A provisional measure to reform Brazil’s electricity sector is likely to benefit traditional power generators and distributors while posing challenges for renewable sources and self-producers of energy, Chrystian Oliveira, an analyst at Levante Inside Corp, told BNamericas.
The proposal, which needs to be approved by congress to become permanent, eliminates – for new contracts or renewals – the 50% discount on the distribution system usage rate (TUSD) currently granted to solar and wind projects.
“This subsidy has been crucial to the competitiveness of renewables in the free market, reducing costs by around 30 reais [US$5.3] per MWh,” said Oliveira.
The analyst said the removal of the benefit could increase rates for free market consumers by up to 25%, in addition to financially impacting companies that currently benefit from incentivized energy.
As a result, wind and solar sources are likely to lose competitiveness compared to hydro and thermal power plants.
On the other hand, distribution companies may benefit from the expansion of the ‘social rate’ that involves exemptions or discounts for low-income consumers, with the potential to reduce default rates and non-technical losses – although passing the cost of these subsidies on to other regulated consumers could put pressure on overall consumption.
To offset the social rate expense, the proposal broadens the taxpayer base by requiring free market consumers to share costs that are currently limited to the regulated market, such as expenses related to nuclear power from the Angra 1 and 2 plants and funding for distributed generation.
Oliveira believes that, although the immediate effects of the full opening of the free market by 2028 may be limited, the measure is likely to encourage greater competitiveness and efficiency in the sector over the long term.
The analyst said the final outcome of the reform still depends on potential changes in congress, “adding a degree of uncertainty to the outlook.”
Felipe Sant’Anna, investment specialist at the Axia Investing group, said the provisional measure is yet another “desperate gamble” by the Luiz Inácio Lula da Silva administration to boost popularity.
“Exempting a large portion of the population from paying electricity bills, in absolute numbers, is nothing more than a cost transfer to industry and the middle class, which, through a ripple effect, will ultimately impact even the poorest segments,” he told BNamericas.
Sant’Anna believes the current policies of Lula’s Workers Party government could have a “massive” impact on the consumer price index and, consequently, on the benchmark Selic interest rate.
“When a poor citizen receives a ‘benefit’, they end up paying for it at the supermarket checkout,” Sant’Anna argued.
Positive long-term implications
Fitch Ratings said the proposed reform could improve the long-term market balance and lead to more sustainable electricity pricing, which will have positive long-term implications for the sector.
The subsidy cuts could negatively affect generation companies’ (gencos’) earnings in the near term, but Fitch expects the impact to be modest.
“The potential near-term negative impact on prices of gencos’ uncontracted renewable energy is outweighed by the longer-term prospects of more sustainable tariffs for captive consumers,” Fitch said.
Gencos may respond to potentially lower prices by pulling back further on renewable energy investments, even if interest rates come down, which could help balance Brazil’s electricity market, which is currently around 30% oversupplied, the rating agency said in a report.
New capacity additions are expected to slow from this year, but there is still 40GW (15% of the current installed base) in the pipeline through 2029, mostly from DG. Electricity consumption, on the other hand, is expected to grow by around 1.4x GDP in the next few years, compared to 3.2x over the past decade, Fitch said.
Rising curtailment is also discouraging investments in centralized renewable projects, Fitch added. It increased significantly in 1Q25 due to distributed generation capacity expansion, higher wind intensity and specific events in the transmission grid and may worsen if congress maintains the requirement for the system to contract 4GW of inflexible thermal energy, it said.