Brazilian Energy Market: The Changing Definition of Free Consumer

Brazil's electricity market is the largest energy market in Latin America and the ninth-largest energy market by production globally.

Electricity Market Overview

Brazil's electricity market is the largest energy market in Latin America and the ninth-largest energy market by production globally. As of 2019, the electricity sector represents almost 3% of Brazil's GDP and has an installed capacity of approximately 172.9 gigawatts (GW). More than 80% of the country's electricity is generated from renewable sources - hydroelectric 60.8%, fossil fuel 14.8%, wind 8.7%, biomass 8.6%, solar 1.2%, and nuclear 1.1%.

Market Reforms

Brazil's electricity sector was a state monopoly until the 1990s. The country initiated its first market privatization and restructuring process in 1996. Due to a lack of sufficient private investments in the generation and transmission sector, the country experienced a severe energy shortage in 2000 and 2001. In 2004, the Brazilian government implemented its second market reform, allowing public and private investments in new generation and distribution projects. The law also deregulated a segment of the consumer electricity market, splitting it into two parts: the regulated market and the free market.

As expected, consumers can only purchase electricity from a utility or a company with a distribution concession in the regulated market. Consumers that may only purchase electricity in the regulated market are referred to as "captive consumers." Utilities and distribution companies must serve 100% of the market demand and buy energy from generators at public reverse auctions. All costs are passed along to end-users. Subject to annual adjustments for inflation, transmission, and distribution, rates are fixed by the National Electric Energy Agency (ANEEL) based on a price-cap mechanism. ANEEL reviews rates every four to five years to ensure the rates are fair, balancing the public interest with the utilities' economics.

In the free market, eligible consumers may negotiate and conclude a bilateral agreement with energy suppliers, generators, or traders. These consumers are referred to as "free consumers." Under the 2004 market reform, to qualify as a free consumer, a company must have contracted demand at a site of 3,000 kW or more. An exception to this rule permits companies with contracted demand of 500 kW or greater to purchase electricity in the free market but only from renewable generators, such as small hydro plants, biomass plants, or solar plants. These consumers are referred to as "special consumers."

Unique Aspects of Market Deregulation

A unique aspect of the Brazilian market is that free or special consumers must be a member and register all bi-lateral supply contracts with the Electric Power Commercialisation Chamber (CCEE). The CCEE, which is regulated and supervised by ANEEL, is responsible for metering electricity generation and consumption, accounting settlement in the spot market, and registering all supply contracts. Members of the CCEE are responsible for the operating costs associated with the CCEE. Due to the complexity of the Brazilian energy market and its regulations, free and special consumers usually engage an energy specialist or consultant to handle energy procurement and representation at the CCEE.

Recent Developments

As the Brazilian government continues to encourage market competition and regulated market rates have been volatile, membership at the CCEE for eligible consumers has increased significantly. Based on recent CCEE data, there are over 7,000 commercial consumer members of the CCEE, representing over 16,000 sites.

Originally, only consumers with a contract demand of 3,000 kW at a site were qualified as free consumers. However, the Brazilian government has been relaxing the qualification requirement permitting more energy users to enter the free market. In 2018, the Ministry of Mines and Energy (MEE) published Ordinance No.514, which expanded the definition of free consumer by reducing the contract demand requirement levels.

- From 1 July 2019: contract demand equal to or greater than 2,500 kW; and 
- From 1 January 2020: contract demand equal to or greater than 2,000 kW

Subsequently, in 2019, MEE published Ordinance No. 465 to further ease the requirement.

- From 1 January 2021: demand equal to or greater than 1,500 kW; 
- From 1 January 2022: demand equal to or greater than 1,000 kW; and 
- From 1 January 2023: demand equal to or greater than 500 kW.

Since the market entry threshold is set to be reduced to equal to or greater than 500kW, the special consumer exception will no longer be relevant by 2023. By January 2022, ANEEL is expected to release reports that support the opening of the free market to all consumers, including small businesses and individuals, by 2024.

Nan Hu