Brazil, the country of cheap energy and increasingly expensive tariffs

How can you explain to someone that Brazil is among the countries with the lowest cost of electricity production and, at the same time, charges final consumers a tariff that is on average 5.5 times higher than Argentina, almost double that of Mexico and South Korea, and practically the same as that of the United States?

“The average tariff today is R$ 864.00 per megawatt-hour. Brazil today is the country of cheap energy, but at an expensive rate”, admitted the general director of the National Electric Energy Agency (Aneel), Sandoval de Araújo Feitosa, in a public hearing at the Senate Infrastructure Services Commission. The final price exceeds several times the exclusive cost of the energy itself (generation) for consumers in the free market (currently around R$ 120.00 per MWh) and the captive market (R$ 250.00 per MWh).

This inflated electricity bill has its roots in the 2001 blackout, which imposed a strict energy rationing for nine months. Since then, public policies in the energy sector have focused on expanding the network and diversifying sources, to reduce dependence on hydroelectric plants and the rainfall regime. With incentives and subsidies, solar and wind energy, practically non-existent at the time, now account for 16% of the electricity matrix. Distributed generation (DG), which is production by consumers, usually with solar panels in homes and businesses, currently has a 9% share. The hydraulic source reduced its importance in the system from 68% to 52%, while nuclear generation remained at 1%.

Electric sector grew “one and a half Brazil” in 20 years

In addition to having diversified its matrix, the country has managed to grow its infrastructure in the electricity sector by one and a half times over these 20 years. It jumped from 81 GW of installed capacity to 212 GW, and from a structure of 70 thousand km of transmission lines to 179 thousand km. In the period, according to Aneel, the average tariff for the “energy” item in the country rose below the IPCA and IGPM; the increase in transmission costs was close to the IPCA, while that of generation was above the IPCA and below the IGPM. Why, then, has the value of the final consumer tariff exploded?

A good part of the explanation, in addition to the weight of taxes, lies in the trinkets added to the electricity bill by the Executive and the Legislative – the so-called sectoral charges – to finance public policies of incentives, benefits and cross-subsidies within the system itself. These charges now account for almost a quarter of the final bill.

On its website, Aneel maintains a transparency panel on the list of subsidies paid by Brazilian consumers. The “subsidiometer” shows how much each item on the invoice that makes up the so-called Energy Development Account (CDE) costs.

The CDE functions as a sectoral “fundão”, and is used to make alternative sources (wind, solar and PCHs) competitive, to bring electricity to isolated regions, encourage distributed generation, subsidize national mineral coal and provide discounts on the electricity bill for low-income residential consumers, among other costs.

Captive consumers bear various energy bill subsidies

In 2022, this fund cost BRL 34.37 billion. A good part, however, was charged only to consumers in the captive market (residential consumers, small industries and businesses). Only they, for example, bear the high cost of contracting thermoelectric plants in energy auctions to provide security for the entire system against the risk of blackouts; only they pay the fees for Itaipu and the Angra 1 and Angra 2 nuclear power plants; and only they pay the subsidies granted to distributed generation. In a report of this People’s Gazettesector businessmen have already warned that if there is no correction of course, the migration of consumers from the captive market to the free market will cause a “death spiral” for the electricity bill of the 88 million users of the low voltage system.

The subsidy for incentivized sources (PCHs, wind, solar and biomass plants) in 2022 reached R$ 8.5 billion. These renewable sources have a minimum discount of 50% on the Tariffs for Use in the Transmission and Distribution System (TUST and TUSD). The subsidy is crossed, that is, the discount given is charged to other consumers.

“The cost of solar panels has already reduced by more than 80% and the wind industry is now 80% nationalized. Of course this (subsidy) has an impact on public accounts, it is a decision that has to be discussed. We are strongly convinced that the new projects would no longer need subsidies, but it is public policy and we have to follow it”, said the director of Aneel in the audience with senators, at the end of May.

Part of the faucet for renewable subsidies was closed with Law 14,120, which removed the 50% discount from the “wire tariff” for new large wind, solar and biomass projects. However, before the end of the benefit, a period of one year was granted for granting grants, which expired in March. “It was a gold rush and created a gigantic inventory, which we still don’t know the size”, says Edmundo Grune, technical director of PSR consultancy.

Solar energy says it contributes more than it benefits

Despite being one of the most benefited by subsidies, the solar energy sector guarantees that, in the medium term, until 2031, the growth of the modality will bring more than R$ 86.2 billion in systemic benefits to Brazilian society. The effect, according to the Brazilian Association of Solar Energy (Absolar) will be to lower the electricity bill by at least 5.6%. The more than 330,000 jobs in the sector, R$ 14.3 billion paid in taxes and the reduction in the emission of pollutants and greenhouse gases, improving the country’s environmental indicators, would still need to be included in the account.

In the next ten years, solar energy would also provide, according to a study by the consultancy Volt Robotics commissioned by Absolar, a reduction in the risk of rationing and tariff flags and an increase in competitiveness in food production, as a result of the improvement in the productivity of solar farms.

There would also be, in ten years, a reduction of R$ 34 billion in the costs of electricity generation, with the reduction of fossil thermoelectric generation; reduction of R$22.4 billion in financial risks, due to the protective effect against fluctuations in fuel prices; reduction of R$ 11.5 billion in sector charges caused by the emptying of hydroelectric reservoirs; reduction of energy price differences between the Northeast and Southeast regions, saving R$ 8.5 billion for consumers; reduction of R$ 8.2 billion with the reduction of technical losses in the electrical system; reduction of consumption at peak hours in Brazil, with savings of R$ 1.6 billion in the period.

Subsidies to distributed generation are questioned

Wind energy is another renewable source that receives incentives, like solar energy. For the president of the Brazilian Wind Energy Association (ABEEólica), Elbia Gannoum, the issue of the wire tariff subsidy – which reached BRL 8 billion in 2022 – is resolved and will not affect new projects that may be approved.

An almost unanimous complaint in the sector, points out Gannoum, is against maintaining incentives for distributed generation. “It should have ended by now, but the distributed solar sector goes to Congress, renews laws, and this is what is weighing heavily on consumer tariffs. And it is not resolved, on the contrary. There are proposals in Congress to increase subsidies for distributed generation, ”he says. In 2022, the light bill subsidy to distributed generation reached R$ 2.8 billion.

Current legislation provides that low voltage consumers will only be able to migrate to the free energy market in 2026 (small commerce and industry) and in 2028 (residential). If you don’t want to wait, you end up opting for distributed generation. It is valid both for those who buy a solar panel roof and for those who join a “solar farm” in the region where their distributor operates.

“This is possible, as long as both, the mill and the consumer, are within the same distributor. The agents realized that this has a lot of value for the consumer, so they buy land, develop a photovoltaic plant up there and form a consortium. You subscribe to a solar plan and have cheap, clean energy without having to pay a series of costs to the distributor”, points out Grune, from PSR.

In a note, the Brazilian Association of Distributed Generation (ABGD) stated “that it is necessary to have a systemic view” on the subsidies included in the final electricity tariff. “There are other axes that receive higher subsidy amounts, both total and proportionally, than Distributed Generation, such as the Incentive Source, the Fuel Consumption Account and the social tariff. We understand that financing renewable energy and energy self-production benefits the environment, the community where there is distributed generation, businessmen, who lower the cost of products and services, and the consumer, who pays less, whether for electricity or for a final product”, pondered ABGD.

Subsidies “should be funded by the Treasury”

What is almost unanimity in the electricity sector is that if the federal government and Congress want to give subsidies, this should be a public policy funded by the Treasury, and not by trinkets on the energy bill. “If it is a subsidy, it is because there is some sector of society that needs it. This has to come from the Union budget. Why do consumers in Curitiba have to pay for diesel oil from the North? We end up subsidizing, in Curitiba or São Paulo, what should come out of the union budget. They don’t want to discuss it in Congress, so they put it on the energy bill”, says Cláudio Ribeiro, CEO of 2W Ecobank, energy trader in the free market.

For Grune, from PSR, the current situation is totally different from when the system was conceived, in 2004. “Over time, several agents discovered that there were legal ways, all within the rules of the game, to avoid certain costs. They took advantage of the rule and opportunities, in the positive sense of the word, and what happened in the end is that, in addition to putting more cost on the electricity bill, there are fewer and fewer people to pay. It is necessary to update this system to try to share these costs more equally, more harmoniously, and mainly in a sustainable way, to deactivate this bomb that we created in the sector”, he concludes.