An extract from The Renewable Energy Law Review, 3rd Edition
The policy and regulatory frameworki The policy background
The Brazilian power sector as a whole (including the renewable power generation industry) has the fundamental characteristic of being centrally planned. Therefore, the government and regulators exert great influence on how the market develops. For example, governmental and regulatory bodies will guide generation expansion by determining what new energy auctions will be carried out and what price caps will apply, and what new transmission facilities shall be put up for tender and constructed (expansion of generation in Brazil relies heavily on pari passu expansion of the transmission grid capacity).
In addition to the centralised planning of the power sector, governmental incentives such as subsidised grid tariffs and tax exemptions on energy transactions or equipment (see Section III.ii on incentives) are very important, if not crucial, to make renewable sources of power competitive in Brazil.ii The regulatory frameworkInstitutional bodies and agents
The following are the relevant institutions in the Brazilian power sector:
- Ministry for Mines and Energy (MME) – the government body responsible for basic policies and decisions, including setting and definition of basic conditions for new energy auctions and concession bids.
- National Electric Energy Agency (ANEEL) – the independent agency in charge of sector-wide regulation, preparation of new energy auction tender rules and power purchase agreements (PPAs), definition of grid tariffs, overseeing of concession agreements and generation authorisations, enforcement of regulatory compliance and imposition of penalties and other disciplinary actions.
- National System Operator (ONS) – the independent system operator responsible for the operation and management of the national grid (save for some regions in the Amazon, Brazil is nationally interconnected) and for the enactment and enforcement of the grid procedures, including assessing interconnection feasibility of power generation projects.
- Electric Energy Commercialisation Chamber (CCEE) – the power market is organised by CCEE, which acts as the administrator of both the new energy auctions and the spot market (and, like ONS, it is a private entity formed and governed by power sector companies and regulated by ANEEL). CCEE measures aggregated consumption and generation on a real-time basis, keeps the market accounts and settles the spot market transactions.
- Energy Research Company (EPE) – a state-owned company attached to MME responsible for the definition of transmission and generation expansion plans, and the definition and setting of technical requirements to be met by projects to qualify for new energy auctions.
While hydroelectric power generation with capacity over 50MW, transmission and distribution activities are subject to concession agreements, hydropower generation under 50MW (small hydroelectric plants (PCHs)) and non-hydropower generation of any installed capacity (including solar, wind, gas, biomass and thermal sources in general) are subject to authorisations.
Concessions are more heavily regulated than authorisations and assets as a matter of course revert to the government at the end of the concession. Concessions and authorisations may have terms of up to 30 years, and are renewable at the government's discretion.
The regulatory playing field for renewable energy generators is stable and there have been no significant changes to the fundamentals of the industry in the recent past.
For projects selling power in new energy auctions, the power generation authorisation is granted by MME, while ANEEL is the entity that grants authorisations for projects developed to operate in the free energy market (the structure of the power market is discussed further below).Environmental licences
Brazil has strict environmental legislation, making the development of a generation project subject to a threefold licensing process: from greenfield to commercial operation, a project must apply and fulfil the applicable requirements for the issuance of (1) a provisional licence, which will allow the entrepreneur to continue the development of the project and demonstrate, when required (in power auctions, for instance), that the project is viable from an environmental standpoint;(2) an installation licence, which will authorise the construction of the generation project; and (3) an operational licence authorising the commercial operation of the power plant.Other permits
Depending on the characteristics of the project and the location, other permits may be required, such as airspace permits (if the project is located inside or near areas where air traffic safety is a concern), mining blockages (if the project is within the boundaries of an area of mining rights held by third parties) and designations of public utility, to enforce the creation of rights-of-way for transmission lines (where the project company is unable to agree amicable terms with neighbouring landowners).Energy markets
Power commercialisation in Brazil is structured into two main market environments: a regulated environment and a free-market environment.
The power market as a whole is organised by CCEE. Energy prices are defined under free-market conditions: in the regulated market, generators sell their power at auction to distributors for the prices they find suitable; and, in the free market, generators will enter into freely negotiated agreements. Only distribution and transmission tariffs are fixed by ANEEL.
Prices in PPAs are, in general, subject to annual adjustments for inflation. Auction PPAs include conditions allowing prices to be reviewed should new taxation or legislation impact energy prices. Parties are free to negotiate conditions for the revision of prices in free market PPAs.Regulated PPAs
The regulated market is based on power auctions where, as a rule, greenfield generation projects sell power for future delivery (new energy auctions, known as A-3 and A-5 auctions respectively, are carried out three or five years ahead of the date that delivery of energy is supposed to commence), by way of PPAs with terms ranging from 15 to 25 years, resulting from auctions jointly conducted by ANEEL, EPE and CCEE. The government may also, at its discretion, call auctions for generators that are already operating (non-greenfield).
In the regulated environment, energy is purchased either by a pool of distributors or, when the auction is for 'reserve-energy' agreements, by CCEE. The auctions group generators together on the selling side, competing against each other on price to sell their energy to the pool of distributors. Distributors are, by law, allowed to purchase energy solely in the regulated environment, except for 10 per cent of their energy demand, which can be purchased in the free market from distributed generation plants (small generators connected to the distributors' own grid).
The amount of power needed by the pool of distributors remains secret until the end of the auction. The bids shall be no higher than a ceiling price defined by MME. The bid, from a generator, takes the form of the power output capacity submitted by the generator for the purposes of enrolment in the auction process together with the price at which that power is offered by the generator (but selection is based on price alone). It is immaterial whether a certain amount of power is supplied by two big projects or by 20 smaller projects.
To be eligible to participate in a regulated market auction, a generation project must be subject to a technical qualification process beforehand, which is carried out by EPE. Ordinance No. 21/2008, from MME, stipulates the following requirements for technical qualification of a generation project:
- registration of the project with ANEEL: this registration has the purpose of informing ANEEL that the entrepreneur is developing a power generation project and authorising the entrepreneur to take all measures needed before third parties, such as filing for environmental licences, access opinions, etc.;
- the expected schedule of construction works, including deadlines for the issuance of the relevant environmental licences, connection to grid, tests on completion and commercial operation of the power plant;
- a descriptive memorandum containing a comprehensive technical, economic and environmental description of the project;
- the project budget;
- documentation proving the entrepreneur has secured rights to the land for the construction and operation of the project (except for PCHs, which are entitled to the expropriation of lands for the reservoir and the power plant);
- certification of wind measurements and of estimated annual energy output of wind projects, issued by an independent certifying entity;
- the access opinion;
- water permits, for PCHs and thermoelectric plants;
- the environmental licences applicable to the project;
- the environmental studies produced for the environmental licence application;
- for thermoelectric plants (such as biomass and biogas), evidence of the plant's ability to store sufficient combustibles for continuous operation at nominal capacity;
- for PCHs, the basic design of the plant or the plant upgrade or refurbishment project approved by ANEEL;
- for solar projects, the certification of the solarimetric data, issued by an independent certifying entity; and
- for wind projects, a statement that the turbines to be deployed shall be new.
Once a project has been declared technically qualified by EPE, it will be allowed to participate in the regulated market auctions. An entity participating in the auctions must meet certain legal, tax and financial requirements set out in the applicable auction's public request for proposals, such as a minimum net worth corresponding to 10 per cent of the project's budget and the requirement to present a bid bond in an amount corresponding to 2.5 per cent of the total investment required for the project (if successful in the auction, a performance bond corresponding to 10 per cent of this amount must be delivered to replace the bid bond).
If a project is successful in selling energy in the auction, MME will issue a generation authorisation and construction must start. If an entrepreneur manages to finish a project ahead of the date on which energy supply is supposed to start, it can sell the energy generated before that date in the free market.
If the construction of a project is not concluded on time, the generator must purchase power in the free market to fulfil its obligations under the PPA. In that case, however, the generator will receive payments calculated in accordance with whichever of the following prices is lower: (1) the PPA price (or 85 per cent thereof if delivery is delayed for more than three months); (2) a combination of the average energy spot price and a spread calculated pursuant to ANEEL's regulations; or (3) the actual price set out in the free market agreement concluded by the generator.Free market
Generators, commercialisation agents and free consumers can trade power in the free-market environment, under freedom-of-contract conditions. The free market represents nearly 30 per cent of the total amount of commercialised energy in Brazil.
Free-market PPAs do not require prior approval from ANEEL or MME, nor to be registered with any of those authorities. Parties to the PPA must, however, provide information concerning amounts of energy and period of supply in CCEE's electronic system, in time for the agreement to be used to settle the energy market. Both CCEE and ANEEL have the authority to request copies of PPAs for inspection purposes.
In contrast to auction PPAs, free-market agreements tend to be for the short to mid term, and free-market PPAs with terms longer than five years are relatively rare. Because of the absence of a secure long-term revenue stream for free-market PPAs, it is more difficult to structure project finance financing mechanisms than it is for projects selling energy via auction PPAs, which have a guaranteed long-term revenue stream.
Free consumers are qualified as follows:
- special free consumers: consumers with a contracted load of 0.5MW, if they can purchase power from renewable sources only; and
- free consumers: consumers with a contracted load of 3MW (MME recently issued an ordinance reducing the load requirement to 2.5MW as of 1 July 2019 and to 2MW as of 1 January 2020).
As mentioned above, MME and ANEEL may conduct energy auctions specifically for renewable generation or alternative sources, creating demand for long-term PPAs (20–25 years) for renewable projects. Historically, at least one auction for renewables has been carried out each year.
At the beginning of the development of non-hydro renewables in Brazil, special auctions were required specifically for those sources because they could not compete with conventional energy sources. However, as the market has evolved, wind and solar have become competitive sources of power and have started to compete against conventional energy in energy auctions.
For 2019, two auctions are planned for wind, solar, hydroelectric and thermoelectric sources: A-6 and A-4 auctions.Subsidised grid tariffs
Generators of renewable sources (hydro, biomass, biogas, wind, solar and qualified cogeneration) injecting up to 300MW of power into the grid, as well as consumers purchasing power from those generators, are entitled to a 50 per cent discount on grid use tariffs. This incentive plays a big role in fostering investments in renewables in Brazil and has helped to create a big share for 'incentivised energy' in the Brazilian energy free market.
This incentive does not apply to distributed generation.ICMS and PIS/COFINS exemption on distributed generation output
The amount of power supplied by distribution companies to consumers corresponding to the amount of power injected into the grid by distributed generation projects is exempt from ICMS (a Brazilian tax similar to VAT). The exemption was allowed by CONFAZ ICMS Agreement No. 16/2015 and replicated by the legislation of most states. ICMS is a state tax and rates normally vary between 12 per cent and 20 per cent depending on the state and type of consumer. The ICMS exemption on off-site distributed generation (when the power plant and consumption facilities are not located in the same place) applies differently according to the legislation in each state.
Similarly, the amount of power supplied is exempt from the PIS/COFINS federal taxes. The PIS/COFINS rate is 9.25 per cent.
If it were not for the exemptions, the taxes would apply to the invoices issued by power distribution companies to consumers using the distributed generation net metering scheme.ICMS exemption on equipment
Pursuant to CONFAZ ICMS Agreement No. 101/97, as amended, equipment for wind and photovoltaic power generation is ICMS exempt.
Some photovoltaic equipment, such as inverters and trackers, however, has not been covered by the exemption.Tax reduction for infrastructure development
Under Law No. 11,488/2007, renewable power generation projects are entitled to PIS/COFINS exemption on equipment, materials and services to be accounted as fixed assets of the project.
To become entitled to tax reduction for infrastructure development (known as REIDI), the project must have received a power generation authorisation and have applied to be qualified as a priority project, which is normally granted by ANEEL.Incentivised project bonds
Projects declared a priority by ANEEL (see above) are also entitled to issue incentivised project bonds (also known as green debentures).
Law No. 12,431/2011 governs incentivised project bonds. Individuals holding these bonds are exempt from income tax, and legal entity bondholders pay income tax at a 15 per cent rate. The bonds must have a maturity of at least four years and pay interest at intervals no longer than 180 days.