Electricity bill increases with migration from captive to free market

Like a condominium that loses residents and needs to apportion expenses among fewer people, the regulated Brazilian electricity market continues to shrink and leave the electricity bill increasingly expensive for small businesses and industries and residential customers of concessionaires.

“If it continues like this, the system will explode”, predicts an executive in the sector, while another endorses the diagnosis and classifies the current model as a “death spiral”.

In Brazil, two energy markets coexist. Around 88 million consumer units are still in the so-called captive, or regulated, market, where they have no option but to buy energy from a local distributor. Most are customers of the so-called Group B, low voltage.

On the other hand, in the free market, there are already 30,000 legal entities, large consumers in industry and commerce, who are not obliged to maintain an exclusive contract with any concessionaire, and can buy energy from whoever offers the best price. It is Group A, of high voltage, which totals 205 thousand consumer units.

Last year, 30,000 consumers in this group saved BRL 40 billion on purchases in the free environment, compared to what they would spend if they were in the captive environment.

Energy subsidy bill already reaches BRL 36 billion

Incentives and discounts for those who purchase energy from renewable sources such as wind, solar, small hydroelectric plants and biomass further accelerate the departure from the regulated market. These discounts are currently around R$8.5 billion per year and are mostly paid by captive consumers (those who remain in the “condominium”) through the Energy Development Account, which already reaches R$36 billion annually.

“When you choose to leave the regulated market, and start buying from these incentivized sources, the consumer has a discount on the tariff for using the electrical transmission and distribution system. This cost now goes to the CDE account. there is an incentive for those who migrate and leave the cost on the market”, says Marcos Madureira, president of the Brazilian Association of Electric Energy Distributors (Abradee).

“It’s what we call a “death spiral”. Every time someone leaves, it will be more expensive for those who stay and this will increase”, he emphasizes. And the hangers on the condominium bill only increase. Madureira cites as the most recent example the Provisional Measure that recreated the Minha Casa, Minha Vida Program.

“It is something that may even seem good, a requirement to buy leftover energy from solar systems from the Minha Casa, Minha Vida program. But if they do not consume everything, the system will have to pay BRL 400 per megawatt-hour, which is the reference value. However, as I do not need this energy in the electrical system, it will be left over and will be sold at R$ 70 per megawatt-hour. And this difference will burden consumers who are in the regulated market”, emphasizes the president of the Abradee. “It’s measures like this that increase the imbalance. Every time you do a different treatment, you’re penalizing the others”.

Escape from the captive market may become more pronounced soon

Would it be like trying to contain a leak in a water tank? “I would say that today it is already looking more like a sieve. The amount of benefits burdening the consumer is very large. We are in favor of market opening, distributed generation and others, but we are against someone having to pay more, being penalized so that someone else has a benefit”, adds Madureira.

As of January 1, 2024, a new contingent of 106,000 medium and high voltage consumer units (the rest of Group A) will also be entitled to purchase energy on the free market, when Ordinance 50/2022 of the Ministry of Mines and Energy (MME).

A survey by the National Confederation of Industry (CNI) pointed out that 56% of industries that are in the captive market are interested in migrating to the free market from 2024 onwards.

According to consultancy Greener, the electricity bill on the free market is usually between 20% and 30% cheaper. “However, a general stampede of these 106 thousand consumers is not expected, not least due to lack of access to information. And also for lack of knowledge, for fear, since the energy market is volatile and you need to be very well advised by a trader”, ponders Heloísa Burin, an analyst at Greener.

Energy trading companies have multiplied in the country – currently there are almost 600 registered – and try to “open the eyes” of businessmen to the opportunity to pay less, jumping out of the regulated market.

Executive Claudio Ribeiro, president of 2W Ecobank, says he feels like a captain of Bope, the Special Police Operations Battalion. “I say that I am the leader of Bope because my role is to free the hostage. Get you out of the distributor’s yoke. I say to entrepreneurs: you can be free, and energy will continue to flow from the same cable in your company. But you will pay cheaper, for renewable energy and without having to invest anything”, he emphasizes.

For entrepreneur, current system is about to “explode”

The company led by Ribeiro aggressively seeks to bring customers to the free market: currently, only 31.5% of those already qualified by the rules agree to migrate. Ribeiro travels the country trying to show businessmen that it is possible to migrate and save money without having to invest.

“The system as it is today will explode. The big one is already on the free market and the small one will come soon. The distributor is getting worse and worse business quality, and manages to invest less and less. It will worsen the financial health, getting the tariff more and more expensive. The last one to stay will pay the bill for those who left first”, says Ribeiro.

In less than three years, he has already managed a portfolio of R$ 1 billion for his energy trading company. 2W is also betting on its own generation, and is investing BRL 2 billion to build two wind farms in the Northeast.

The opening of the energy market in Brazil has been delayed for more than a decade. In Portugal, every consumer, even residential ones, has been able to choose who to buy energy from for 15 years. In England, freedom of choice has been a reality for 25 years. Around here, the liberalization of Group B, low voltage, should only arrive in 2026 (small businesses and industries) and in 2028 (residences), and should be preceded by public consultation and legal regulation.

Opening cannot be a “big bang”, says former ONS

Another symptom of this “save yourself who can” scenario in the captive market would be the rush of low voltage consumers to microgeneration, installing solar roofs on homes and businesses, and to purchase energy from distributed generation in the so-called “solar farms”. .

For Luiz Eduardo Barata, president of the National Front of Energy Consumers and former general director of the National Electric System Operator (ONS), the total opening of the market is inevitable, as has already happened for several years in telecommunications.

“But it can’t be a big bang, suddenly releasing it to everyone. It has to be done in a staggered way, so that it doesn’t cause such a huge blow to consumers and also to providers. We could have moved forward with consumer release at a greater speed than we did. The perspective is that this will happen in the near future, but in a very well thought out and planned way, under the risk of creating bigger problems”, stresses Barata.

The current regulatory framework of the Brazilian electrical system, including the creation of the free market, was built in 1998, during the government of Fernando Henrique Cardoso (PSDB). Then the framework underwent changes in 2004, in the Lula government (PT), and later in the management of Dilma Rousseff (PT).

The issue is that, when it was designed, the model did not consider a free market accounting for 40% of traded energy, as it does today. And it addressed mainly hydroelectric and thermal sources. Currently, however, wind and solar sources already exceed the contribution of thermoelectric plants.

“There was also no talk of distributed generation when the milestone was established. These changes make it essential to review this entire framework”, says the former director of the ONS.

It is time to debate changes in the electricity sector

In practice, in the short term, several measures will be taken that should impact the operation of the Brazilian electricity system market. From the tax reform, which could reduce the weight of taxes on the tariff, to the definition of parameters for renewing the contracts of 21 energy distributors in the country that expire by 2030, such as Enel São Paulo, CPFL, Light and Escelsa.

In August, the renegotiation of Annex C of the Itaipu Binacional treaty began, which required that all surplus energy not used by Paraguay be sent to Brazil. All this, now, must be renegotiated.

“The media has a fundamental role in putting these issues in the headlines, calling society’s attention to a fundamental problem, which is the cost of energy. The legislature and the executive have this responsibility, but above all society needs to raise awareness in order to exert pressure and put the matter on the country’s agenda”, concludes Barata.

For Abradee, it is necessary to establish mechanisms that do not allow the continuation of adding costs for one market, to the benefit of another. The most advanced path for this would be the bill (PL) 414, which awaits appreciation in the Chamber of Deputies.

The project foresees the total opening of the market in 42 months, starting from its enactment, and small consumers (below 500 kW) will have to buy energy through a retailer, who will represent them before the Energy Trading Chamber Electrical (CCEE).

“It doesn’t solve past problems, but at least it creates conditions to prevent this problem from continuing to grow”, says Madureira, from Abradee.