In Energy

Brazil’s National Operator System (ONS as per the Portuguese acronym) determined that the 21-day blackout that struck the northern state of Amapá was caused by a defect in a transformer that was owned and operated by private company Gemini Energy. The transformer subsequently exploded, causing a ripple effect throughout the electric grid that led to the shutdown of several hydroelectric generation plants. [1] Over 700,000 people were left without power.

State-owned Eletrobras, the biggest power utility in Latin America, assumed the task of restoring electricity by contracting thermoelectric plants to supply energy to the state. Eletrobras’ successful involvement created a perfect opportunity for anti-privatization advocates to reiterate that the company should remain under state control.

Davi Alcolumbre, the Senate president from Amapá, has been particularly vocal against Eletrobras’ privatization. In fact, Alcolumbre urged that Gemini’s private concession be cancelled and transferred to Eletronorte, a subsidiary of Eletrobras, if the private company was found responsible for the blackouts.  The concession contract states that the National Electric Energy Agency (Aneel) has the right to intervene in the concession “at any moment to ensure adequate public service(s).”  

Prior to the incident, Alcolumbre had already warned that there was no support in congress for a privatization bill that excluded the government’s right to veto strategic decisions in Eletrobras—known as the “golden share.” [2] He also argued that the proposed sale amount was too low, estimated at the time to be U$4 billion dollars.

Since the Senate president has direct control over what bills are held for a vote, Alcolumbre has played a vital role in the non-approval of Eletrobras’ privatization. Without Alcolumbre’s backing, the bill can only be voted on if it enters into an “urgency regime,” which requires support from the supermajority of senators or a presidential order. As it stands, both of these scenarios are unlikely to happen.

Political Shifts Favoring Privatization

However, on December 6, 2020, the STF (Brazilian Supreme Court) ruled that the current Senate and House presidents can’t run for reelection in February 2021. This decision has long-ranging implications. Not only will it dissipate Alcolumbre’s key role in Eletrobras’ privatization, but it is likely to improve the government’s chances of passing the pending tax and administrative reforms, two fundamental policy objectives. Behind the scenes, the team of Economic Minister Paulo Guedes applauded the STF’s decision as a step forward in its reform agenda. [3]

Although it is too early to know who will succeed the Senate president, internal reports indicate that Alcolumbre may support Senator Antonio Anastasia (PSD-MG) as his successor, known as an independent candidate (with no ties to the government) who is well-liked among the opposition. [4] Anastasia has not commented on the privatization of Eletrobras, but he does publicly support the privatization of state-owned companies in Minas Gerais, his home state. [5] Anastasia will need a majority of the Senate votes to be elected as the next Senate president.

Recent comments by Guedes reflect that the government remains eager to proceed with its privatization agenda to mitigate Brazil’s rising public deficit, which is reaching the symbolic 100% debt-to-GDP ratio. Despite ongoing negotiations involving a possible modification to Brazil’s spending cap, Guedes understands that any changes to this spending limit would frighten investors and hurt the country’s fiscal credibility. This has encouraged him to refocus efforts on selling state-assets to compensate for the increase in Covid-19 public stimulus.

The government plans to have an Eletrobras privatization bill approved by the end of 2021, allowing for the sale of its shares by 2022. In order to gain the necessary legislative support, the proposed sale would preserve the government’s “golden share” to veto strategic decisions, a fundamental point of contention for many opposing politicians. The government’s shares would also be sold via a follow-on public offering, which includes the issuance of additional shares subsequent to the company’s initial IPO. The government expects to raise U$12 billion dollars with the sale. [6, 7]

Opportunities beyond Eletrobras

Despite the Economic minister’s optimism, the path forward remains complex and will take a long time to determine how it will develop. The Eletrobras privatization bill was initially introduced in the Temer presidency back in 2018, and has made minimal progress since. Comparable attempts to offload state-owned companies, most recently the unsuccessful sale of Embraer to Boeing, reflect that politicians are keen to retain control over their national enterprises.

For investors eager to enter the growing energy market in Brazil, the silver lining is that Electrobras has already entered into agreements to begin selling its shares in regional subsidiaries. It is also looking for investors to buy their equity ownership in Rio Grande do Sul’s distribution, transmission and generation companies: CEEE-D and CEEE-GT; Sao Paulo’s generation company: EMAE; and Mato Grosso’s gas company: MSGas. Although these sales require approval by Eletrobras’ Board and General shareholders meeting, in addition to the greenlight from the Brazilian anti-trust authority (CADE), the process is significantly less thorny than the pending privatization bill in Congress.

Even more appealing opportunities are found in the private sector, where energy developers are seeking capital for new projects and a few private companies are looking to divest their assets. In Minas Gerais and Rio Grande do Norte, states known for their rich solar radiation, several solar farms are being developed to take advantage of a 50% renewable transmission discount set to expire in September 2021. This expiring subsidy has encouraged developers to seek authorization for projects even before they have signed a deal with distributors to buy the energy. [8] Among brownfield projects, opportunities are less common, but they do still exist. Naturgy, a Spanish multinational gas company, is currently looking to sell its gas distribution assets in Rio de Janeiro. Several small-scale hydroelectric plants are also for sale in the state of Goias.

Investors are also looking at less-mature sectors, such as the distributed generation space, which is the decentralized powering of homes and SMEs often using solar panels or biogas. In just over a year, this sector has tripled in size and has attracted investment from leading local players such as Petrobras and EDP. Since the approval of a net-metering model in 2012, distributed generation has received nearly U$3bn in investment [9]. By 2030, the Energy Research Office (EPE) estimates that the sector will attract another U$13.5 billion in capital and grow six-fold [10]. Despite continuous regulatory changes in the sector, finding these key pockets of opportunities is where energy investors will see the largest ROIs during a period of low global yields.

Contact us to find out how we can help your company with an opportunity benchmarking study to gauge the best options for taking advantage of this shift to privatization in Brazil’s energy sector. We can also design and execute political risk studies focused on the challenges surrounding these issues, as well as conduct due diligence research to evaluate potential partners and other obstacles.


[1] Valor Econômico

[2] EBPR

[3] Folha de Sao Paulo

[4] O Tempo

[5] Estado de Minas

[6] Exchange rate ar R$5.16 for every US$1

[7] Valor Econômico

[8] Valor Econômico

[9] Ciclovivo

[10] Valor Econômico

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