Brazil is now in the process of recovery from one of its worst economic recessions since 1929, and from its biggest political scandal, both of them mainly caused by corruption scandals. Nonetheless, several changes are being implemented and discussed to allow resumption of economic activity and foreign investment in the country. Not only due to the new  expected  outlook  for  the  Brazilian  power  sector,  but  also  due to  the difficult financial  situation  of  important  players  in  the  sector  whose  assets  are  for  sale,  the Brazilian power sector currently presents good investment opportunities. This article will present  some  of  these  opportunities,  but,  as  we  are  not  Alice  thinking  of  Brazil  as  a wonderland, also deal with some of the challenges to be overcome by the investors.

It is undeniable that, after Dilma Roussef's impeachment, a new phase has started for Brazil, and for the power sector. The team built by new president Michel Temer is mainly composed  by  well  known  professionals  of  the  power  sector, what  was viewed  by  the market as a strong indication that the changes will lead to a more investment-friendly regulatory framework. For instance, the economy has been giving signs of recovery (for example,  the  recent  decrease  of  SELIC  rate  by  Brazilian  Central  Bank  to  14%  -  first decrease  in  the  past  4  years)  and  important  reforms  and  legal  matters  are  under discussion in the congress to enhance foreign investments in the country .

In this context, and despite the current and temporary surplus of energy contracted by distribution concessionaires, as soon as economy resumes to the level it had before the crisis,  power  demand  will  obviously  increase.  In  addition,  considering  the  projected increase for Brazilian GDP's in the following years, there will be a continuous need for new  installed  capacity  and  its  associated  transmission  and  distribution  infrastructure. Based on the ten-year energy expansion plan disclosed by federal government in the end of 2015, the current installed capacity of Brazilian power system is of 160GW, and by 2024  the  Government  expects  an  increase  of  46,447MW,  part  of  which  is  already contracted and under implementation. On transmission lines there is also an expected development up to 2024 by an increment of 85,782km of new lines.

The installed capacity increase will be composed mainly by the expansion of solar, wind, biomass and even nuclear sources, but hydro will continue to be the main source in the Brazilian  matrix  and  thermo will  still  have a  system  security  role. Solar is planned  to increase seven times and represent 3% of total installed capacity; wind will increase five times, jumping from the current 6% to 12%; biomass that currently has no significant portion is expected to represent 9% by 2024. According to planned, by 2030, non-hydro renewable sources will represent 40% of Brazilian power mix.

To meet such expected growth, the government has been using the already traditional and tested auction schemes for generation and transmission assets, but now with more attractive  return  rates  and  more  realistic  conditions.  For  instance,  after  revising  the parameters initially proposed, the transmission auction scheduled to the end of October has increased  the annual  maximum  revenue  in  around  10.2%, with a  total  estimated amount of R$2.3 billion

However,  there  are  challenges  to  be  overcome  by  the  investor  willing  to  invest  on greenfield  projects  and  here are  some  of them:  (i)  restrictions on  acquisition  of rural properties by Brazilian companies controlled by foreigners and the uncertainties created by an  opinion from  the Brazilian General  Attorney's Office; (ii) environmental  licenses may be very difficult and time consuming, sometimes resulting in the non-viability of the project (even though there is a project of law being analyzed by the congress aiming to simplify the environmental licensing process and a pretty new law provides for longer construction  periods  for  projects  sold  in  auctions);  and  (iii)  labor  laws  are  still  very protective of the employees, although there is no tenure on the job. At last, but no least, there is a latent need for tax, political, labor and social security reforms, but some of them are already under discussion in the Congress.

Private investors willing to swim such challenging waters may also want to keep an eye on several different assets that are being sold, in different stages of construction and operation, mainly by companies that are facing liquidity issues or even going through court-supervised reorganization. There are also different opportunities in transmission, distribution  and generation  projects whose construction  works have been  delayed  and are unlikely to be finalized according to the schedule initially approved by ANEEL.

The issues surrounding Petrobras's crisis, the enactment of Brazilian Clean Company Act (or anti-corruption law) and other recent political scandals are also bringing investment opportunities in the power sector. The construction companies involved in the "car-wash operation" launched by Brazilian Federal Police are selling different assets in the sector trying  to  remedy  a  severe  financial  crisis,  mainly  due  to  the  difficulties  on  obtaining financing.

On transmission, there are also M&A opportunities. The most challenging one is related to  the  assets  owned  by  Abengoa  Group,  which  is  currently  under  court-supervised reorganization, and owns relevant concessionaires in the sector. A specific law is being passed to enable the sale of the concessionaires with more attractive concession conditions.

On generation, there are also auctions to be organized by state-owned companies to sell existing generation plants in the States of Paraná, São Paulo, Santa Catarina and Minas Gerais, such as power plants Jaguara, São Roque, Miranda and São Simão.

In  the  distribution  area,  the  government  is  promoting  the  sale  of  distribution  assets currently owned by Centrais Elétricas Brasileiras S.A. – Eletrobras. This sale is seen as a unique opportunity for Eletrobras to rebalance its financial statement. Up to now, seven power distribution concessionaries of Eletrobras are expected to be privatized and sold in 2016 (Celg) and as of 2017 (the other distribution companies). New legislation is being passed to make the sale faster and to help Eletrobras's financial situation to be under control. In addition, important distribution companies were sold in 2016, contributing to the consolidation of important groups in the distribution sector.

The corruption scandals and the efficient way that Brazilian authorities are reacting to them  are  also  changing  the  way  business  and  deals  are  being  done  in  Brazil.  Both national and international companies with subsidiaries or branches here are implementing  robust  compliance  programs  and  acquisition  deals  are  granting  special attention to earn out conditions, price holdbacks and special indemnities. Regardless of the deal's structure, M&A  transactions must  be preceded  by  a  thorough  due diligence especially of actual and potential liabilities in the tax, labor, compliance and environmental areas.

As  a  consequence  of  so  many  challenges  and  opportunities,  Brazilian  power  market currently seems to attract those with bigger appetite for risk and long term viewers that, as us, believe that after the storm Brazil will be stronger and "cleaner" than ever before.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.