Energy market in Brazil: opportunities for self-regulation and ESG

The International Energy Agency recently announced that it will produce the world's first comprehensive roadmap for the energy sector to reach net-zero emissions by 2050, detailing what is needed from governments, companies, investors and citizens to fully decarbonize the energy sector. Along this line, a study from Bloomberg New Energy Finance projects that, by 2050, 62% of the world’s energy will be generated by renewable sources (50% solar and wind). This movement will open an opportunity of US 13 trillion in investments around the world (85% in renewable sources). Due to its abundant natural resources, Brazil is considered one of the principal countries to lead the generation of energy and is expected to benefit from the growth in the sector.

The increasing need for energy around the world and this window of investment and growth opportunities in Brazil, bring to the foreground the debate on what would be the best regulatory framework to increase energy generation, enable innovation, improve the efficiency and safety of the transmission and distribution systems, and reduce the risks, costs, volatility, and the negative externalities for the environment.

An ideal regulatory framework must rely on a balance between two seemingly opposing concepts of energy under Brazilian law: energy as a public service and energy as a commodity. These can converge in a system that integrates state regulation and self-regulation to enhance innovation, competition, efficiency and, at the same time, grant the safety of the energy system.

On the one hand, energy is defined by Brazilian law as a public and essential service, which every citizen and enterprise has the right to access by paying a regulated price. This concept derives from the joint interpretation of certain provisions of the Brazilian Federal Constitution, the Consumer Protection Code and the Federal Law that created the National Electricity Agency (ANEEL). As a public and essential service, it is supplied mainly by state-owned monopolistic companies, and, in some cases, by private enterprises under concession, authorization and permission regimes. In this context, the purchase and sale of energy is carried out through public auctions and tenders in regulated contracting environment, known as the ACR.

On the other hand, energy is also considered a commodity, which can be generated, transmitted and distributed in a decentralized manner by competitors and traded in line with the free-market logic, subject to supply and demand forces and the premise of fair price formation. This concept fits in the Brazilian economic principles set forth in the Brazilian Federal Constitution, and in a Federal Law of 2019 known as “Economic Freedom Act”. These operations are performed in a free contracting environment called the ACL and are monitored by ANEEL.

The current opportunity for investment and growth in Brazil’s energy sector is likely to affect both ACR and ACL markets. If current trends prevail, the ACL will absorb most of the investment flow, due to its consistent growth history and marketable characteristics. In fact, from 2020 to 2019, the ACL increased 13.4% in trade volume, despite the context of the COVID19 pandemic, according to CCEE. The ACR market, on the other hand, retracted 0,8% during that same time period.

Recent technology and innovation in the energy sector have introduced mobility, diversification and descentralization in the energy supply chain, progressively reducing the need for capital intensive and the duration of investments returns for certain renewable energy sources, introducing the concept of “prossumers” (consumers that produce their own energy), and helping to reduce the negative externalities for the environment.

This dynamic creates new opportunities, risks and complexity within the energy market, shifting the regulatory framework from state-owned company monopoly to a market-based approach, whose main current drivers are profit prospects, the institutcionalization of self-regulation, and ESG (Environment, Social and Governance) agenda.

The Brazilian regulatory framework has long recognized the relevance of institutionalized self-regulation in the energy market. For example, Normative Resolution ANEEL nº 109/2004 establishes the general rules of CCEE, which is responsible, among others activities, for the commercialization of energy in ACR and ACL.

Another example of institutionalized self-regulation in energy market is BBCE, the Brazilian over-the-counter (OTC) energy trade entity, also responsible for the commercialization of energy in ACL. BBCE was recently authorized by Brazilian Securities and Exchange Commission (CVM) to manage the OTC market for energy backed derivative transactions, to trade risks associated with the energy market, that is another pillar for the development of a healthy market.

The market-based approach in the Brazilian energy sector has long been developed and now has found an extremely favorable moment to flourish as the main engine to improve the efficiency and safety of the transmission and distribution system, and reduce the risks, costs, volatility, and the negative externalities for the environment. The path for that: strengthening self-regulation and the drivers of ESG agenda.