Brazil: Emergency power plants run the risk of not operating

RIO DE JANEIRO, BRAZIL – In October, the 14 natural gas thermoelectric plants contracted in the emergency auction held by Aneel (National Agency for Electrical Energy) and CCEE (Chamber for Commercialization of Electrical Energy) are with the start of operation delayed or without any forecast. According to the Simplified Competitive Procedure notice, these plants should start operating next Sunday (May 1, 2022).

The bidding was carried out in haste after a decision by the then-current CREG (Chamber of Exceptional Rules for Hydropower Management), chaired by the Minister of Mines and Energy, Bento Albuquerque. The inter-ministerial group decided in September, at the height of the water crisis.

At the time, with no forecast of rainfall that could recover the reservoirs of the hydroelectric plants, the government preferred not to risk a possible energy crisis in the middle of an election year and contracted the thermoelectric plants at about R$1,598/MWh (US$322/MWh) – about seven times the average value of the last ten new energy auctions, considering the natural gas plants.

Entrepreneurs fear the application of penalties. An unjustified delay of more than 90 days can lead to termination of the contract, for example. There are also contractual penalties of at least 2.5% of the declared value of the investment and fines imposed by law. In addition, the guarantees presented in November by the 14 projects can be executed by the CCEE. They add up to R$251.7 million.

Poder360 found out that there is a negotiation in the Ministry of Mines and Energy for the mutual rescission of the contracts. They would be terminated without the application of fines.

Together, the 14 projects have about R$5 billion in expected investments and a total of 1.3 GW of injected power in the system, equivalent to about 1/3 of the power of the Jirau hydroelectric plant on the Madeira River in Rondônia. The contracts are for about three and a half years, ending on December 31, 2025.

The entrepreneurs heard by Poder360 justify the delays for several reasons, mainly because of the bureaucratic processes of environmental licensing, both for installation and operation.

According to Xisto Vieira Filho, president of Abraget (Brazilian Association of Thermoelectric Generators), the contracts must be fulfilled even though the auction was made in an exceptional and emergency situation. He says, however, that it is customary for the agency to hear the reasons.

“But Aneel always asks the agent to justify, and if the justification is plausible, it accepts. For most delays there [at Aneel], the justifications are not technically plausible. But we didn’t follow this auction specifically because we didn’t have any interested members,” said Xisto.

According to Juliana Melcop from the Souto Correa Advogados law firm, Aneel usually accepts justifications for delays related to the environmental licensing process and force majeure events, such as the covid-19 pandemic. In these cases, “to not apply the fines, they [the entrepreneurs] should provoke Aneel with a liability exclusion clause.”

Another factor that may be behind the delayed schedule is fuel contracts. According to Aneel, half of the plants have not yet signed gas purchase contracts. Some entrepreneurs had agreed on the purchase, but the supplier did not follow through with the negotiation.

“Contract renegotiations are happening [throughout the sector] because fuel prices follow various indexes. You have the Henry Hub, the Brent, etc. When you sign the contract, you say what index you will use. For example: when you import from Asia, you use the JKL. If you import more from the United States, which is most of the cases, you use the Henry Hub,” said Xisto.

The contracts consider certain gas reference values for the Henry Hub (United States), NBP (United Kingdom), JKM (Japan), and Brent (oil, traded on the London Stock Exchange) indexes. The Brent barrel, for example, has a reference price of US$59.13 in contracts. With the war in Ukraine, it has exceeded US$100.

Xisto says that he doesn’t like the emergency modality but understands the reasons that led the government to make the auction.

“We [the members] made a point of not participating. In general, emergency auctions are not good because they have very high costs. But I don’t criticize it at all, because if I were there, as I have been, maybe I would make the same decision. When in doubt, I don’t want rationing. Is the cost high? Yes, but rationing would be much worse. Imagine if the government had done nothing and there had been no rain. We would have rationing, and people would say we could have done it in an emergency,” said Xisto.

Brazil’s Ministry of Mines and Energy said that “although the current hydrological scenario has improved, the contracted plants make an essential contribution to the increase in the electro-energetic security of the National Interconnected System (SIN), in the short and medium-term.

According to the ministry, the use of the plants “also tends to provide lower costs with thermoelectric generation during the dry period of 2022, to benefit all consumers.

The ministry also stated that the CMSE (Electricity Sector Monitoring Committee) would continue monitoring “given the uncertainties associated with future hydrological scenarios.

With information from Poder360