The Brazilian Electric Energy Agency – ANEEL is holding a reserve energy contract cancellation auction, or reverse auction, on August 28, 2017, at 10:00 am, in accordance with the rules of the competitive mechanism announcement published at the end of July. Participation in the auction is a good alternative for eligible generation projects that fail to ensure their deployment viability.

The auction has been discussed for some months as an alternative to (i) excess contracting of distributors, in view of the forecast of an average structural surplus of 8.4 GW energy in 2018, and for (ii) the high number of projects with significant delay in deployment, which causes uncertainty as to their viability.

The eligible projects were disclosed by ANEEL through Order No. 2,254, dated July 26, 2017, totaling 4,518.5 MW of power and 1,600.60 average contracted MW. As set forth in Decree No. 9,019/2017, which created the competitive mechanism, these projects will allow for the contract cancellation of reserve energy from wind, hydro, and solar photovoltaic sources.

The criterion to define the winners of the auction will consider the price negotiated in the respective reserve auctions, which represents the advantage of the contract cancellation in relation to the performance of the respective contracts, and the payment of a premium offered by the bidders in the mechanism.

Participation in the auction is subject to acceptance of the conditions set out in the bid notice and its exhibits, including the impossibility for winners to participate in two reserve auctions subsequent to the mechanism (item 12.4 of the notice and exhibit III).

The bidding phase of the auction should take place in two steps: the initial step and the continuous step. For the first, bidders will be able to submit a single bid for each project, equal to or greater than the initial product premium (R $ 33.68/MWh for solar, wind, and hydro products). The ranking will be in descending order of the Premium Classification Index - ICP (corresponding to the bid prize offered plus the contracted sale price).

In the second step, those who offered a premium equal to or greater than the initial premium of the product will participate. In the continuous step, bidders may bid incrementally for a defined period in the system and will also be ranked in descending order of ICP. In the event of a tie in the final bids, a tie-break shall be conducted at the highest contractual price, followed by the criterion of greater contracted quantity.

The bid notice also defined the proposal guarantees to be provided by the bidders in the contract cancellation auction. Quite similar to the guarantee already provided for in the auctions to contract energy in the regulated market spearheaded by ANEEL, the proposal guarantee has as its main features:

  • Types of collateral in money, performance bond, bank guarantee, or public debt securities;
  • It should be provided via the Internet;
  • It should have the Electric Energy Trading Chamber (Câmara de Comercialização de Energia Elétrica ) as beneficiary;
  • It should be valid until December 20, 2017; and
  • The amounts should correspond to R$ 2,000 for each lot of energy that can be contracted, with each lot of energy = 0.01 average MW.

In the event that the winning bidder desists from any of the obligations assumed in the contract cancellation auction, in addition to the execution of the proposal guarantee, a penalty of temporary suspension of the right to contract or participate in bids spearheaded by ANEEL for a period of two years shall be applied, and this penalty will also extend to direct and indirect controlling shareholders, subsidiaries, and controlled companies with a stake equal to or greater than 5%.

Agents that decommission energy in the auction will have their obligation to performance under their contracts released and will be spared the penalties provided in the reserve energy purchase and sale contract. In turn, they will be unable to participate in the next two auctions contracting for reserve energy.

Although the consequences of contract cancellation may sound discouraging to taking part in the auction, it is important to note that the maintenance of reserve power contracts that are behind schedule may result in the application of even heavier penalties, such as execution on the guarantee of due performance and suspension of the right to contract or participate in auctions held by ANEEL for two years by agents, controlling shareholders, and affiliates, among others.