The New Centrality of Transmission Infrastructure in the Brazilian Electricity Sector

The Brazilian electricity sector is undergoing a period of profound economic and regulatory reorganization. In a short period of time, two news items revealed seemingly opposing trends, but which, when analyzed together, demonstrate the same structural reality: transmission infrastructure has become the main strategic element for the sustainable expansion of the national electricity matrix.

On one hand, Brookfield has begun selling off assets from Quantum Energia, estimated at approximately R$ 5 billion, highlighting the intense heating up of the secondary market for transmission concessions. On the other hand, Engie has requested that the National Electric Energy Agency (ANEEL) revoke the authorizations for seventeen solar power plants in Bahia and Rio Grande do Norte, alleging economic unviability resulting from recurring episodes of... curtailment, that is, the operational limitations imposed on the dispatch of renewable generation.

Although they deal with distinct segments of the production chain, both movements stem from the same phenomenon: the growing relevance of transmission as an essential infrastructure to ensure the economic efficiency of Brazilian energy expansion.

The appreciation of the secondary market for transmission assets.

The sale of Quantum Energia's assets represents another chapter in the consolidation process of the Brazilian secondary infrastructure market. In recent years, successive transactions involving transmission assets demonstrate that institutional investors, pension funds, infrastructure managers, and strategic operators have come to consider this segment one of the most stable asset classes in the national economy.

This increased value stems primarily from the regulatory characteristics inherent in the transmission of electrical energy.

Unlike generation or distribution, whose remuneration can be influenced by demand behavior, hydrology, or energy trading, transmission remuneration is based on the Allowed Annual Revenue (RAP), defined by ANEEL (Brazilian Electricity Regulatory Agency). This is a regulated revenue, previously established and contractually guaranteed to the concessionaire for making the infrastructure available, regardless of the volume of energy actually transported.

This model significantly reduces exposure to market risk, provides high cash flow predictability, and facilitates financing operations.project finance), in addition to facilitating acquisitions, corporate reorganizations, and mergers and acquisitions (M&A) transactions.

It is no coincidence that multi-billion dollar transactions involving assets from Equatorial, Energisa, EDP, State Grid, Taesa and, now, Brookfield, demonstrate the maturing of the Brazilian regulated infrastructure market.

Legal certainty and the transfer of concessions

From a legal perspective, the intensification of these operations was only possible thanks to the progressive maturation of the public concessions regime.

The Federal Constitution establishes, in its article 175, that the indirect provision of public services depends on prior bidding. However, this does not mean that every subsequent change in the concessionaire's corporate structure requires a new bidding process.

The rule is based on Article 27 of Law No. 8,987/1995, according to which the transfer of the concession or corporate control of the concessionaire depends on the prior consent of the granting authority, conditioned on the demonstration that the new controller meets all the technical, legal and economic-financial requirements originally demanded for the conclusion of the contract.

The constitutionality of this provision has been debated for many years.

The controversy was definitively resolved by the Supreme Federal Court in the judgment of ADI No. 2,946, when the Court recognized, by majority vote, the full constitutionality of Article 27 of the Concessions Law. The Supreme Federal Court affirmed that the constitutional requirement for bidding refers to the moment of the initial granting of the concession, not preventing subsequent subjective alterations to the contract, provided that the public interest and administrative oversight are preserved through the consent of the granting authority.

The leading opinion highlighted an aspect particularly relevant to the infrastructure sectors: concession contracts are dynamic and incomplete in nature, requiring instruments capable of accommodating economic, financial, and corporate changes that occur during decades of contract execution.

This understanding brings Brazilian law closer to international best practices in infrastructure, recognizing that the stability of concessions depends precisely on the possibility of corporate reorganizations capable of preserving the continuity of public service provision.

The paradox of the expansion of renewable energies.

While the market celebrates the appreciation of transmission assets, Engie's decision highlights the difficulties currently faced by renewable energy generation projects.

The company requested that ANEEL revoke the authorizations for seventeen photovoltaic plants that are part of the Campo Largo Solar (Bahia) and Santo Agostinho Solar (Rio Grande do Norte) complexes, alleging that the recurring increase in episodes of curtailment It compromised the originally projected economic and financial viability.

THE curtailment This refers to the limitation imposed by the National Electric System Operator (ONS) on the dispatch of certain power plants, usually due to electrical restrictions, insufficient transmission capacity, or the need to preserve the operational security of the National Interconnected System (SIN).

Although technically justifiable from a systemic operational perspective, the phenomenon produces significant economic consequences.

The entrepreneur makes significant investments in the implementation, financing, and connection of the power plant, but some of the energy produced is not effectively injected into the grid, reducing revenue and increasing uncertainty about future cash flows.

The Engie case perfectly illustrates this new regulatory challenge.

The expansion of renewable energy generation in Brazil has occurred at a faster pace than the expansion of transmission infrastructure, especially in the Northeast and North regions, where the country's greatest wind and solar potential is concentrated.

The result is a growing mismatch between the generation and distribution capacity of the energy produced.

Regulatory Resolution No. 1,071/2023 and regulatory rationality

From a regulatory standpoint, ANEEL Normative Resolution No. 1,071/2023 deserves special mention, as it governs, among other aspects, the circumstances under which authorizations for generation projects may be revoked.

In the requests submitted by Engie, the company informed that the projects had not yet entered into Transmission System Usage Contracts (CUST) or Transmission System Connection Contracts (CCT), a circumstance that allows the revocation process to proceed within the regime provided for by current regulations.

The regulatory solution demonstrates ANEEL's concern in preventing the perpetuation of projects whose execution has lost economic rationale due to significant changes in the regulatory or operational environment.

At the same time, the possibility of future restructuring of the projects under more favorable conditions is preserved.

Transmission infrastructure as a strategic asset

Reading the two episodes together reveals a structural shift in the logic of the electricity sector.

For many years, the expansion of the energy matrix focused on the construction of new generation projects.

Today, however, it is clear that the main constraint to the sector's growth is no longer the capacity to produce energy, but rather the capacity to transport it safely to consumer centers.

This change simultaneously explains two seemingly contradictory movements.

The greater the difficulty in transporting the energy produced, the higher the economic value of transmission assets tends to be.

In other words, the curtailment While reducing the profitability of power generators paradoxically reinforces the strategic importance of investments in transmission lines.

From an economic perspective, this is a typical infrastructure bottleneck.

From a legal perspective, there is a clear need for continuous improvement of regulatory mechanisms aimed at the proper allocation of risks among generators, transmission companies, financiers, and the Granting Authority.

Conclusion

The recent moves by Brookfield and Engie illustrate a new phase in the Brazilian electricity sector.

On one hand, a sophisticated secondary market for regulated transmission assets is consolidating, supported by the predictability of the Allowed Annual Revenue, contractual stability, and legal certainty conferred on the concession regime, especially after the Supreme Federal Court's ruling on ADI No. 2,946.

On the other hand, there is growing concern about the economic sustainability of investments in renewable energy generation given the structural limitations of the transmission system and the recurrence of incidents of curtailment.

More than isolated events, these movements demonstrate that the energy transition will depend less and less on the capacity to produce energy and more and more on the institutional, regulatory, and legal efficiency necessary to transport it.

In this context, corporate transactions involving concessionaires, M&A processes, requests for regulatory approval, project restructurings, risk allocation reviews, and discussions on economic and financial equilibrium tend to occupy a central position on the agenda of Brazilian Infrastructure Law, reinforcing the role of specialized legal counsel in structuring long-term investments and promoting the legal certainty essential to the sector's development.

Article written by: Alexandre David and Gabriel Machado.