Published on September 2 of this year, Executive Order (MP) No. 998/20 seeks to strengthen the opening of the free market for the sale of electricity and, among other measures, introduces improvements in the efforts to modernize the electricity sector led by the federal government.

The text provides that up to 70% of the funds for investment in research and development and energy efficiency not yet committed to projects will be allocated, between September 1, 2020, and December 31, 2025, to the Energy Development Account (Conta de Desenvolvimento Energético - CDE). The transfer is still subject to the regulations of the National Electrical Energy Agency (ANEEL). The objective is to promote fee moderation and reduce part of the impact on electricity fees for costs related to the Covid-Account, a mechanism to alleviate the effects of the pandemic for electricity distributors that was recently contracted by the Electric Energy Trading Chamber (Câmara de Comercialização de Energia Elétrica - CCEE) with domestic financial institutions.

Seeking to rationalize the policy of industry subsidies and also in the context of efforts to avoid future rate increases due to covid-19, MP 998 provides for the gradual abolition of discounts on Distribution System Use Fees (Tarifas de Uso do Sistema de Distribuição - TUSD) and Transmission System Use Fees (Tarifas de Uso do Sistema de Transmissão - TUST), commonly referred to as “wire-fee discounts", which currently benefit renewable energy projects.

With this measure, new renewable generation projects will only be entitled to this benefit if they have requested a grant or change in installed capacity by September 1, 2021, and are expected to enter into commercial operation within four years after the date of issuance of the grant.

As a counterpart to the phasing out of the wire fee subsidy, the MP provides that the Federal Executive Branch will define guidelines, by September 1, 2021, for the implementation of mechanisms that take into account the environmental benefits related to low emission of greenhouse gases brought about by renewable source generation projects.

The MP also brings in preparatory measures for possible privatization processes of public service energy concessionaires, such as extension to June 30, 2021, of the deadline for state-owned companies controlled by states, the Federal District, and municipalities to hold bids for the transfer of control and granting of new energy concessions. Another example is the provision for a simplified competitive process, in the event of unsuccessful bidding, to ensure the provision of emergency and temporary electricity distribution services until the provision is taken over by a concessionaire under the official public service arrangement. Other provisions seek to bring about greater efficiency in the allocation of industry costs borne by state-owned companies that hold energy utilities concessions, such as the use of resources from the Global Reversion Reserve (Reserva Global de Reversão – RGR) to indemnify part of the assets of the distributors that were already in operation at the time of privatization and had not been accounted for.

Also relevant is the change that involves the retailer's performance in the free contracting environment, in line with the federal government's energy policy objectives to open up the free market. For example, some guidelines were defined for retailer's actions in representing consumers, still subject to ANEEL regulations. In addition, MP 998 provides for the possibility of suspending the supply of electricity to consumer units modeled under a generator or retailer in the event of closure of their representation by a generator or retailer distributor in CCEE, if the consumer does not diligently ensure the continuity of its service.

MP 998 also establishes measures to promote the development of the Brazilian nuclear industry, such as the planned auction of reserve generation capacity for the Angra 3 Thermonuclear Plant, held by Eletrobras Termonuclear S.A. (Eletronuclear), which may receive a 50-year generation grant, with the possibility of renewal for another 20 years and benefit from a 40-year contract for the sale of electricity.

To this end, the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social – BNDES) is expected to develop an economic and financial feasibility study of Angra 3 and its financing, which will serve as the basis for defining the price of the Angra 3 energy sales contract.

Still in relation to the nuclear sector, the MP provides for the transfer of all shares held by the National Nuclear Energy Commission (CNEN) in the capital stock of Indústrias Nucleares do Brasil S.A. (INB) and Nuclebrás Equipamentos Pesados S.A. (Nuclep) to the Federal Government. INB and Nuclep will be transformed into public companies linked to the Ministry of Mines and Energy (Ministério de Minas e Energia - MME) through the redemption of all shares held by private shareholders.

Between September 2 and 5, 2020, the text received 205 proposed amendments from congressmen. Many of them are propositions that the power sector tries to insert in the main text, while others intend to modify or delete passages from the MP.

The section dealing with nuclear energy meets with strong resistance from members of different parties, especially the opposition. There are proposals to delete the article that gives the National Energy Policy Council (Conselho Nacional de Política Energética - CNPE) the prerogative to authorize the operation of Angra 3 for 50 years, extendable for another 20 years. There is also strong resistance regarding the transformation of INB and Nuclep into government-owned companies linked to the MME.

Various other amendments attempt to alter the percentage of use of resources of the Research and Development and Energy Efficiency programs. Some proposals attempt to maintain the discounts on the transmission and distribution system use fees granted to renewable source ventures, and there is even an amendment that extends the granting of subsidies to coal plants for longer.

In addition, proposals were submitted to extend the exemption from the social fee throughout the term of the state of public calamity, scheduled to end in December of 2020, in order to prohibit the cutting off of electricity supplies due to defaults by homes, essential services, consumers who depend on life support electrical equipment, and those who have had difficulty paying their bills.

There are also amendments specifically related to the contracting of the Covid-Account credit operation. One of them prohibits distributors from paying interest on equity and distributing dividends to shareholders until the loan is fully paid off. Another establishes that the distributors may not request Extraordinary Fee Review alleging economic and financial imbalance due to the coronavirus pandemic until December 31, 2025, the deadline for amortization of financing.

In view of the multiplicity of issues covered by Executive Order 998 and the large number of amendments presented, especially when other relevant bills involving the electricity sector, such as PLS 232, are already under discussion, it is expected that the processing of the text in Congress will face challenges. The risk of any lapse of the executive order due to the impossibility of deliberation in accordance with the constitutional procedures and time limits for conversion into law are not ruled out. It is certain, however, that some of the topics contemplated in MP 998 are on the agenda and are in harmony with the efforts to modernize the electricity sector and strengthen the free market for energy marketing and trading.