Challenges

What are some of the technical, political, financial or regulatory challenges to corporations adopting green energy in the short/medium term in your country and how have these challenges been overcome (or how can they be overcome)?

Financial

There is a financial risk associated to the corporate PPAs considering the uncertainty of future energy prices. The price of the spot energy market, which is currently calculated weekly, takes into consideration several variables such as hydrological conditions, power demand, entrance of new players, amongst numerous others. Therefore, the prices may rise significantly and directly affect the parties; or they may decrease and become a competitive disadvantage. This risk may be mitigated by means of a price review mechanism agreed between the parties. Note that, as of  January 1st, 2021, the spot price will begin to be calculated on an hourly basis, which is good news for the market, since it will reflect the complexities of Brazilian power mix with more accuracy.

Planning

Considering the long-term structure of corporate PPAs, the offtaker needs to estimate its power consumption level, taking into consideration the possible growth in its consumption, as accurately as possible, otherwise some divergences between the planned and the actual consumption rate may occur. In order to mitigate this risk it is important to establish contractual mechanisms that are able to absorb some variations regarding the initial planned amount, such as defining a contracted amount limited to a percentage of the global charge, or contracting a diversified portfolio, with different term and delivery conditions, to minimize any exposure.

Counterpart

Corporate PPAs are used by the developers to obtain funding for the construction of their facilities and delivery of the agreed power. Until the generator’s facilities are completed there is a risk of delays or issues in the construction of the plant and, therefore, in the delivery of the contracted power supply. To mitigate such risk, it is important to analyse the developer’s background and its capability of delivering the project on time and include provisions in the PPA regarding construction and delivery milestones. Another way to mitigate such risk is requesting the presentation  by the developer of a performance bond.

Performance

Renewable sources, especially wind and solar, are intermittent and, therefore, may generate contractual exposures for the offtaker or for the generator, depending on the contract structure. The Brazilian power market has been mitigating this risk by contracting an energy broker that may provide the remaining power when the renewable sources included in the corporate PPA do not perform as expected. Additionally, corporate PPAs in Brazil generally contain specific provisions regarding supply obligations and guarantees.

Submarket

Brazilian power market is divided into four submarkets, which may present different spot prices among them. Therefore, if the consumer is in a different submarket of the generator, even if the amount produced is the same as the amount consumed, there may be some positive or negative amounts that need to be settled. This difference between submarket prices may create risks for both the offtaker and the generator. In order to minimize such risks one strategy is purchasing electricity from a generator that is located in the same submarket of the offtaker; this alternative, however, is not always available due to certain conditions, including technical and geographical ones. An alternative that has been used by the power market to address this matter is including energy brokers in the PPA contractual structure to manage the submarket risk, due to their diversified portfolio. Another alternative is including provisions that anticipate the costs of submarket swaps, so both parties have more predictability and may better allocate their risks. 

Last modified 16 Dec 2020

Brazil

Brazil

To what extent are corporate PPAs presently deployed and what sort of structure do they take?

Corporate PPAs in Brazil (which are essentially of solar and wind sources) have been exponentially growing in the past years and the regulatory and economic perspectives indicate that this trend will continue for the future.

Most PPAs in Brazil are physical, however, the development and maturity of this market may lead to the rise of more complex arrangements.

Do the country's regulators allow corporate owners to purchase (1) directly from a facility, or (2) from a choice of suppliers?

According to Brazilian regulation there are two power market structures: (i) Regulated Market; and (ii) Free Market. The consumer which are included in the Regulated Market can only purchase power from the local distribution company, which are concessionaries of the distribution services and operate in a monopolistic structure within the applicable geographical areas.

As for the consumers allowed to be part of the Free Market, they can buy their power from other market agents, including directly from generation facilities and energy brokers. Accordingly, corporate PPAs in Brazil are executed within the Free Market.

Currently, for a consumer to enter the Free Market it is required to have a charge of at least 2,000 kW.

Other than the generator and the off-taker, are any third parties commonly party to the PPA structure (e.g. a utility or other market agent)?

Most Corporate PPAs are entered between generators and offtakers. However, there is a new trend in the market that involves an energy broker taking part in the agreement to enable better risk allocation. The energy broker may undertake risks that the other parties are not willing to take (such as submarket and production/consumption profiles risks), since its diversified power portfolio allows it to better allocate and mitigate them.

Note that other agreements are required to enable the physical delivery of the power to the offtaker, such as agreements for the use of the distribution/transmission system, entered with the relevant distribution/transmission utility company.

Is a generator permitted to sell electricity directly to an end user? If so, do they require a licence or other form of authorization?

Yes, the generator may sell electricity directly to the end user, provided that both the generator and the end user are participants of the Free Market.

To be part of the Free Market, the parties must be enrolled as agents before the Chamber of Electricity Commercialization (CCEE). The enrolment process involves the providing of several documents and information related to corporate and financial aspects of the company, the adhesion to the commercialization rules, the adequacy of the consumer’s or the generator’s electricity measurement systems, among other steps.

Last modified 16 Dec 2020

Brazil

Brazil

What are some of the technical, political, financial or regulatory challenges to corporations adopting green energy in the short/medium term in your country and how have these challenges been overcome (or how can they be overcome)?

Financial

There is a financial risk associated to the corporate PPAs considering the uncertainty of future energy prices. The price of the spot energy market, which is currently calculated weekly, takes into consideration several variables such as hydrological conditions, power demand, entrance of new players, amongst numerous others. Therefore, the prices may rise significantly and directly affect the parties; or they may decrease and become a competitive disadvantage. This risk may be mitigated by means of a price review mechanism agreed between the parties. Note that, as of  January 1st, 2021, the spot price will begin to be calculated on an hourly basis, which is good news for the market, since it will reflect the complexities of Brazilian power mix with more accuracy.

Planning

Considering the long-term structure of corporate PPAs, the offtaker needs to estimate its power consumption level, taking into consideration the possible growth in its consumption, as accurately as possible, otherwise some divergences between the planned and the actual consumption rate may occur. In order to mitigate this risk it is important to establish contractual mechanisms that are able to absorb some variations regarding the initial planned amount, such as defining a contracted amount limited to a percentage of the global charge, or contracting a diversified portfolio, with different term and delivery conditions, to minimize any exposure.

Counterpart

Corporate PPAs are used by the developers to obtain funding for the construction of their facilities and delivery of the agreed power. Until the generator’s facilities are completed there is a risk of delays or issues in the construction of the plant and, therefore, in the delivery of the contracted power supply. To mitigate such risk, it is important to analyse the developer’s background and its capability of delivering the project on time and include provisions in the PPA regarding construction and delivery milestones. Another way to mitigate such risk is requesting the presentation  by the developer of a performance bond.

Performance

Renewable sources, especially wind and solar, are intermittent and, therefore, may generate contractual exposures for the offtaker or for the generator, depending on the contract structure. The Brazilian power market has been mitigating this risk by contracting an energy broker that may provide the remaining power when the renewable sources included in the corporate PPA do not perform as expected. Additionally, corporate PPAs in Brazil generally contain specific provisions regarding supply obligations and guarantees.

Submarket

Brazilian power market is divided into four submarkets, which may present different spot prices among them. Therefore, if the consumer is in a different submarket of the generator, even if the amount produced is the same as the amount consumed, there may be some positive or negative amounts that need to be settled. This difference between submarket prices may create risks for both the offtaker and the generator. In order to minimize such risks one strategy is purchasing electricity from a generator that is located in the same submarket of the offtaker; this alternative, however, is not always available due to certain conditions, including technical and geographical ones. An alternative that has been used by the power market to address this matter is including energy brokers in the PPA contractual structure to manage the submarket risk, due to their diversified portfolio. Another alternative is including provisions that anticipate the costs of submarket swaps, so both parties have more predictability and may better allocate their risks. 

Last modified 16 Dec 2020

Brazil

Brazil

Are there any anticipated regulatory changes which will alter the regulatory landscape for corporate green energy and corporate PPAs?

Modernization of the Brazilian Power Sector

At the beginning of 2019, the federal government announced its plan to submit a set of measures to modernize the regulation of the electricity sector and the Ministry of Mines and Energy (MME) formed a work group for such purpose. The work group presented an action plan and proposals for the modernization of the power regulation and MME created a committee to enable the effective execution of the action plan. The modernization plans encompass several different topics. In addition to those mentioned below, other proposals are being analysed, such as review of the public bidding system, governance, simplification and improvement of procedures and insertion of new technologies in the sector.

Expansion of the Free Market

In the past years, the Brazilian power market has seen an expansion of the Free Market, increasing the direct participation of corporate consumers in the energy sector. In December 2019, the MME issued Ordinance No. 465/2019, which set yearly charge reductions for the consumer to be able to acquire power in the Free Market. By January 2023, the required charge amount shall be reduced to 500kW.

Review of Incentives

Small hydro, solar, wind, biomass and qualified cogeneration projects currently receive a subsidy in the form of a discount of 50% in transmission and distribution tariffs. These subsidies are currently under review. Please refer to Item 10 for further details.

Changes to the Spot Market Price

As from January 2021, the spot market price, which is currently determined on a weekly basis, will begin to be calculated on an hourly basis. This change is expected to better reflect the complexity of the country’s power sector and adequately represent the greater insertion of renewables in the matrix. It will also allow the creation of new products in the power trading market, with countless flexibility combinations.

Last modified 16 Dec 2020

Brazil

Brazil

What is the corporate appetite for green energy, including any political or financial incentives available to corporates to adopt green energy?

Considering the increase of the supply of power generated from renewable sources, the prices have become more competitive over time. This trend has generated an interest in the consumers to replace their power supply agreements, which use sources that cause more environmental impact, for renewable power. 

Also, corporate PPAs offer the possibility of associating offtakers’ brands to the financing and acquisition of renewable energy, which has shown to be very beneficial since, more than ever, both consumers and investors claim for companies that show their concern with the environment and sustainability and that have consistent ESG policies.

What are the key local advantages of the corporate PPA model which can benefit our clients?

Due to Brazil’s natural characteristics (hydrology, availability of solar radiations, strength of the winds), the country is a global leader in the generation of power from renewable sources. This vast experience of the Brazilian market contributed to a business environment with great diversification of players, business models and risk appetite which presents opportunities to clients with several business profiles and objectives.

What subsidies are applicable to the generation and sale of renewable energy?

Brazilian energy matrix is composed mostly by large hydro plants (currently, such source corresponds to more than 60% of the energy mix). In view of that and aiming at increasing the part of the alternative sources in the mix, projects based on small hydro, solar, wind, biomass and qualified cogeneration sources have a subsidy in the form of a discount in the transmission and distribution tariffs. Current legislation provides that projects based on such sources which power injected into the systems is greater than 30,000 kW and less than 300,000 kW are entitled to a discount of at least 50% on such tariffs. Please note that these subsidies are currently under review since many consider that their goal to increase the development and use of renewable sources in the country has already been attained.

Does your country implement a national support scheme with tradable green certificates (such as guarantees of origins)?

Brazil integrates the International REC Standard and, therefore, is authorized to issue RECs (Renewable Energy Certificates), by means of a single authorized issuer, and the Brazilian companies can trade such RECs. The issuance of such certificates has exponentially risen in the past few years, with over 2 million certificates issued in 2019. Each certificate equals 1 MWh of renewable energy generated and injected in the power system.

Last modified 16 Dec 2020

Brazil

Brazil

To the extent corporate PPAs are deployed, how are prices, terms and risks affected?

Do prices tend to be floating or fixed?

There are a number of possible options: fixed prices, step prices adjusted over the term, and price indexation; hybrid forms of these alternatives are possible. Given the private nature of contracts, it is difficult to generalise on commonly used pricing arrangements across Brazilian market.

What term is typically agreed for the PPAs?

The usual term for a PPA in Brazil is within the range of 8 to 20 years.

Are the PPAs take-or-pay or limited volume?

The PPAs deployed in Brazil are usually structured as a take-or-pay combined with a monthly flexibility (usually between 10% and 15%) and yearly seasonality.

Are there any other typical risks?

For the main risks regarding corporate PPAs in Brazil, please refer to Challenges.

To the extent corporate PPAs are deployed, in whose favour will the risks typically be balanced?

Volume risk

If the generator falls short of the contracted power amount, it will need to acquire the necessary amount in the market to comply with the PPA.

Change in law

Neither party. Generally, corporate PPAs contain a provision establishing that in the event of change in law that affects the contract, the parties shall renegotiate its conditions in good faith.

Increase / reduction of benefits

Given the private nature of contracts, it is difficult to generalise on this across Brazilian market, however where the reduction of benefits is caused by a change in law, this may be covered by a change in law clause.

Market liberalisation (if applicable)

Not applicable.

Credit risk

Offtaker or generator, depending on the credit rating of the parties involved.

Imbalance power risk

Not applicable.

Production profile risk

Offtaker or generator, depending on the PPA structure and generator’s and consumer’s production and consumption profiles, respectively.

Last modified 16 Dec 2020

Brazil

Brazil

Does your country operate a balancing responsibility scheme?

Yes.

If your country operates a balancing responsibility scheme, who is the balancing authority and do the generator and offtaker typically undertake balancing themselves?

The physical delivery of the electricity is controlled by the Operator of the National Electricity System (ONS), who centralizes the dispatch of the power plants.

The contractual/financial portion is handled by Chamber of Electricity Commercialization (CCEE), who is responsible for the financial balance of the power system. CCEE is also responsible for the short-term or spot market and for the calculation of the spot price.

All corporate PPAs must be registered with CCEE. If generators fail to provide the amount of power contracted or if consumers fail to contract all their consumption, the difference between the actual and the contracted electricity production/consumption will be subject to the spot price. Also, generators and consumers may be penalized by CCEE for their shortfall.

Last modified 16 Dec 2020

Brazil

Brazil

What significant transactions/deals have taken place in the last 12-18 months?

  • BRF and Voltalia Eólica entered a 64 MW Wind PPA in November 2018;
  • Vale and Casa dos Ventos entered a 151.2 MW Wind PPA in January 2019;
  • L’oreal Brazil and Engie Brazil entered a 212.6 MW Wind PPA in June 2019;
  • Ambev and Casaforte Investimentos entered a Wind PPA in November 2019 of over 80 MW
  • Vulcabras Azaleia and Casa dos Ventos entered a Wind PPA in April 2020. The total size of the wind park from which the power will be supplied is 540MW;
  • Braskem S.A and Canadian Solar entered a 152 MW Solar PPA in June 2020;
  • COPEL and Canadian Solar entered a 122 MW Solar PPA in June 2020.

What transactions/deals are anticipated to come to market in the next 12-18 months?

The following projects were recently announced by Engie Brazil and Furnas Centrais Eletricas S.A., but we expect to see many more in the upcoming months:

  • Engie Brazil plans to hold two energy auctions this year to contract renewable energy such as wind and solar power. In the first auction, to be held on October 13, 2020, the company will award a 15-year PPA starting from 2023. Companies which projects are still under development and construction may participate. The second auction is for shorter term PPAs (five years, beginning in 2022) and targeted at projects that already operate in the market.
  • Brazilian utility Furnas Centrais Eletricas S.A. plans to hold an energy auction on November 12, 2020 to contract solar and wind power. The company will award PPAs with power supply period starting on January 1, 2024 and ending on December 31, 2038 for both sources. This auction is targeted exclusively for developers that seek to make their wind and solar projects viable.

Last modified 16 Dec 2020

Brazil

Brazil

Fabiano Gallo

Fabiano Gallo

PartnerDLA Piper Campos Mello Advogados