Government wants to reform the electricity sector to lower electricity bills

The government of Luiz Inácio Lula da Silva (PT) is preparing changes to the rules of the electricity sector. The objective is to reduce the country’s energy tariff, one of the most expensive in the world.

The Minister of Mines and Energy, Alexandre Silveira, has been promising reform for months and mentions it frequently. Still in October, he said that she was ready.

Although it has not yet formalized the proposal, the government makes it clear that one of the main targets of the reform is the free market, a negotiation environment in which companies can buy energy directly from generators, generally at lower prices.

The government also intends to change the charges and subsidies that increase the electricity bill in the regulated market, also called captive. This is where the majority of consumers are, forced to buy energy from local distributors.

Among other things, these “hangings” support the generation of energy using fossil fuels in isolated systems and also support incentives granted to renewable energy and distributed generation.

In December, making reference to the governments of former presidents Michel Temer (MDB) and Jair Bolsonaro (PL), Silveira said that in the last six years “the Executive lost its grip on public policies in the Brazilian energy sector”, and that the Lula government seeks to regain command.

The idea of ​​changing the rules to lower the electricity bill is reminiscent of a provisional measure issued on September 11, 2012 by then president Dilma Rousseff (PT). The objective of MP 579 was to reduce tariffs by 20% through the early renewal of concessions. But the effect of the package on the sector – especially Eletrobras, then state-owned – was such that that day became known as “the September 11th of the electricity sector”. Voluntarism did not prevent a sharp increase in tariffs in the following years.

Lula says that “poor people pay the bill for the richest”

President Lula has repeated that he doesn’t think it’s fair for poor families to pay more for their electricity bills. He refers to the free energy market model, which adopts differentiated benefits for those who buy energy directly from the generator. Until recently, this system was only accessible to large companies, such as industries, and this year it was opened to small and medium-sized companies.

“Is it fair for the rich to pay less than the poor? Is it fair for you to pay half of what you earn for electricity in a country that produces a lot of energy? The government will have to take action at the beginning of the year and we will resolve this energy issue , because the poor and working people cannot continue paying the bills for the richest people in this country”, said Lula in December.

The statement echoed figures cited by the Minister of Mines and Energy to compare the free and regulated markets. The minister said at the time: “We have 90 million consumer units in Brazil, 3 million of which are on the free market and 87 million receive their energy bill at home and pay the distributor. These 3 million pay for energy at around R $250 per megawatt-hour and the remainder pays an average of R$650.”

There is no legal provision for opening the free market to all consumers, including households, but this is an expectation that the sector has had for many years. In 2022, during the Bolsonaro government, the Ministry of Mines and Energy even presented a draft that provided for complete opening by 2028, but the issue has not progressed since then.

Judging by Lula and Silveira’s public statements, the extension of the free market to all consumers will not happen anytime soon. Still in May, the minister said in a Senate hearing that “the opening of the market had to be more careful to be fairer”.

Even without total opening, there is already a strong movement of consumers from the captive market towards the free market, which already accounts for approximately 40% of all energy consumption in the country.

While in a captive case the customer pays all the sector’s charges, the free consumer does not participate in the apportionment of this account. And, with direct negotiation with the generator, the consumer can save around 30% on their electricity bill, in some cases.

The estimate is that the opening for medium and small companies, in effect since January, will bring approximately 100 thousand corporate customers to the free market, with monthly bills between R$10 thousand and R$60 thousand.

If on the one hand this migration makes life easier for many companies, on the other it ends up leading to an unbridled increase in the electricity bills of those who remain – in most cases, out of obligation – in the regulated market. It is a movement that part of the sector has dubbed the “death spiral”.

Professor Nivalde de Castro, general coordinator of the Electrical Sector Study Group at the Federal University of Rio de Janeiro (Gesel/UFRJ), explains that, as more consumers migrate to the free market, fewer are left to pay the electricity bill. charges and subsidies. Thus, each of them will pay more and more dearly.

“The bill increases for those who remain in the captive market, because the fixed cost is shared by fewer people, as the others migrate to the free market”, says the expert.

Subsidies paid by conventional consumers reach R$37 billion per year

This year, around R$37 billion in subsidies will be paid by consumers in the captive market. The weight in the tariff will be equivalent to 14%, according to calculations by the “Subsidiometer”, a tool from the National Electric Energy Agency (Aneel).

Rafael Herzberg, managing partner of the energy consultancy Interact, remembers that, in addition to these charges, Brazilians also pay for the loss caused by the so-called “cats” – that is, energy theft. According to him, around 30% of what the consumer pays is not energy used by him and serves to pay for subsidies and “cats”.

Therefore, Brazilians’ electricity bills become more expensive every year, he says. Even though the cost of energy generation has been decreasing in recent years, the bill for conventional consumers has only increased – from the beginning of 2020 to the end of 2023, residential electricity was 17% more expensive, on average, according to the IPCA measurement , from IBGE.

The sector’s subsidies are concentrated in the Energy Development Account (CDE), a fund paid by electricity consumers. It was created to finance universal access to energy, energy development and renewable sources. It is from this fund that Minister Alexandre Silveira has already signaled that the government intends to reduce costs.

In 2023, the CDE’s biggest charges, according to the Subsidiometer, were with Fuel Consumption Cost (CCC), whose expenditure was more than R$10.3 billion. This funding is used to generate energy in remote regions that are not connected to the national electricity grid and need independent thermal plants.

Next, the biggest expenditures were on subsidies with incentivized sources (in general, renewables), with R$10 billion, and distributed generation, with R$7.1 billion. Distributed generation includes, for example, subsidies for energy generation using solar panels that many Brazilians have in their homes.

The Electrical Sector Associations Forum Phase (Fase) structured an Agenda for Improving the Brazilian Electrical Sector (SEB) in 2022, claiming that the current incentive cycle is unsustainable. According to the survey, the forecast is that CDE charges will exceed R$40 billion by 2030.

The group of companies in the sector proposes to minimize charges and subsidies, accelerate the energy transition, complete market opening initiatives and attract investments.

“The CDE has become priceless and causes a death spiral: it encourages consumers to leave the regulated environment. As those who stay pay a bigger bill, they also try to escape. If you succeed, it leaves the bill even bigger for those who stay. It’s a successive movement”, said Mario Menel, president of the Phase, to Folha de S.Paulo.

Minister talks about reorganizing “patchwork” of the electricity sector

The Secretary of Economic Reforms of the Ministry of Finance, Marcos Barbosa Pinto, said that the government will review the subsidies, but without mentioning which ones.

Last week, Minister Silveira defended the reasonable tariffs and sustainability of the electricity sector during a meeting with entities and associations in the sector. He said that the department’s main challenge is to reorganize the “patchwork” that the sector has become and equalize the tariff issue in the country, protecting the most fragile consumers.

A measure always advocated by most experts in the sector would be to change the financing of charges and subsidies. Instead of including them in the tariff paid by consumers, it would be more correct and transparent to transfer them to the federal budget.

The package of changes also mentions the possibility of relocating resources from the privatization of Eletrobras, from the Treasury, to solve a very specific problem: mitigating the adjustment of Amapá tariffs, which could reach 44%. Minister Silveira has been promising a provisional measure in this regard since December.

Free market versus captive market

Rafael Herzberg, from the Interact consultancy, disagrees that the free market is the problem. For him, instead of attacking the model – which is more recent and received incentives to start operating – the government should assume the subsidies in the captive market that currently fall to the consumer. Furthermore, he highlights that the poorest families already benefit from the social tariff.

In the consultant’s assessment, what the government should really focus on is the problem matrix: “I see two solutions. One is for the government to include subsidies in its budget so that it bears responsibility, not consumers. The other is to end with “cat”. It’s a decades-old problem. The problem is not the free market growing, but solving the whole.”

For him, the government’s stance scares away investors, who are exposed to legal uncertainty. “What will an executive say to a headquarters in the United States, Japan or Europe when he has to choose a place to invest and cannot say what will happen to the electricity sector in Brazil? What is at stake is much more to discover the strategy for the electricity sector”, he says.

On the other hand, Nivalde de Castro, from Gesel/UFRJ, maintains that consumers in the free market do not carry with them the costs they should. For him, everyone should share the bill.

“The simplest solution is: everyone pays for everything. Why doesn’t everyone pay?” he asks. “The subsidy is a real “cancer”, because everyone is held captive via the CDE. And as the rule is lowering, then whoever ends up paying”, said Castro.