Grupo de Economia da Energia

Evolution of the institutional framework for energy industries in Brazil

In energy on 01/03/2010 at 01:30

By Edmar de Almeida 

Since the 1990s, the energy sector in Brazil has been a laboratory seeking a new form of industrial organization and a new institutional framework that will enable the introduction of private capital, without compromising security of supply. The relatively high rate of growth relate to energy demand and the large size of the Brazilian economy represent a major challenge to ensure the level of investment necessary for the security of energy supply.

The liberalization of energy sector in the 1990s tried to cut down the State’s role in this activity. This reform had no desired results. Private investment has failed to ensure the expansion of the Brazilian energy sector on the relevant volume and celerity. Moreover, several specific aspects of the Brazilian energy market represent important obstacles to private investments: i) marginal cost of increasing expansion, ii) presence of major energy state-owned companies, iii) significant uncertainties about the trajectory of energy prices, iv) lack of expansion planning for energy supply.

The electricity supply crisis in 2001 caused a significant adjustment in the institutional framework of Brazilian energy industry in order to accelerate the pace of investments. In the second half of the current decade, the liberal reform of the energy sector in Brazil has undergone major adjustments in search of a new compromise between State and private sector in terms of responsibility in economic dynamics of the Brazilian energy industry. New gas and electricity laws were approved. A new law for the oil sector is being discussed in Congress.

These new laws resulted from a radically different political strategy for the sector, from the first Lula administration. Initially, the negative effects of energy crisis in the economy and its political effects led the new government to review the institutional framework and regulation of the Brazilian energy sector.  The main objective of this reform was to provide the federal government new mechanisms of coordination in order to ensure energy security. The main guidances related to the new energy policy were:

  • priority to security of supply,
  • more centralized institutional design, strengthening the federal government’s role in increasing the energy supply,
  • less emphasis on operational competition and greater importance to competition for new investments,
  • interruption of the privatization process and return of public companies as key players for energy sector expansion.

The effort to increase the pace of public and private investments in the sector was characterized by seeking mechanisms of coordination and reduction of uncertainty for investments. New mechanisms for coordinating the investment process were established. These mechanisms have two distinct natures: economic coordination and institutional coordination.  The main mechanisms of economic coordination that have allowed the reduction of uncertainty on investments are:

i) the return of indicative expansion planning for energy supply;

ii) development of more complex projects under the Federal Government leadership;

iii) setting a reserve price for the price of energy sold;

iv) long-term contracts for sales of electricity and transportation capacity of gas and electricity;

v) public auctions for long-term contracts and oil and gas exploitation blocks.

Long-term indicative planning is the first step in establishing projects to expand the energy supply. Planning work includes the identification of potential hydraulic studies, as well as proposing specific projects with greater complexity (large hydroelectric or nuclear power plants) and expansion projects for electricity and gas transmission.  The Ministry of Mines and Energy is also involved in studies to calculate the reserve price of each proposed project, including those proposed by public and private companies. That is, the maximum rate for sales of electricity for each project or type of plant in the regulated market. Thus, the State has an important role for development of projects, in order to expand the supply of electricity.

The proposed projects will become long-term contracts through a bidding process for selection of cost-saving projects. In the case of electricity production, there are two types of auctions: i) the auction to determine which investors will act on projects set by the government, such as large hydroelectric power plants, which have an automatic right of long-term contract, ii) auction between different projects for the allocation of long-term contracts based on lower price.

To facilitate the implementation of new mechanisms of economic coordination, several new institutional mechanisms had to be created. Among these new institutional mechanisms it is important to mention the Energy Research Company’s role, under the Ministry of Mines and Energy, which allowed the resumption of planning and coordination of the investment process in the electricity sector and rehabilitation of the National Energy Policy Council. The latter, although established by Act 9,478/1997, gained prominence as an area of policy decision-making in the Lula administration.

The Ministry of Mines and Energy focused its work in coordinating the political negotiation process between different agents operating in the national energy sector: Energy Planning Company, National Petroleum Agency, National Electric Energy Agency, National Water Agency, National System Operator, Electricity Sector Monitoring Committee, Electric Energy Commercialization Chamber, state-owned companies, business and consumer associations.

This new institutional arrangement represented an important progress for solving institutional issue that prevailed in Brazil during the 1990s, characterized by accumulation of responsibilities between the different public agents and a significant uncertainty about the decision process for energy policies.

The Brazilian experience allows us to draw some important lessons: i) market liberalization does not guarantee automatically the security of energy supply, ii) private investment in developing countries such as Brazil faces economic and institutional risks higher than in developed countries; iii) these risks can be reduced by adopting institutional and economic mechanisms of coordination, iv) finally, even in cases where States choose to withdraw themselves from the activity of producing energy, they have an important role in the development and implementation of mechanisms of coordination in order to reduce the risks of private investments for security of energy supply.

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