Although it is the largest and one of the most developed energy sectors in the region, Brazil still requires important regulatory changes to improve the competitiveness and openness of its sector. Despite having access to cheap generation sources, the cost of electricity for both small and large consumers are disproportionately high. In fact, 48% of consumer’s electricity bills are composed of taxes, fees and subsidies used to fund an Energy Development Account (CDE) and incentivize specific generation schemes.  Brazil’s heavy dependence on hydropower has also forced the country to turn on expensive thermal plants during periods of insufficient rain and low water supplies, leading to historic surges in energy costs.
As it stands, Brazil’s energy market remains highly fragmented due to its unique set of rules for its different types of consumers. Depending on the amount, the type of energy, and the setting in which they consume electricity, consumers can fall into the following five categories: free, special, regulated, distributed and self-generating. A more unified set of rules for consumers would encourage price transparency and grid predictability in Brazil. 
Despite the challenges, there are unique pockets of opportunity within Brazil’s energy sector that remain highly attractive and lucrative. A key prospect is the Distributed Generation subsegment, where companies and homes use solar panels to generate decentralized power of up to 5 MW. Following the approval of a net-metering bill in 2012, the segment has attracted U$3.5 billion in investments. By 2030, if subsidies are kept, Brazil’s distributed generation capacity will increase six-fold and will attract an additional U$13.5 billion in capital investments. 
The growth in distribution generation can be attributed to two main factors: first, the current regulatory framework exempts companies and individuals from paying distribution fees while generating this type of power. This creates lofty returns as solar technology becomes increasingly cheaper. Second, any distributed energy that is generated, but is not consumed, can be used as a credit to discount future bills.
There is one bill currently being discussed in congress that can drastically change the direction of this segment. PL 5829.2019, which is supported by the government in behind-the-scenes negotiations, recently “entered” the House of Representatives’ agenda and seeks to preserve the subsidies granted to users of distributed generation. The mere fact that the bill is part of the legislative agenda and supported by the government, is by no means a guarantee that the bill will be voted on, much less approved. Brazil’s horse-trading politics can lead to years of voting delays as congressman holdout their votes in exchange for specific concessions.
Critics of the bill claim that keeping the subsides will be an unfair burden carried by all consumers, especially those that don’t have the means to install distributed generation. They project that subsidies will cost consumers U$25 billion in the next 30 years. Proponents, on the other hand, calculate that the law will create cost-savings and energy efficiencies that will lead to US$9 billion in net savings by 2035. 
A gradual opening of the market
In addition to creating a regulatory framework for the distributed generation sector, the government also took a large step towards improving the energy market In April of 2021. After seven years of debate, Brazil’s congress approved a bill (law 4476/2020) to further open the natural gas market to private competition and break the monopoly held by state-owned Petrobras. The bill aims to promote fair competition in the distribution of piped gas, allowing private market players to access existing pipeline infrastructure. The construction of new pipelines will now be conducted via a simple authorization model, rather than the long-standing concession structure.
Although the federal law seeks to prevent vertical monopolies by prohibiting local gas producers from distributing gas, the Brazilian constitution grants a monopoly to states over the distribution of piped gas. For the federal law to be fully implemented, it will require each state to pass their own compliant regulations, which they purposefully may delay or even challenge. Nevertheless, four states have already passed laws, and more are likely to follow.
In the meantime, the new gas bill has already begun to attract private capital.  Soon after the Senate first approved the bill in December 2020, Brazil’s largest Liquified Petroleum Gas distributor, Ultragaz, said it would invest U$43 million in expanding its infrastructure to handle the country’s opening refining market.  Since Brazil’s gas infrastructure is underdeveloped, especially when it comes to pipelines, the government expects the bill to unlock U$10.6 billion in private investment by 2026. Currently, the United States’ pipeline system is 50 times the size of Brazil’s.
Another bill floating in congress is PL 414/2021 (formerly PLS 232/2018), which seeks to structurally reform, open and modernize the electricity sector.  Initially, the bill would allow all consumers with a demand greater than 500 KW to buy energy from any generation source. 42 months later, this option would be opened to all consumers—regardless of their demand. The bill also seeks to end a compulsory quota regime to buy hydroelectricity and separates the supply and commercialization of energy. In simpler terms, it aims to change how energy is bought and sold in the country. Many proponents believe the bill will fundamentally improve the country’s much-needed energy efficiency, as Brazil is the only country in the G20 whose energy consumption grows more than its economic production. 
Generation-related subsidies to promote alternative energies have also been the subject of intense discussions in the government. A provisional measure in September 2020 declared a 12-month phase out period for the 50% network tariff discount provided for renewable plants to connect to the transmission and distribution networks. The Ministry of Energy argues that these subsidies, which are often given to large consumers, increase costs for retail consumers by U$775 million per year. In line with some of the more developed markets, the Ministry argues that incentives for renewables were suitable 15 to 20 years ago—not for the current scenario in which renewable energy is highly advanced. The elimination of the tariff discount is also aimed at alleviating losses experienced by distributors, who are paid these discounted fees, and many of whom are in the northeastern region of the country—home to several congressmen in the influential “Centrao” coalition formed by the Bolsonaro government. 
In a rush to take advantage of the expiring subsidy, solar and wind developers have more than doubled their efforts to build new renewable projects.  In some cases, developers are seeking project authorizations from Brazil’s Electricity Regulatory Agency (Aneel) before they have even secured a deal with a distributor to buy the energy generated. This pre-approval is especially common among solar PV plants, which don’t require a deposit when seeking authorization from Aneel. Without this requirement, developers can limit their potential losses if the project never becomes operational. The elimination of this subsidy will also negatively impact the price of solar energy more than any other renewable energy source, subsequently accelerating the push to develop projects powered by the sun, Greener, a Brazilian-based consultancy, expects prices to increase up to U$3.5/MWh for solar energy. 
Politics delay key privatizations…yet open other opportunities
Another fundamental aspect in the opening and improvement of the Brazilian electric sector is the privatization of the largest power utility in the region, Eletrobras. Eletrobras once held a vertically integrated monopoly over Brazil’s electricity sector and its privatization has been a key policy objective for President Bolsonaro’s administration. Eletrobras still owns 31% of Brazil’s installed generation capacity and 47% of the country transmission lines. Currently, the federal government holds 51% of the company’s ordinary shares, which includes voting rights. 
Following a 21-day blackout period in the Northern State of Amapá, where a private company’s transformer suffered a defect and exploded, many anti-privatization politicians reinforced their calls to prevent any further privatizations. In Amapá, the partial privatization of the state’s electric grid began in 2008, where the concessions for the transmission and distribution of energy were awarded to the private Spanish company, Isolux. During the recent blackouts, which left more than 700,000 people without power, Eletrobras successfully took over the grid and contracted supply from thermal-electric plants nearby.
Using the “success” of the publicly owned Eletrobras and the “failure” of the privately-owned Spanish Company in Amapá, many old-school politicians, part of Brazil’s traditional horse-trading politics, reiterated their refusal to support a privatization bill that did not preserve the government’s “golden share” in Eletrobras. This golden share will allow the government to continue to have veto power over strategic decisions made by the company.
Despite congressional resistance, in February 2021, President Bolsonaro symbolically delivered the privatization bill (MP 1.031/2021) to the legislature. The intended bill determines that the privatization will take place through the sale of new shares in the market, causing the Union’s shareholding percentage to fall below 50%. This capitalization is estimated to raise U$9 billion dollars and may be accompanied by a secondary public offering of shares. The bill will also renew the concession contracts of the company’s hydroelectric plants for another 30 years. Lastly, the sale of the company—expected for 2022—would preserve the government’s “golden share” to please politicians eager to retain partial state control. [13, 14]
Newly inaugurated Eletrobras President, former Secretary of Energy Rodrigo Limp, has also reiterated the need for privatization to unlock investment in Eletrobras. Limp’s experience and close relationship with the ins-outs of the current administration should help the privatization process. Another key policy driver in the Bolsonaro administration, Economic Minister Paulo Guedes, has remained steadfast on his goal to sell state-owned companies to compensate for Brazil’s growing fiscal deficit. Brazil’s Covid-19 stimulus, one of the largest and most effective in the region, has the country’s debt-to-GDP ratio nearing the ominous 100% threshold. Guedes understands that Brazil’s spending cap must not be modified, as this would hurt the country’s fiscal credibility and scare investors. To compensate for Brazil’s increased spending, Guedes has reemphasized his team’s efforts to move forward with divesting state assets, including those owned by both Eletrobras and Petrobras.
As the privatization legislation unfolds, a June 2019 decision from the STF allowed both Petrobras and Eletrobras to proceed with selling their shares in regional energy subsidiaries. Eletrobras, for example, has begun privatizing utilities such as the CEEE-D in Rio Grande do Sul, the distribution company of the southernmost state.  Petrobras also aims to slash U$30 billion in debt by selling its downstream refineries and gas distribution assets. With growing demand from China, Petrobras is focusing on oil exports and upstream development of its pre-salt basins. In 2019, in asset sales alone, it raised U$16 billion dollars. 
Foreign investors looking to purchase assets at a discounted price should look closely at the divestment of state-owned assets. Smaller segments, such as distributed generation, are even more profitable and less competitive. In fact, distributed generation in Brazil is generating 30 percent annual returns. These opportunities are surging across the region and will attract top global energy players. Navigating the challenging investment climate that awaits these projects, requires careful ESG due diligence, risk monitoring and a precise reading of the new political alignments forming in key jurisdictions. That is where AMI can help.
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