 cycle;

• 50%/50% from the 2027/2028 cycle onward.

ANEEL, according to Regulatory Impact Analysis Report No. 02/2021-SGT/ANEEL, understood that such a solution would meet the contributions received under PC 39, since some agents requested keeping the current regime and others requested the change, while also allowing the methodological change to happen gradually and in a balanced way.

Source: TR Soluções and MC&E.

4. Who Wins and Who Loses from the TUST Improvement?

To simulate the impact on application tariffs from the locational-signal improvement, TR Soluções, using transmission-tariff data provided by Marangon Consultoria & Engenharia (MC&E), calculated the expected variations in the TUSD and application tariff, by tariff subgroup, across Brazil's different regions.

To isolate the effect of the transition ANEEL adopted for the locational signal, we considered projected tariffs for all distribution concessionaires connected to the basic grid. In these scenarios, all tariff-calculation assumptions were held constant, except for the expected value of basic-grid transmission tariffs.

For basic-grid transmission tariff values, MC&E, using data from the Nodal Program, 23/24 cycle, attached to ANEEL Approval Resolution No. 3,217, of July 4, 2023, recalculated the 23/24 cycle's Transmission Tariffs, changing the locational-transition steps for that tariff cycle.

Based on these new transmission tariffs calculated at different transition steps, TR Soluções was able to estimate the new application tariffs that would be seen in the period from July/23 to June/24 under different TUST transition scenarios, thereby estimating the expected impact of improving the locational signal.

Source: TR Soluções and MC&E.

As expected, after the locational methodology improvement, transmission tariffs tend to be lower for the consumption segment in the North and Northeast submarkets, and higher in the South and Southeast/Center-West submarkets, pushing application tariffs up or down.

Source: TR Soluções and MC&E.

Source: TR Soluções and MC&E.

Source: TR Soluções and MC&E.

Source: TR Soluções and MC&E.

Source: TR Soluções and MC&E.

It's worth noting that, in calculating application tariffs for electricity distribution concessionaires, the weight of the tariff component tied to the transmission grid isn't uniform across tariff subgroups, due to the tariff structure for allocating regulatory distribution costs. Because of this, Group A consumer units tend to be more affected than Group B consumer units by changes made to transmission-tariff calculations.

5. Final Considerations

Although the Fio A component (costs of electricity transmission grid infrastructure) of the application tariff isn't the dominant one for Group A and B consumers relative to other tariff components, it's clear that, overall, there's relief in tariffs for consumers in the North and Northeast regions. In other words, the signal for the consumption segment in those regions is that there's excess generation and that a load increase is welcome.

Either way, the solution adopted by ANEEL, setting up a transition whose goal is to have the locational signal reach, in tariff terms, only half of its real impact, still preserves a portion of subsidy in favor of generators in the North and Northeast regions.

Considering the trajectory of transmission-system investments observed over the last ten years (BRL 227 billion) and their significant tariff consequences for the Fio A component over that period (721%), one would expect the old maxim of "efficient costs with prudent investments," adopted in calculating distribution-segment tariff repositioning, should also be observed in the transmission segment.

The new rules are more favorable in this sense: ANEEL's improvement to the locational methodology amplifies the economic signal so as to favor electricity consumption at grid points where more generation projects are located. This economic signaling tends to postpone the need for new system investments, which, in the long run, contributes to tariff moderation. So it's undeniable that the one who benefits from the TUST improvement is Brazil as a whole.