With a 38% growth in investments from June 2019 to February 2021, the Covid-19 pandemic helped accelerate the growth of Brazil’s “free” or “unregulated” market. Between 2021 and 2025, 72% of generation projects under construction in Brazil will be unregulated projects, tripling the size of investments to U$18 billion dollars. This growth is largely explained by three factors:
- The consumption shock caused by the pandemic coupled with the suspension of all regulated government auctions
- Falling prices in the free market attracted both consumers and generators
- As more market players have transitioned into the free market, confidence surrounding its regulatory framework has grown and banks are providing easier access to financing
This has led to a further consolidation in the space. 
*Portion of energy destined for the free market from plants that are also contracted in the Regulated Market
Source: Abraceel, Estudo de Expansão da Oferta para o Mercado Livre, 2021
In addition to the free market, there are four different categories that large consumers tend to fall in: special, distributed, self-generating and regulated. Large consumers tend to gravitate towards two of these categories—free and special—both of which operate inside the unregulated market. In fact, 85% of industrial energy consumption takes place in the deregulated market.  To qualify as a free market consumer, the 2004 energy market reform requires consumers to have a contracted energy demand of 3,000kW or above; “special” consumers must have a monthly demand of 500kW or above, but they can only buy energy from small-scale renewable projects. 
5 Megatrends in Latin America’s Energy Sector for 2022 and Beyond
What you can expect in the near term and how you can leverage these shifts
Large consumers in Brazil’s unregulated market can purchase electricity directly from energy suppliers, generators, or traders. These bilateral agreements are attractive for both large consumers and generators: large consumers are given the flexibility to negotiate shorter-term contracts and to choose who they purchase their energy from, while generators are paid a higher price for energy vis-à-vis the regulated market. Unlike the free market, regulated consumers can only purchase electricity directly from a utility or a company with a distribution concession. [4,5] Despite the low auction prices caused by falling demand of regulated purchases, the rigidness of the 20-to-30-year contracts with distribution companies tends to scare away large consumers.
Source: Canal Energia
Due to the falling demand in long-term auctions, large consumers seek to secure energy supply via other avenues. A common type of energy purchase among unregulated large consumers is the signing of short to medium-term PPAs with independent power producers. These contracts, negotiated in the free market, vary significantly in pricing based on the location of the plant, the type of energy source, the length of the contract and other external factors. For example, utility-scale solar projects greater than 5 MW can sign PPAs at a price of U$23 p/MWh. This is highly attractive for large consumers seeking to lock-in contracts at stable and relatively low prices. In comparison, small-scale solar PV plants of up to 5 MW often sign “informal” PPAs ranging from U$80 to U$100 p/MWh, giving project developers large returns. In exchange for those returns, developers often allow large consumers to became shareholders in the generating plant, providing discounts that make the pricing more affordable. This is similar to the “leasing” model that will be explained below. .
Another growing trend among larger Brazilian consumers is the direct ownership of generation plants, allowing them to be energy self-sufficient. Vale, the country’s largest mining company, consumes just over 60% of its energy from self-production.  Its self-generation takes place through a joint venture with CEMIG, the Minas Gerais generation company, in which they share a portfolio of seven hydroelectric plants and a wind farm. Self-generation is often cheaper for companies as they obtain a 100% exemption in the distribution fee (TUSD) and 50% discount in the demand fee for renewable energies. 
Banco do Brasil and EDP: Self-Generation via a Lease Model
Another type of self-generation is in the form of a lease, where a large consumer secures a long-term deal to “rent” a generation plant from a utility. The plant is built and operated by the utility, allowing the consumer to remain focused on its core business. A recent example is Banco do Brazil, Brazil’s largest state-owned bank, who is leasing a solar generation plant from Portuguese-based EDP, one of the largest utility companies in the world. EDP, who has 3 GW of generation and aims to be completely renewable by 2030, owns and operates the solar plant in exchange for a lease payment from the bank.
Since EDP benefits from cost savings related to self-generation, in return for the rental fee, Banco do Brazil is provided with a long-term supply of renewable energy at a cheaper price than a regular PPA. In addition to the attractive price, lease models have grown in popularity because they provide large consumers with more control over their energy supply, while simultaneously freeing them from operating and owning the plant. As ESG factors become increasingly important for investors and shareholders, companies that have greater control over their energy supply chain will become more attractive investment targets.
Traditional Sectors Look at a “Pay-as-You-Save” Model for Renewable Energy
Albeit more slowly, the important transition into renewable energy is also happening among traditional sectors such as manufacturing and mining. In an iron ore loading port in Rio de Janeiro, Vale is installing a Tesla battery system  in partnership with Siemens and Brazilian-based Micropower-Comerc. Vale intends to store energy during periods of low demand, often at night, and consume the battery power during peak hours when the cost of the electricity is high. This phenom known as “Peak Shaving” could reduce costs by almost 20% at the loading port. [10, 11] This will be Brazil’s first battery-storage project for an industrial complex. Unfortunately, historically high import taxes on batteries—of up to 65% of the total battery costs—have limited Brazil’s battery storage capacity. 
Although Micropower is responsible for the initial funding of the project, it will be paid back in increments as Vale saves on energy costs. This “pay-as-you-save” model is attractive among traditional sectors that are more hesitant to switch away from power generation sources that have worked in the past—such as diesel and coal. Although they require a smaller initial investment, diesel and coal emit significantly more carbon emissions and have higher operating costs, making them more expensive in the long run. Companies that depend on these sources will also have higher credit risks and will have to pay a higher cost of capital as investors shy away from fossil fuels. Thus, a gradual repayment scheme based on cost-savings should incentivize miners and manufacturers alike to overcome the hesitancy of investing a higher initial capex in their transition to cleaner energy.
Source: EPE, 2030 Report; *USD-R$ exchange rate was R$4.90/U$
Adopting New, More Environmentally-Conscious Strategies
As of December 2020, hydroelectric generation accounted for 108 GW of Brazil’s installed capacity, equivalent to 66% of the total share. This was followed by 16 GW of wind power at 10%, and 14 GW for both gas plants and biomass, at eight percent each. The remaining eight percent came from solar, nuclear and coal/diesel plants. By 2024, it is estimated that wind, gas and solar will see the greatest increases; hydroelectric plants will see its share fall to 61% as the country’s hydrological conditions worsen.  To compensate for some of this decline, alternative energy sources, such as waste-to-energy and hydrogen, will likely see further adoption.
Using a Virtual Landfill to Transform Trash into Energy
ZEG, a producer of biogas using agro-industrial residues, is one of the newest alternative energy suppliers in the country. In Brazil, trash is either incinerated or put in a landfill, which emits methane and carbon dioxide. ZEG aims to serve as a “virtual” landfill by transforming trash into energy using Pyrolosis technology. Pyrolysis uses high temperatures to convert organic waste into energy, usually in the form of synthetic gas (e.g., biomethane) or oils. Brazil’s sugarcane, ethanol, and soybean sectors, which create vinasse and straw as byproducts in their production process, could be the main beneficiaries of this technology.
ZEG is operating the first plant in Sao Paulo of its kind that produces biomethane from landfill. The biomethane, which is known as a renewable natural gas that emits 70% less CO2, is produced from 8,000 tons of daily waste in Sao Paulo’s eastern neighborhoods. The biomethane is then used to fuel commercial fleets—such as the gas-powered trucks owned by Scania—and to generate electricity for industries and homes.  ZEG’s plant currently produces 30,000 m³ /day of biomethane, but could triple capacity, if needed.
Since September 2020, ZEG has also helped MarBorges, a palm oil producer in the state of Pará, which utilizes vinasse to generate biogas and water. The biogas is used as an energy source—either as fuel for industrial vehicles or electricity for the plant—and the water is used for irrigating crops. When factoring in logistical costs of transporting fuel, self-generation via biogas is 25% cheaper than using diesel. It also creates a circular economy in which the plant’s residue is reused instead of disposed, making it self-sufficient and environmentally friendly. Another ZEG agreement, signed with global mining company Nexa Resources, uses ZEG’s technology to transform residues from Nexa’s steel mining plant (Arcelomittal) into renewable vapor. The vapor is then used for energy production in Nexa Resources’ Zinc production plant in Juiz de Fora, Minas Gerais.
Despite the promising use-cases for biogas, Brazil only has 200 MW of installed capacity related to urban waste.  Since most people are unfamiliar with biogas as an energy source, there is uncertainty around its overall feasibility and the market demand of such a product. Regulatory obstacles and insufficient technological innovations also hinder the larger-scale deployment of the resource. For mass adoption, biogas requires clearer market guidance and fiscal incentives. 
5 Megatrends in Latin America’s Energy Sector for 2022 and Beyond
What you can expect in the near term and how you can leverage these shifts
Petrobras Seeks to use Green Diesel to Reduce Transportation Emissions
Microsoft founder and billionaire, Bill Gates, recently suggested that switching to electric vehicles and alternative fuels (e.g., biofuels or electrofuels) is the most effective way that the world can move toward zero emissions in the transportation sector, which contributes 23% of global energy emissions.  Biofuel, which is largely underfunded and is not ready to be deployed at scale, is a renewable source made from organic matter or waste which is often blended with diesel or gasoline. The most common types of biofuels are biodiesel and bioethanol, both of which are gaining adoption in Brazil. Electrofuels, which cost three to seven times more than fossil fuels, are carbon-neutral fuels made by converting stored renewable energy into liquids. As it stands, the market demand is simply not large enough for either to grow in scale. Thus, innovation is required to make these technologies more affordable, more efficient, and most importantly, more scalable. 
Improved regulatory frameworks are also necessary to promote the mass adoption of these technologies. Brazil, through its RenovaBio program, initially required that diesel fuels have a minimum 13% biodiesel blend. Although the amount is expected to jump to 15% in 2023, President Bolsonaro mandated a temporary reduction to 10% to limit price increases for diesel. Biodiesel producers heavily criticized the government decision, claiming that it was a clear market intervention that squeezed their margins. 
Source: EPE, 2030 Report
Although a minimum requirement of biodiesel content promotes the use of cleaner fuels, both Europe and the United States limit their biodiesel thresholds to five to seven percent. Requirements much higher than that can lead to engine complications, as seen among commercial trucks in Brazil. Biodiesel critics argue that a simple solution is the use of renewable diesel, known locally as green diesel, to fulfill the country’s blending requirements. Renewable diesel is made from waste or residue oils; it is also cleaner than traditional biodiesel and chemically the same as diesel. Striking the right content requirements for biodiesel and renewable diesel will promote a higher quality fuel, decrease the environmental impact of the transportation sector, and simultaneously cause biodiesel costs to fall.
With that in mind, and after facing nearly half a billion dollars in losses, Petrobras is transitioning from biofuels to producing a renewable diesel labeled HBio. To that end, Petrobras has begun divesting half of their refining capacity and proposes changing the biodiesel regulatory framework to liberalize the market. Currently, biodiesel auctions are fully executed by Petrobras, who also signs Purchase and Sale agreements, prepares the monthly biodiesel supply and demand schedule, and controls the daily loading capacity of biodiesel plants. To promote private competition, Petrobras believes in eliminating auctions, removing the requirement that obligates diesel producers and importers to purchase biodiesel, and allowing distributors to purchase biodiesel directly from plants through private contracts.  More importantly, Petrobras wants new regulation to allow for the incremental use of “green diesel” in the country’s blending requirements. This will create a direct competition between biodiesel, which Petrobras is transitioning away from, and “green” diesel, its new venture.
According to studies conducted by the APROBIO (Brazilian Biodiesel Producers Association), green diesel reduces greenhouse gas emissions by 15% compared to biodiesel.  Some players, however, simply view this as Petrobras’ attempt to preserve its market share as biodiesel eats into the company’s sales of traditional fuels. Petrobras has responded by explaining that they are optimizing the use of their biorefinery infrastructure to produce a cleaner fuel used in both vehicles and airplanes. The state-owned oil company has completed the necessary tests and announced that it is ready to invest on an industrial scale, providing 50,000 to 60,000 m3 of HBio this year.
Exponential Growth of Distributed Energy Turns Heads
The distributed generation business in Brazil is also receiving serious attention across the market—ranging from residential consumers to leading energy companies such as EDP and Petrobras. Despite the attraction, many ordinary consumers struggle to find information about installing this type of technology. To solve this pain point, startup Sunalizer created an online platform to standardize the procurement process for small-scale solar panels, allowing smaller companies and residential consumers to compare solar installation costs based on different suppliers. Sunalizer estimates that solar PV consumers with demand above 300 Kwh p/month will reach their breakeven point within six years, experiencing a 20% unlevered IRR. The return would be even larger if distributed generation consumers were able to sell their energy surplus energy back to the grid. Instead, the current framework provides consumers with an energy “credit” that can be used for up to 5 years.
Source: EPE, 2030 Report
The substantial returns have naturally attracted critics that claim that the sector is overly subsidized and improperly regulated. As of now, distributed generation consumers don’t have to pay distribution fees and related charges, which Brazil’s Federal Court of Accounts (TCU) determined were passed on unevenly to non-distributed generation consumers.  A November 2020 decision by the TCU determined that ANEEL must present a plan of action within 90 days regarding the elimination of distributed generation subsidies. Although the 90 days expired, ANEEL decided not to present a proposal until there is a clear outcome of PL 5.829/2019, a bill in congress that seeks to preserve the subsidies granted to the distributed generation sector. Despite the government’s support for this bill, Brazil’s horse-trading politics and upcoming Presidential elections make policymaking extremely slow and complex. The outcome of this bill will have a tremendous impact on the growth of the distributed generation sector.
Conclusion: Brazil Is the Country of the “Now”
Brazil’s size and regulatory complexity should not discourage investors and energy players from entering the market. Despite its bureaucratic and political challenges, it is a country with favorable wind and solar capacity, as well as a tremendous amount of oil and gas. Brazil also has the region’s largest manufacturing, agricultural and industrial sectors, all of which require a sizeable amount of energy consumption. As investors pressure companies to go green, and the country’s hydrological conditions worsen due to droughts, this supply is increasingly going to be satisfied with non-conventional clean energy, such as wind, solar energy, hydrogen and biowaste.
Regardless of the political outcome in the 2022 presidential elections, Brazil’s energy demand will continue to be the largest in Latin America. This demand cannot be satisfied without foreign monies and expertise. Understanding the country’s on-the-ground risks, and how to mitigate them, will be fundamental in overcoming the challenges of operating in the Brazilian market. By locating key pocket of opportunities, capitalizing on its vast local network, and utilizing its proprietary knowledge, AMI can help ensure that your energy interests in Brazil achieve financial success.