'You can't leave all the burden to the regulated market'

The opening up of Brazil’s electric power market, together with the expansion of distributed generation, has had a profound effect on the sector. 

Among the players most affected are distribution concessionaires, who are suffering from a loss of revenue. 

BNamericas spoke with Guilherme Schmidt, a partner at Schmidt Valois Advogados, a law firm that specializes in the energy sector.

Currently, only units with consumption above 500kW are free to negotiate their power supply. With the new rules set by the mines and energy ministry, about 72,000 new consumer units classified as high voltage have the potential to enter the free market, according to electric power trading chamber CCEE.

BNamericas: What challenges does the opening up of the electricity market pose?

Schmidt: The big discussion is that you can't leave all the burden, such as transmission costs and overall system capacity, to the captive [regulated] market. It's great to have wind and solar energy, but they are intermittent sources and we need firm energy. 

Today, base-load power plants [such as hydro and thermoelectric plants, which guarantee supply at any time] have their costs apportioned to consumers in the regulated market. 

Opening up is positive, as it will bring greater competition but we need to be fair to those who remain in the regulated market. 

The challenge, therefore, is to have a fair division of the costs involved.

BNamericas: What about the situation for distribution companies?

Schmidt: There’s an eventual loss of billing and customers, so, proportionally, the distributors can no longer fully assume all the costs. Last year, the regulatory framework for distributed generation was published, according to which the costs will be passed on to free consumers over 20 years. During this period, most of the costs will continue to be borne by the distribution concessionaires.

BNamericas: In the next few years, several distribution concessions will come to an end, and there are companies, such as Light, that are in a delicate financial situation. 

Schmidt: You see, isolated systems [those not connected to the national grid], especially in the Amazon region, depend a lot on diesel and oil, which are more expensive. So if there was no apportionment of this energy, it would be very expensive. That's why there's the CCC [fuel consumption account], which is paid by all consumers. 

Light's big problem is the gatos [illegal connections], which occur mainly in areas dominated by criminal organizations. Considering that Light can't go into these areas, where the police often don't even enter, wouldn't these thefts be cases of force majeure and therefore unmanageable losses? Therefore, the case could be argued for a kind of CCC for this.

BNamericas: Is this one of Light's arguments in its request for bankruptcy protection?

Schmidt: I don't know if this was one of the claims in the process, but it was certainly one of the justifications for the company's financial problems. 

I think the big challenge now will be the review of the concessions, as well as the future of the energy auctions. There are many uncertainties [due to the migration of consumers to the free market and the expansion of distributed generation], and the government has the challenge of providing predictability.

BNamericas: Distributors continue to have a surplus of contracted energy, which is among the reasons for the postponement of the backup capacity tenders.

Schmidt: The profitability of distribution services has fallen. And it was necessary to hold auctions contracting large thermal power plants because of the risk of water shortages [in 2021 and 2022 due to the drought]. In the event of another drought, over-contracting is not so clear, as we’re still very dependent on rain. 

Under the current rules, the distributor has to have a crystal ball. They can't be out of contract, so they tend to be conservative, otherwise they'll face fines. So, given the possibility of the concessionaires losing consumers, Brazil’s faced with a very complex issue.

BNamericas: You gave a presentation this week at a symposium hosted by the Brazilian association of energy consumers ABCE. What were the main points discussed at the event?

Schmidt: We saw that there is a great deal of acceptance of the new CCEE convention, published in February 2023, which, in practice, has modernized and clarified some procedures, placing greater emphasis on arbitration decisions within the chamber.

BNamericas: What types of cases are brought to arbitration?

Schmidt: Discussions about amounts charged that one of the parties believes they shouldn't pay, for example. 

The CCEE is like an external accounting department for companies trading on the free market. And arbitration is a more agile means of resolving conflicts than the courts.

BNamericas: How are the discussions on the GSF [generating scaling factor] and hydrological risk going?

Schmidt: I think this discussion will go on for years. 

Each hydroelectric plant has a guaranteed minimum power reserve. When it reaches the limit, the ONS [national grid operator] orders it to stop generating and dispatches thermal power plants, whose energy is more expensive. The discussion is about how this bill will be apportioned. It's a billion-real question.