01-04-2020

In the midst of the public calamity scenario faced as a result of the COVID-19 pandemic, the Ministry of Mines and Energy has suspended the next energy and transmission auctions for and indefinite term. The suspension encompasses the next auctions for the expansion of the transmission and generation sectors, primarily destined to supply future demands of distribution companies, both for the National Interconnected System (SIN) and for the Isolated System.  This new measure is set on the Ordinance MME No. 134, published on March 30, 2020.

By means of a communication, the Ministry reinforced that the Ordinance does not cancel the auctions, and that it is still confident that they will occur in the future, as soon as the public health emergency is solved and the economic activities in the country are resumed.

According to the Ordinance, the following auctions will be postponed:

  • Existing energy auction “A-4”/2020 and “A-5”/2020;
  • New energy auction “A-4”/2020;
  • New energy auction “A-6”/2020;
  • Transmission auctions; and
  • Auctions for solution of supply to isolated systems.

Although its real motives were not specified in the Ordinance, it is clear that the postponement is directly related to the abrupt decrease in the energy demand, caused by the prevention measures implemented as a result of COVID-19. Moreover, the decrease in energy demand causes a significant economic setback, especially affecting the distribution companies and large-scale free consumers, considering that such decrease leaves them overly contracted.

In the current scenario, not only the sudden decrease in energy demand aggravates the situation of the electricity sector, but also the likely increase in the rate of default of contractual obligations and the decrease in the energy prices in the free market. Thus, some agents are already indicating that they may try to request the recognition of a force majeure event in their contracts, as a means to be able to reduce the amount of contracted energy. Notwithstanding the above-mentioned faces, the applicability of a force majeure event may not be immediate, due to the already existing contractual protections, such as optmization and improvement clauses and/or clauses to previously negotiate alternatives to maintain their agreements. Nevertheless, an increase in the number of arbitration proceedings is expected.

In order to solve this issue, the government is studying whether to make new loans, as has been the case in 2014. However, such measure only partially solves the problem, as it only supports the companies who are under contracts in the regulated market. In the free market, however, there are concerns that the renegotiations of contracts due to a force majeure event may result in a mass judicialization of the sector, having the suspension of the Auctions as a possible precedent to acknowledge the impacts of the COVID-19 as a cause for contractual revisions. Considering COVID-19 is a new situation, its consequences are still hard to predict. For the time being, it opens an opportunity to the parties to renegotiate their current power agreements, whether to maintain them or to terminate them.