Energy storage regulation in Brazil

Brazil has a long tradition in hydroelectric energy production, with approximately 80% of its electrical energy coming from a combination of reservoir dams and run-of-the-river dams. Brazil has been at the forefront of hydro-storage technology, building the first two pumped-hydro storage plant in the world in the 1940s, respectively the Pedreira and the Traição Dams. Nevertheless, due to unrelated environmental issues, local authorities prohibited water pumping from the feeding river, effectively limiting the use of the two projects to a minimum. While it is true that today’s Brazilian hydroelectric plants do benefit from the storage of water during the wet months to guarantee baseload generation throughout the year, such storage facilities are different in nature from traditional pumped-hydro storage facilities. The water reservoirs are, in fact, state owned resources and hydro generators are required by law to obtain a minimum quantity of water rights from nearby reservoirs. Indeed, generators do not decide when to produce electricity, but rather this is a decision of the National Independent System Operator (Operador Nacional do Sistema Elétrico – “ONS”) based on the results of a stochastic analysis.

More recently, the increased interest in energy storage has driven investment in small-scale pilot programs to allow more stable access to electricity in isolated communities. The first of its kind went live in April 2016, and constitutes a 282 kWh battery pack connected to 360 photovoltaic modules for a total of 90 kW.

In April 2016, the Brazilian National Regulatory Authority (“ANEEL”) published the first draft of a three-year energy storage initiative in the context of its R&D programme for technological innovation in the power sector, which was launched in 2012. The initiative is expected to launch this year and project selection will be concluded in 2017.

ANEEL’s announcement is timely and shows an interest in pushing energy storage to be considered as a solution to Brazil’s growing renewables capacity and urgent need to fill the transmission infrastructure gap.

The regulator’s announcement is designed to prevent a sudden and inefficient implementation of storage technology in the future and seeks to incentivise technical and commercial arrangements for the evaluation and integration of energy storage systems in the Brazilian electricity sector. The initiative will be funded by the monies raised in accordance to legislation that requires all power companies to invest 0.4% of their annual revenue in R&D projects supervised by ANEEL itself.

ANEEL calls for the submission of propositions for innovating the current legislative framework and for the development of projects introducing new technologies and the installation of a pilot storage projects by any generation, transmission or distribution company that is currently authorised to operate in Brazil.

While renewable energy projects, such as solar and wind, are growing exponentially, the Brazilian electricity matrix still relies heavily on a combination of hydro-power and fossil fuel peaking plants.

The current lack of a clear regulatory framework creates fundamental challenges. The absence of regulation relating to short-term intermittency management caused by renewable sources and the absence of specific compensation mechanisms relating to frequency regulation or back-up generation should be considered a priority in the process of developing an appropriate regulatory framework for energy storage.

Another challenge for energy storage in Brazil will be access to capital. Given the current unfavourable economic conditions, it is not clear how long it will take for energy storage to benefit from large-scale investments.

A plethora of government entities are involved in the Brazilian electricity sector. The Mining and Energy Ministry (“MME”) has overall policy-making responsibilities, as well as having other important powers such as granting concessions and regulating the bidding processes for concessions relating to public services.

As the national regulatory authority, ANEEL is responsible for the implementation of MME’s policy directives as well as overseeing the market participants operating in the electricity sector. Pursuant to the national R&D program for the innovation of the energy sector, ANEEL is also responsible for incentivising innovation through initiatives such as the one mentioned above regarding energy storage.

The Company for Energy Research (Empresa de Pesquisa Energética – “EPE”) is another important stakeholder in the Brazilian energy sector, being responsible, in particular, for the country’s Ten and Thirty Year Energy Plans, as well as the implementation of Capacity Auctions for generation and transmission facilities. Given its crucial strategic development role, EPE will have important responsibilities once a preliminary energy storage regulatory framework has been established.

ONS is a private non-profit entity, responsible for the operational control and coordination of the generation and transmission facilities connected to the National Interconnected Power System. If the energy storage regulatory framework adopted considers storage as a generation activity, ONS will gain operational control of the energy storage facilities connected to the grid.

Finally, on the financing side, three main entities, the Brazilian Development Agency, the Brazilian Development Bank and the Funding Authority for Studies and Projects might provide incentives for private sector developers to invest in the energy storage sector.