The Ministry of Mines and Energy (MME) submitted to the President of Brazil a proposed bill (PL) relating to the reform of the electric sector and covering a variety of significant changes to the sector that have long been awaited. The final text of the bill is the result of discussions held under Public Consultation No. 33/2017, undertaken by the MME with widespread participation by the entire sector. The proposed changes cover a number of issues, but here we will address only two issues: (i) the new policy for granting subsidies to renewable energy sources; and (ii) the change in the rule of occupation of rural areas by foreigners, an obstacle also observed in other sectors, but which in the electric sector is of greater importance due to regulatory requirements that developers prove their right to use the area to be used by the projects.


Regarding the first topic, it is important to highlight that the subsidies to which the PL refers are discounts granted to certain projects and applicable to Tariffs for the Use of the Electric Transmission (Tust) and Distribution Systems (Tusd). Current legislation provides that, pursuant to Article 26, paragraph 1-A, of Law No. 9,427/96, projects based on solar, wind, biomass, and qualified cogeneration sources, whose power injected into the systems is greater than 30,000 kW and less than 300,000 kW, are entitled to a discount of at least 50% on these tariffs.


According to the same provision, this percentage is established by Aneel, in Normative Resolution No. 77/2004, which establishes a 50% discount for projects based on renewable sources and whose characteristics fit within the specifics of the subsections of Article 2 of that Resolution. Subsequently, its fourth paragraph establishes a differentiated and specific percentage for projects based on solar sources that went into commercial operation before December 31, 2017. They are entitled to a discount of 80%, applicable in the first ten years of operation, and 50% in subsequent years.


With the proposal, MME intends to institute a new regime for granting these subsidies (Article 6 of the PL’s proposal), according to which the discounts will continue to be granted after the reform, but under two new conditions: (i) a requirement for consideration to the beneficiaries consistent with the purpose of the subsidy; and (ii) subjection to access criteria that consider environmental issues and the social and economic conditions of the target public.


This possible change, however, has raised concerns on the part of current grant recipients, as the new scheme may be more rigorous. In this sense, according to the PL's explanatory memorandum, in event of approval of the bill, grants granted before December 31, 2020, would maintain the right to discount in the current framework until the end of their deadlines. Any extensions, however, would occur under the new framework.


This provision is in line with one of the basic elements of the vision for the future on which the reform is based: the protection of existing contracts, which is emphasized throughout the PL’s explanatory memorandum. This is due to the need to balance the necessary reform of the sector with the maintenance of legal certainty for sector participants, and also establish appropriate transitional rules for relations established during the transition period in order to reduce the risks of judicial disputes with respect to the issue.


Thus, the reduction in subsidies sought by the PL does not mean extinction of the discounts currently granted, but rather a search for greater supervision and control over the subsidies, as the new framework maintains the possibility of a discount, but only conditions it on pre-established criteria, which allows for greater oversight by the public administration. In this manner, it can exercise its regulatory role without ceasing to incentivize renewable sources.


With regard to the proposal to amend Law No. 5,709/71, which regulates the acquisition of rural properties by foreigners, the PL's text sought to overcome a situation that has lasted for almost a decade. The excitement arises from the interpretation conferred by Opinion No. LA-01/2010 of the Federal Attorney-General’s Office, which reinvigorated the restrictions provided for in Law No. 5,709/71 with respect to Brazilian companies controlled by foreign capital. Until then, they were excluded by an earlier opinion issued by the Federal Attorney-General's Office, issued in 1994, on the grounds that equating Brazilian companies with majority ownership by foreign capital to foreign companies, as done by Law No. 5,709/71, was not preserved by the Federal Constitution of 1988.


Thus, since 2010, Brazilian companies controlled by foreign capital have restrictions on the acquisition and rental of rural properties, which, in short, limits the rural area to be occupied and requires prior authorization from the National Institute for Colonization and Agrarian Reform (Incra).


In the electricity sector, such restrictions have culminated in almost insurmountable obstacles, since, in the vast majority of cases, generation projects are implemented in rural areas and, on the other hand, foreign investors are also large in number. In this context, and considering that proof of the right to use the area is a regulatory requirement for the implementation of such projects, many companies have started to use legal instruments not included in the restrictive interpretation by the Attorney-General’s Office, such as in the case of assignments of the right of use, granting of surface rights, or other arrangements of a similar nature, which make the process more complex, whether from a tax, contractual, or recording point of view.


Thus, Article 2 of the PL's proposal provides for an amendment to Law No. 5,709/71 so as to allow the acquisition of rural properties by a Brazilian legal entity controlled by a foreign individual or legal entity. The permission is conditional on the use of the property exclusively to carry out the activities of generation, transmission, and distribution of electric energy.


If approved, the PL will therefore allow Brazilian companies with foreign capital to freely acquire rural properties necessary for the implementation of projects in the electricity sector, thus making it considerably easier to develop such projects. Although positive, the change does not provide for the removal of the same restrictions with respect to rural leases or the issue of properties located in border strips, as the latter restriction arises from an express provision of the Federal Constitution.


In summary, the proposal brings in changes aimed at modernization of the sector. The bill stems from a growing desire of the public power to modernize the Brazilian energy grid, which it seeks to achieve through changes that allow for a reduction in regulatory and legislative obstacles. The ultimate goal is to encourage the development of the Brazilian electricity sector and, in particular, to maintain the growth of renewable energy sources in the Brazil's energy grid.