New Rules Purport To Overcome The Obstacles For Brazilian Thermoelectric Power Plants
I. Structural Changes In The Brazilian Energy Sector
The restructuring of the Brazilian energy sector has created new opportunities for investors, among which those related to thermoelectric power plants operated by natural gas.
The opening of the sector to foreign private investments occurred in 1995, when an amendment to the Federal Constitution eliminated the restrictions to foreign capital, enabling private companies incorporated under Brazilian law, headquartered and with administration in the country to carry out activities of exploitation of hydraulic energy resources, research and exploitation of oil or gas, refining of oil and imports and exports of products and basic by-products resulting from such activities.
It was the end of a state-owned economic model. The new model for the electric energy sector based on competition has required since then substantial redefinition of the economic activities involved in the sector, and the review of the legal system, as well as the entering of new agents for the sector.
The implementation of a model based on free competition implied (i) the separation between the activities of generation, transmission and distribution of energy for purposes of the grant and the applicable legal system; (ii) the flexibilization of offer and demand of energy, through the creation of Independent Producers of Energy1 and of the Trading Agents, as well as the category of Free Consumers2; and (iii) the free contracting of electric energy among the agents of the sector, under bilateral agreements freely negotiated and under short-term agreements, for which special pricing, accounting and liquidation mechanisms have been defined through the creation of a Wholesale Market of Electric Energy3.
The National Agency of Electric Energy (Agência Nacional de Energia Elétrica - ANEEL)4 was then created with the purpose of regulating and fiscalizing the generation, transmission, distribution and commercialization of electric energy. ANEEL was also in charge of implementing the electric energy reform. The activities of coordination and control of the generation and transmission of electric energy in the interconnected systems were attributed to the National Operator of the Electric System – ‘ONS’5.
In 1997, the National Agency of Petroleum (Agência Nacional do Petróleo – ANP) was created by law 94786, as the regulatory agency of the oil and gas sector. Such law has also defined the activities related to the industry of oil and gas (search, exploitation, transportation, imports, exports and distribution, among others), as well as the objectives of the National Policy for Energy.
II. The Role Of The Thermoelectric Power Plants In The Brazilian Energy Generation
The Brazilian energy generation is characterized by being predominantly hydroelectric. It depends, therefore, heavily on the hydrologic system. The hydroelectric plants are distant from urban centers and considered to cause heavy environmental impact and to require financing of high sums.
On the other hand, the Brazilian thermoelectric plants still have a small participation in the generation park. Such Thermoelectric Power Plants may use several different fuels. They sometimes use industrial by-products as fuel, such as cane trash and asphalt residues. Coal and schist, scarce in the country, are used only in some thermoelectric plants of the South Region, where the reserves are greater. The Brazilian natural gas production is not sufficient to allow a great expansion of the energy sector. However, the natural gas in neighboring countries is abundant. Imports of natural gas to be used as fuel by thermoelectric power plants shall increase the participation of thermoelectric power plants in the Brazilian generation park.
The grant for generation of electric energy shall be given for thermoelectric power plants: (i) for public services, by concession; (ii) for independent production of energy, by concession or authorization; (iii) for self-production, by authorization; (iv) with power lower than 5,000 MW, no grant is required. Law 9074/95 has further provided for rules of commercialization of energy: the independent producer may sell energy to (i) free consumers and (ii) concessionaires of public services of energy, among others7. The self-producer (which generates energy for its own use) may also sell its energy surplus, with a special authorization from ANEEL.
The thermoelectric plants shall permit the diversification of the Brazilian energy park. There are, however, obstacles in fuel supply, especially with respect to the natural gas.
The obstacles for thermoelectric generation are particularly related to: (i) the supply of gas, since the national production is insufficient to meet the thermoelectric demand in the country; (ii) the contracting with distributors of canalized gas that hold a concession from the states to supply gas in the area where the thermoelectric power plant is located; (iii) the purchase price of the gas, which is imported and supplied by only a few agents (particularly Petrobras), in a small competition market; (iv) the exchange risk arising out of the variation of the gas price, a problem that is aggravated by the different dates of readjustment of the prices of the contracts of supply of gas and those of sale of energy; (v) the possibility to pass-through the price paid for the gas to the tariffs charged to captive consumers; (vi) the need, for obtaining financing, to enter into contracts of supply of gas and of sale of energy; as well as (vii) tax matters8.
In 2000, the Brazilian Government has created the Priority Thermoelectric Program – PPT with the purpose of increasing the generation of electric energy by the thermoelectric power plants and therefore to overcome the existing obstacles for thermoelectric generation in the country.
The Brazilian electric energy crisis of 2000/2001, caused by the absence of investments in the sector and due to the unfavorable pluviometric volume, was responsible for the incentive that is now given by the Chamber of the Electric Energy Crisis ("CEEC") 9 to the thermoelectric generation and therefore to the PPT. CEEC has established an Emergency Strategic Program of Electric Energy, with the purpose of increasing the offer of electric energy. The Program provides for the diversification of energy sources so as to reduce the dependency on the hydrologic regime.
Thermoelectric power plants using natural gas have been considered in the Brazilian crisis program as the main alternative to increase energy in the short term. Thermoelectric power plants are envisioned as having several advantages vis-a-vis the hydroelectric plants. They are smaller plants that may be located near the large consumer centers, they also cause a smaller environmental impact and require lower investments.
The difficulties in obtaining the natural gas were overcome with the beginning of the operation of the Brazil–Bolivia Pipeline in 1999/2000, which has permitted access to the large Bolivian natural gas reserves, which currently account for 80% of the supply of the required gas to the thermoelectric power plants.
In 2001, CEEC has provided for new rules to improve and accelerate the Priority Thermoelectric Program – PPT.
III. The Priority Thermoelectric Program - PPT
The Priority Thermoelectric Program - PPT initially established the possibility to grant benefits to 49 thermoelectric plants, provided that they start operation by the end of 2003. Such list of thermoelectric power plants has since been modified.
Several benefits are included in the PPT10:
(i) guarantee by Petróleo Brasileiro S.A. – Petrobras of the supply of natural gas for a term of up to twenty years, according to price alternatives mentioned below:
(a) a price equivalent in Reais to US$ 2.26 / MM btu, based on September 1999, readjusted quarterly in accordance with the national policy for natural gas and with the other commercialization conditions provided for in the contracts for the purchase of imported natural gas; or
(b) a price equivalent in Reais to US$ 2.475/MM btu, based on April 2000, readjusted annually according to the percentage variation of the Wholesale Price Index in the United States. The price of the purchase and sale of gas shall be kept fixed in the US currency for a period of 12 months after the readjustment of both the gas purchase contracts and the electric energy sale contracts.
The investor must choose one of such alternatives until the date of the beginning of the commercial operation of the plant.
Both prices indicated above are subject to readjustment pro-rata tempore up to the date of the readjustment of the prices provided for in the contracts for the sale of electric energy of the thermoelectric power plants, in order to have the same date for the annual readjustments of the gas purchase contracts and of the sale of electric energy contracts by the thermoelectric power plant. Such mechanism will allow the immediate passing-through of the costs of the gas to the buyer of the energy.
(ii) BNDES’ guarantee of access to the Program of Financial Support to Priority Investments in the Electric Sector, including for the transmission systems associated with the plants, as well as with the works of connection and/or of the transmission system; and
(iii) guarantee of the application of the normative value to the distributor of electric energy for a period of up to twenty years, according to the rules established by ANEEL11.
Such price alternatives have not, however, established a solution with respect to the exchange variation risk (gas purchased in US$ and sold for the thermoelectric power plants in Reais). For such reason, a third alternative establishing a compensation mechanism was created.
IV. Thermoelectric Power Plants Operated by Gas and the Compensation Mechanism
Provisional Measure (MP) n. 2149 of May 29, 2001 determines that the Ministries of Mining and Energy (MME) and of Finance (MF) are competent to establish the referred-to compensation mechanism.
The Interministerial Administrative Rule MME/MF n. 176 of June 1, 2001 has therefore provided for such compensation mechanism. The compensation mechanism will maintain fixed the natural gas prices in Reais for periods of twelve consecutive months, with the subsequent pass-through of the exchange variation to gas purchase contracts, after such period.
Such Rule provides the following:
(i) It sets the maximum base price, in Reais, for the MMbtu, for supplying natural gas for generation of electric energy by the plants participating in the PPT, which are put into effective commercial operation until June 30, 2003 and adopt, in their supply contracts, a firm commitment to receive and deliver the gas, with the following formula:
Base Price = 2.581 US$/MMBTU x TMD012
For readjustment purpose, the gas price is divided into two portions: one, corresponding to eighty per cent, readjusted by the variations of the exchange rate and of the wholesale price index in the United States of America (PPI, all commodities, published by the U.S. Department of Labor, Bureau of Labor Statistics); and the other portion, corresponding to twenty per cent, readjusted by the ‘IGPM’ variation13.
The compensation mechanism shall be used for the cases where the gas price will be kept fixed in Reais for periods of twelve consecutive months. The supplier of the gas will bear the exchange variation during such period, and such variation will be subsequently offset against future amounts for gas supply. Thus, the gas price, after the first annual readjustment, will reflect the inclusion of the compensation amount, for the purpose of the readjustment.
Compensation shall only take place in respect to the portion of price readjusted by the exchange variation/PPI. The Administrative Rule establishes the continuation of this compensation system for a period of 12 years.
(ii) It establishes that the date of anniversary of the annual readjustments of the contracts of natural gas covered by this Administrative Rule will be defined in accordance with the interest of the producer of energy, and the first readjustment may occur in a period shorter than twelve months, according to the provisions of MP n. 214914. Therefore, the investor may arrange for the dates of the readjustment of the contracts of gas supply and of the sale of energy contracts to coincide, and may thus forthwith pass-through the exchange variation.
(iii) It limits the volume of natural gas to be contracted, in the ambit of the PPT, to a maximum of 40 million cubic meters per day.
V. Normative Value Application to the Thermoelectric Power Plants
The normative values constitute the mechanism that limits the pass-through to the electric energy tariffs charged to captive consumers of prices freely adopted in the electric energy contracts entered into with the distributor.
The normative value in R$/MWh is defined by ANEEL considering the energy source15. A normative value shall be attributed to each bilateral contract of energy with a term equal to or exceeding 24 months. Such normative value shall be the parameter to establish the amount that may be passed-through to the tariffs applicable to captive consumers.
The normative value shall be readjusted (updated) by the time of the readjustment of the distribution tariffs. The formula for readjustment of the normative value takes several indexes into consideration (relating to the IGP-M, fuels and exchange variation). The percentages applied to each one of such indexes shall be indicated and justified by the distributor.
For thermoelectric power plants that use natural gas, it was initially established that the index relating to fuels would be defined according to the Administrative Rule MME n. 215 of July 26, 2000, which specified the price alternatives for the natural gas to be supplied by Petrobras to thermoelectric power plants.
None of such alternatives is, however, adequate to the new compensation mechanism proposed in the Interministerial Administrative Rule 176, in which the price of the gas is fixed in Reais for a period of twelve months, being then readjusted annually according to the exchange variation/PPI and the IGP-M. The revision of the normative value system was therefore necessary.
On July 2, 2001, the normative values applicable to thermoelectric power plants with generation using natural gas covered by the Interministerial Administrative Rule MME/MF 176 were established by ANEEL Resolution 256 at the values of 91.06 R$/MWh for plants of a power higher than 350 MW and of 106.40 R$/MWh for plants of power lower than or equal to 350 MW. Such Resolution has further specified that the index relating to fuels, used in the formula for updating the normative values, would, in such cases, be defined based on the price of the natural gas in force in June 2001 and in the month preceding the date of the updating of the normative value.
VI. Other Thermoelectric Power Plants Are Admitted to the PPT
The CEEC established, by Resolution n. 23 of July 5, 2001, the possibility to extend the benefits granted by the PPT (i) to thermoelectric power plants whose works have been started and have not been interrupted16, as well as (ii) to the thermoelectric power plants that participate in the selective process coordinated by the Ministry of Mining and Energy17.
Further, co-generation power plants were also considered by the program. The thermo-electric power plants of co-generation qualified by ANEEL and which start commercial operation up to December 31, 200318 are included in the PPT. A specific volume of natural gas was destined for such co-generation power plants included in the PPT.
- The Independent Producer of Energy produces electric energy for full or partial commercialization, at its account and risk, without the existence of a captive consumers – contrary to what happens with the concessionaires of the public service of electric energy – and without imposing tariffs, but instead at prices freely negotiated with the buyers of such energy.
- Free consumers (substantially those with a contracted demand exceeding 3 MW) are those that may choose their supplier of energy.
- Laws 9074, of July 7, 1995 and 9427 of December 26, 1996.
- ANEEL was created by Law 9427 of December 26, 1996.
- ONS was created by Law 9648 of May 27, 1998. The Brazilian electric sector is not fully interconnected, however, its main agents operate in a coordinated manner for maximizing the efficiency of the productive process in the interconnected system. Isolated hydroelectric systems are not significant in the national generating park and are mainly concentrated in the North Region of the country. It is the interconnected system and the guarantee of free access to the transmission and distribution systems (upon the compensation of the transportation cost involved), that allow suppliers and free consumers to freely contract energy (Law 9074, art. 15, § 6).
- Law 9478 of August 6, 1997.
- Other hypotheses cover (i) electric energy consumers comprising an industrial or commercial complex, to which the independent producer also supplies steam originated from the co-generation process; (ii) group of consumers of electric energy, regardless of the tension and load, under conditions previously agreed upon with the local concessionaire of distribution; (iii) any consumer that demonstrates to the granting power that the local concessionaire has not assured the supply in a term of up to one hundred and eighty days as from the respective request.
- With respect to tax matters, Bill of Law n. 4941/2001 establishes that the contributions for the Social Integration Program and Formation of Public Servants Property (PIS/PASEP) and for the Social Security Financing (COFINS) shall not apply to the revenue obtained from the sale of canalized natural gas to the producer of electric energy. Further, the States are analyzing possible modifications to the value added tax (ICMS tax) applicable over transactions with natural gas for purposes of generation of electric energy.
- Provisional Measure n. 2147 of May 15, 2001 (currently, MP n. 2198 of June 28, 2001) has created the Chamber of the Electric Energy Crisis ("CEEC"), a committee responsible for proposing and implementing measures to make the offer and demand of electric energy compatible.
- Administrative Rules MME n. 43 of February 25, 2000, and n. 215 of July 26, 2000. It has been further established that investors whose projects have been admitted in the PPT must file at ANEEL the request to be considered as an Independent Producer of electric energy.
- The system of free negotiation of energy (bilateral contracts and spot contracts) establishes as a restriction purporting the defense of captive consumers of energy a system of normative values – the normative values limit the pass-through to the electric energy tariffs of the prices freely agreed for the acquisition of energy. The adaptation of such system is very important for thermoelectric power plants, whose contracts of energy shall substantially reflect the cost of the natural gas used in the generation of energy. In these cases, therefore, the application of the normative values system regulates and controls, in last instance, the pass-through of the gas price to electric energy tariffs (one of the indexes used in the formula of readjustment of the normative value refers to the fuel).
- TMDo is the average of the daily exchange rates R$/US$ between the preceding thirtieth day and the thirtieth day subsequent to the date of the publication of this Administrative Rule.
- IGPM (General Index of Market Prices, as measured by Getulio Vargas Foundation) is an index for monetary correction.
- The MP eliminated, for the aforementioned cases, the restriction established by law of readjustment or monetary correction with a term lower than one year.
- In ANEEL Resolution n. 22 of February 1, 2001, which generically regulates the matter, the normative value of R$/MWh 72.35 base value of January 2001 was applied to thermoelectric power plants using natural gas.
- Thermoelectric power plants are however required to meet the following requisites: ANEEL’s authorization, environmental license, execution of contracts of engineering, and of contracts for the supply of the generating units. The demonstration of compliance with such requirements must be made within a time limit of 30 days from the date of publication of this resolution.
- This process implies the registration of the investor at the Executive Secretariat of MME within a time limit of sixty days from the date of effectiveness of this Resolution, informing the following: (i) schedule for the plant implementation, with the respective intermediary points of the implementation with the dates projected for the commercial operation of the plant in its various stages; (ii) ANEEL’s authorization of the operation; (iii) agreement of acquisition of the generating units; (iv) environmental license; (v) status of the works; (vi) location of the plant; (vii) engineering, project and implementation agreements - EPC; (viii) financial feasibility of the project; (ix) contracts of purchase and of sale of energy - PPA; and (x) contract of access to the electric network.
- Administrative Rule MME n. 551 de 06/12/2000.
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