'We live the paradox of having a free market with low prices, but a high bill for consumers'

Bnamericas Published: Thursday, January 19, 2023
'We live the paradox of having a free market with low prices, but a high bill for consumers'

Subsidies, poor regulation and political interests are obstacles to Brazil reducing its energy rates and attracting global industries interested in producing from renewable sources. 

That is the opinion of Paulo Pedrosa (pictured), president of Brazil’s association of large energy consumers and free consumers Abrace, which brings together more than 50 business groups responsible for almost 40% of electricity consumption and 42% of natural gas consumption in the country. 

In this interview, Pedrosa and Abrace's gas and electric power directors, Adrianno Lorenzon and Victor Iocca, respectively, address the main challenges and prospects for the sector.

BNamericas: Brazil is one of the countries with the most expensive electricity rates in the world. What strategies have the big energy consumers adopted to reduce their costs?

Pedrosa: From a conjunctural perspective, since the electric power rates in Europe are very impacted by the war in Ukraine, and this contaminates other countries, at this moment we’re no longer the champions of more expensive energy. But we could have much cleaner, cheaper and safer energy. 

Brazil's energy wealth is captured by interests in the energy chain, through subsidies, protections, poor regulation and lack of competition, as well as political interests that 'hang on' to the energy sector. 

Meanwhile, in the natural gas sector, we see a movement toward concentration of the gas market, which is not conducive to competition. 

I think that minister [of the economy, Fernando] Haddad captured, in his participation in the [World] Economic Forum in Davos, a giant opportunity for Brazil: that we can be a hub of renewable energy, attracting industries that are pressured by expensive energy in other places of the world to produce here. 

BNamericas: You talk about concentration in the gas market, despite the work done by the government and authorities to open this sector, with a new regulatory framework, and reducing the participation of Petrobras and attracting new suppliers of the fuel. 

Pedrosa: It turns out that, in practice, the antibodies against the modernization foreseen by the new gas law have been winning in many situations. And the gas regulation is antiquated and favors the distributors in the states. 

Lorenzon: We’ve had some diversification in the supply of the molecule, with 10% to 15% of the gas sold leaving Petrobras' hands and going to private players. But there’s a trend towards concentration in demand, first because Petrobras sold Gaspetro to Compass [of the Cosan group], which already owned the main distributor [Comgás], and the free market is still very small. And, on the supply side, we also see a tendency of concentration in Petrobras. Those 10% to 15% may be a ceiling, considering the pipeline of Petrobras projects that will come into operation in the coming years. 

BNamericas: There’s the Subida da Serra pipeline issue, on which Abrace has already positioned itself.

Lorenzon: The Subida da Serra project is an example of self-dealing that Compass is practicing, as Petrobras has done throughout its history. 

It’s worth mentioning that Cosan also bought Sulgás, and may buy ESGás, and acquire a participation in Paraná state’s distributor [Compagás, which will be privatized]. There is also Gasmig, which is expected to launch an IPO. 

BNamericas: Isn't it up to [regulator] Cade to act to prevent this concentration?

Lorenzon: Cade did not veto the purchase of Gaspetro by Compass. We were very vocal against this sale, which went against the TCC [term of commitment to termination] signed by Petrobras with Cade [in 2019 to reduce market concentration in the state-owned company]. One cannot trust that it will act now. 

BNamericas: The hydrology in the country is going through an especially favorable moment, quite different from what was seen in 2021. Are lower energy rates expected this year?

Pedrosa: Our base is the industrial consumer, who’s in the free [non-regulated] market. So we look not at the power rate, but at the final cost of energy, which includes a set of charges that are paid by the consumer. We perceive that, at this moment, the prices of energy contracts are low, but the future perspectives remain worrying. 

Transmission costs are growing, and the costs paid by all consumers for the backup energy capacity are likely to rise. We live, in Brazil, the paradox of having a free market with low prices, but a high bill for consumers. Our priority is the modernization of the electric sector and the dismantling of a subsidy mechanism that is causing the energy bill to explode. 

There are several issues of concern. For example, will the Angra 3 [nuclear plant] enter the system as backup capacity? This would represent more than 4bn reais [US$770mn] of additional costs per year for consumers. 

Another case: the transmission companies want to substitute old equipment with new equipment priced by [regulator] Aneel's price bank. This could add another 32bn reais in transmission costs.

The Brazilian consumer has paid for the anomalies of Eletrobras’ privatization, for subsidies for coal and small distributors and distributed generation. 

Iocca: Tomorrow [Thursday], Brazilian consumers will pay 1.3bn reais for the thermal plants contracted in the emergency auction [PCS, held in 2021], of which almost 450mn reais are for plants that started operating up to four or five months late. And they are only receiving because Aneel, until now, has not finished evaluating the requests for exclusion and other administrative processes. This is all that’s missing to terminate the contracts. 

The year 2023 starts with readjustments in the electricity rates very close to inflation, and some distributors will even have power rate reductions. Therefore, this could be an opportunity to rediscuss the sector without a stressful environment. Rediscuss price formation and the CDE [energy development account], so that we can transfer subsidies within the CDE to the federal government’s budget, which should bear this cost. 

One of the biggest impacts in recent years is the CCC [fuel consumption account, which subsidizes the annual generation costs of areas not connected to the national grid], which had a huge increase due to the hike in fuel prices. These subsidies are around 10bn reais per year. 

In parallel, the subsidy for renewable sources by the CDE has been increasing at an accelerated rate, reaching 9bn reais annually. 

In addition, there is the social power rate, which in the last two years has more than doubled due to the COVID-19 pandemic. And it will continue to grow. Abrace recognizes that, socially, it’s fair to have differentiated power rates, but this is a public policy, not of the electric sector. It would have to be supported by the federal government. 

BNamericas: How does Abrace view the scenario of opening the energy market?

Pedrosa: We’re in favor of freedom of choice. But it’s important to say that the energy market in Brazil has many distortions and subsidies. The opening of the market with the maintenance of subsidies will partially serve some consumers, but will generate an explosion of the CDE charges that will be paid by the other consumers. The opening needs to serve the efficiency of the market, benefiting everyone in the market, not just some consumers. 

BNamericas: What are the main requests of the association currently and the agenda for 2023?

Pedrosa: In the gas sector, it’s important to comply with what was approved in the gas law. Some states are approving laws that contradict the gas law. We have a lot of pre-salt gas, but we run the risk of losing the opportunity of the energy transition with this fuel. 

Lorenzon: [Regulator] ANP has not yet established any regulation provided by the gas law. And where the federal government doesn't get involved, the states end up creating rules that are beneficial to the distributors [that are state owned] and hinder the development of the free market, maintaining the demand via the captive market. 

Another important item is the concentration of gas supply in the hands of Petrobras. ANP is expected to open a public consultation on this issue. We’re concerned about the possibility of Cade revisiting the TCC with Petrobras. We’ll fight against it. 

Iocca: It’s necessary to rediscuss the obligation to contract the 8GW of gas-fired thermoelectric plants [as provided by the Eletrobras privatization law]. We argue that this contracting should not occur, because the country doesn't need it. When all of them are in operation, they will cost consumers at least 20bn reais a year. 

BNamericas: Is green hydrogen in your members' plans? 

Pedrosa: We have many interests. In the steel sector, for example, green hydrogen can potentialize Brazil's role in steel exports, with green steel. But we have one concern: that the development of green hydrogen is not based on subsidies from the electric sector.

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