Challenges to Investment
Before Brazil undertook power sector reforms in 1995, the sector was under state control with a vertically integrated structure, preventing private participation and market pricing. Power generation companies – owned by either the federal government or the individual states – operated Brazil’s transmission systems and embedded transmission costs in power sold to distributors. Distributors would push back on any increased costs from new transmission projects and power generators were not otherwise incentivized to invest in transmission projects. As a result, the transmission system suffered from chronic underinvestment, which resulted in poor service quality and insufficient infrastructure to satisfy demand.
Approach
In 1995, Brazil undertook a series of reforms to boost the performance, efficiency, and capacity of the power sector by unbundling the generation, transmission, distribution and trading activities. For transmission in particular, the reforms established the principle of equal access, permitting independent transmission players to freely access generation and compete to offer transmission services. To facilitate private investment in transmission, the reforms created a framework for power market concessions and permissions for tendering transmission services, awarded through a competitive process. Under Law Nº 9,427/1996, Brazil established the Energy Regulatory Agency (Agência Nacional de Energia Elétrica; ANEEL), which took over responsibility for tendering transmission projects from the Ministry of Mines and Energy (MME). ANEEL evaluated the bids through a one-stage reverse bidding process and the award was subject to a price cap, based on a benchmark maximum annual revenue. A thirty-year BOOT contract (Build-Own-Operate-Transfer contract) was awarded to the bidder proposing the lowest annual revenue, equivalent to the lowest transmission tariff. The awarded company received the annual revenue in monthly payments for the entire contract term, with the price defined in Brazilian reais and annually adjusted for inflation.
Key Enabling Conditions
Several related reforms enabled the proliferation of transmission projects and companies in Brazil. First, the reforms established the National System Operator (ONS), which provided ongoing power sector coordination from the design phase to system operations. Second, ANEEL offered multiple concession structures, increasing the ability of existing and new players to launch new transmission projects. Last, transmission companies that had experienced delays in previous tenders could not participate in future tenders for a certain period, reducing the impact of defaults on overall energy supply.
Impact / Outcomes
From 1999 to January 2017, ANEEL conducted 38 auctions for multiple lots, awarding 211 transmission line concessions of over 69,811 km in total length. The use of competitive tendering in these auctions helped to reduce costs, with the discount on winning bids averaging 22.8% of ANEEL's estimated annual revenue (based on tenders awarded from 2000-2015). The capital mobilized for transmission expansion projects amounted to $15.9 billion. Of that investment, the private sector accounted for almost 70% of investments in transmission between 2000 and 2010, with 30% coming from foreign companies and 39% from local private companies, while the remaining investments were made by federal and state-owned companies. Between 2005 and 2009, all tenders were successful, but it is worth noting that from 2012 to 2015, 37% of the lots tendered were unsuccessful due to overestimation of the benchmark annual revenue, delays in the issuance of environmental permits, and relatively tight financial conditions.
Additional Sources
- ESMAP (2012). International Experience with Private Sector Participation in Power Grids: Brazil Case Study, https://openknowledge.worldbank.org/server/api/core/bitstreams/b8aa4612-6c11-5148-b0f0-09d187fe5081/content
- ESMAP (2015). Private Sector Participation in Electricity Transmission and Distribution, https://documents1.worldbank.org/curated/en/786091468189572248/pdf/99009-ESMAP-P146042-PUBLIC-Box393185B.pdf
- Tolmasquim, M. T., de Barros Correia, T., Porto, N. A., & Kruger, W. (2021). Electricity market design and renewable energy auctions: The case of Brazil. Energy Policy, 158, 112558, https://doi.org/10.1016/j.enpol.2021.112558.
- WBG (2017). Linking Up: Public-Private Partnerships in Power Transmission in Africa, https://openknowledge.worldbank.org/server/api/core/bitstreams/2aa0efdd-f47f-5f9c-b8a6-042e891b2c2c/content
- https://www.financierworldwide.com/expansion-of-the-brazilian-power-trade-market-impacts-and-opportunities-for-foreign-investment
- https://www.iea.org/reports/brazil-case-study/grids-in-brazil-mobilising-private-capital-through-a-robust-regulatory-framework