Transition team recommends postponing the privatization of Eletrobras, core of privatization

The transition team for the area of ​​mines and energy recommended that the elected government consider postponing the decoting of Eletrobras hydroelectric plants, a process that begins in 2023, due to potential impacts on electricity tariffs.

In order to change its contracts via decoding and renew hydroelectric concessions, Eletrobras paid the Union R$ 26.6 billion in grant bonuses after privatization, which may raise legal questions if the elected government follows the transition recommendation.

A change in the privatization schedule could affect contracts signed by the electricity company in its privatization process, carried out in the middle of this year, and would have an effect on the company’s forecast cash flow.

At the heart of the privatization of the largest electricity company in Latin America, the decoupling allows Eletrobras to sell the energy generated by its hydroelectric plants at market prices, instead of a value calculated by the regulatory agency Aneel.

The change in the commercialization regime, which will be progressive and starts in 2023, will have an important effect on business in the free energy market.

The final report of the working group on mines and energy, seen by Reuters, places the end of the quota regime as a warning point, as it understands that “energy from amortized plants is the cheapest available”, so that replacing the form of hiring “by any other will imply a real increase in the tariff”.

The group did not manage to estimate the potential tariff impact of decoupling, but pointed out that, in the middle of the year, the average value of the quota was R$ 73 per megawatt-hour (MWh), and the estimated value of energy in the market would be two to three times larger.

In this regard, the group suggested “an analysis of the economic, legal and political viability of the CNPE (National Council for Energy Policy) issuing a resolution postponing the start of the release schedule, in order to allow the assessment of tariff impacts and mitigating measures”.

Eletrobras has a physical guarantee of 7.5 average gigawatts (GW med) of energy from hydroelectric plants under the quota system. In order to prevent this high volume of energy from reaching the market at the same time, in the privatization process it was established that the decotization would occur at a rate of 20% per year, for the next five years, starting in 2023.

According to Credit Suisse analysts, changing the signed terms to offer a different schedule for decoding changes the economic balance of the contracts, and could not be unilaterally implemented by the government without further discussion.

“Changing this cash flow would imply a different NPV for these contracts and a different concession rate than calculated in the past, likely opening up significant legal disputes,” Credit analysts wrote.

A market source, who asked not to be identified, noted that, although the quotas have reduced Eletrobras’ revenue potential for several years, they can be good business at times of low energy prices, as is currently the case, amid to a structural imbalance in energy supply and demand.

The source also recalled that Eletrobras was privatized with energy price assumptions considered high, a scenario that should not materialize in the coming years.

Eletrobras was already preparing to reinforce its energy commercialization area in view of the decoding. The electric company’s CEO, Wilson Ferreira Jr, said that he could even evaluate the purchase of an energy trader, but that he would prefer to move forward in the area with the constitution of his own team, taking advantage of talents and seeking to bring in new professionals.

MARKET AND GOVERNMENT INFLUENCE

The report also pointed out other concerns related to Eletrobras, such as its “strong market power” and the loss of Union influence in the company after privatization.

Regarding market concentration, the transition team pointed out that electricity is responsible for more than 40% of the country’s transmission system and hydroelectric capacity, which could be harmful to competition and lead to tariff increases.

One source recalls that, when the privatization of Eletrobras began to be conceived, the company was “smaller”, since the old project did not include in the scope of privatization plants such as Tucuruí. Today, the portfolio of the privatized Eletrobras is larger, and the company has recently consolidated new assets, such as the Santo Antônio plant, giving it a market share of around 30% of the national installed capacity, the source pointed out.

As for the Union’s influence on the company, the group recommended that the government assess the feasibility of adopting measures that allow the government “to have voting rights proportional to the number of common shares”.

The Union, together with the BNDES, owns 42.7% of the common shares of Eletrobras, but the statutory change in the privatization limited to 10% the voting power of any shareholder.

Bylaw changes, however, can be more difficult to approve, as they need to go through a shareholders’ meeting.