LexisNexis

Brazil’s government launches new framework to resolve up to US$1.6bn in GSF disputes

Tuesday 8 June 2021

José Roberto Oliva Jr

Pinheiro Neto Advogados, São Paulo

joliva@pn.com.br

Julia Batistella-Machado

Pinheiro Neto Advogados, São Paulo

jbmachado@pn.com.br

Almost 500 hydropower plants are eligible to a new settlement launched by Brazil’s government, which will extend concessions in exchange for a waiver of lawsuits and claims.

The Generation Scaling Factor (GSF) has been at the centre of many litigation cases in Brazil over the last decade, piling up to around BRL$9bn (approximately US$1.7bn) that remained unpaid to creditors of the centralised settlement of electricity due to injunctions. While the government attempted to solve the issue in 2015-2016, the agreement was only attractive for power generators in the ‘regulated market’ and left those hydropower plants with sales in the ‘free market’ mostly unattended. The new framework launched with Law No 14,052, of 2020, and regulated by the Electricity Agency (ANEEL) by means of the Normative Resolution No 895, of 2020, proposes to address this unsolved part of the problem.

The term GSF is part of the regulatory mechanism whereby hydropower plants share hydrology risks between themselves. This mechanism, called MRE, is compulsory for larger hydropower plants but optional for the others, and is justified by many factors. In addition to alleviating the variations in hydrology risks across the country’s continental proportions, it also factors that power stations located in the same river basin are affected by the operation of those located upstream, and that there are power stations centrally operated by the National Grid Operator (ONS) according to the power needs of the system.

The MRE functions as a cooperative in which the total power generated by the participants is shared in the same proportion of the power they were expected to generate, if it wasn’t for the hydrology. This proportion is known as ‘physical guarantee’ and is a fixed nominal amount calculated by the government based on installed capacity and historical performance.

The ratio between the power generated by MRE participants and their expected generation is called GSF. If GSF is greater than one, it means that the hydropower plants have jointly generated more than their physical guarantee and will be allowed to sell that month’s excess energy. On the other hand, if GSF is less than one, all participants will have less energy available for sale in a given month and may have to purchase energy from third parties to fulfil their contractual obligations or be exposed to regulatory penalties.

From 2013, the GSF turned and remained consistently below one, which is in part attributed to unfavourable hydrology. The losses to the hydropower generators led to several waves of litigation. Initially, hydropower generators and related associations filed lawsuits requesting that they not be affected by third parties’ lack of generation or have their exposure limited to a certain percentage, such as five per cent (known as Type 1 Injunctions).

Even though this first group of lawsuits was against power sector authorities, in particular ANEEL and the Electricity Trade Chamber (CCEE), they ended up affecting all MRE participants because the regulatory mechanism, by design, demands the accounts to be matched every month. After a number of agents were granted injunctions to limit their exposure to GSF adjustments, the immediate result was an increase in GSF effect on others. These repercussions led to a new wave of litigation whereby some of the other participants in the MRE asked not to be affected by those first type of injunctions, in turn, called Type 2 Injunctions.

Eventually, the consequences of the MRE became relevant to all electricity market participants – even if unrelated to hydropower sources or even power generation. Anyone with credits at the centralised settlement of electricity performed by CCEE is currently at risk of only receiving a fraction of such credits due to the loss sharing resulting from injunctions and defaults. This led to a third wave of litigation, whereby market participants asked to receive their credits in full, without deductions caused by third-parties’ injunctions or defaults, referred as Type 3 Injunctions.

Aiming at reducing litigation, Brazil’s government proposed the first GSF agreement through Law No 13,203, of 2015. It consisted in ‘products’ whereby hydropower generators could pay a premium not to be affected by GSF. Those adhering were required to withdraw the GSF lawsuits and would in turn receive an extension of their main regulatory licence (either a concession or an authorisation to generate power, referred to as Outorga). The reason it was not attractive to hydropower plants with sales in the ‘free market’ of electricity was that it offered – as a supposed benefit, and at the same time a requirement – that such power generators sold at least five per cent of their physical energy in the ‘regulated market’, at prices established by the regulators.

The new framework is different to the former in relevant aspects. First, it is not designed as ‘products’ that can be bought by power generators, but as compensation due to certain factors that inadvertently affected the GSF in recent years. These include the fact that some relevant power stations received a physical guarantee higher than they should, due to factors unrelated to hydrology, such as delays in the construction of transmission facilities or partial entrance into commercial operation, and also cases where thermal power plants were dispatched without the required price advantage. Furthermore, it is no longer required that part of the energy is sold in the ‘regulated market’ for those adhering to the new framework.

Compensation will be made through the extension of the Outorgas, which is an inexpensive solution for the current government, and at the same time adds value to the companies. To adhere, owners of hydropower plants have to withdraw any Type 1 Injunction and renounce discussing such matters in the future. This should result in these companies having to pay any monies that were suspended due to these injunctions.

Brazil is still in the part of the process where ANEEL publishes the number of days of the proposed extension of the Outorgas, and the owners of hydropower plants decide whether to adhere. Preliminary calculations show that average extensions would be of more than two years, up to the maximum of seven years. Almost 500 hydropower stations are entitled to adhere. It is yet to be seen if this second government attempt to solve the GSF issue will be successful.