Regulatory change and innovation in Latin America: The case of renewable energy in Brazil

Utilities Policy xxx (2017) 1e9

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Regulatory change and innovation in Latin America: The case of renewable energy in Brazil Amanda Bradshaw Columbia University, Graduate School of Architecture, Planning and Preservation, 400 Avery Hall, 1172 Amsterdam Avenue, New York, NY 10027, United States

a r t i c l e i n f o

a b s t r a c t

Article history: Received 1 October 2016 Accepted 21 January 2017 Available online xxx

This article examines how market-oriented regulations have advanced renewable energy sources in Brazil. Despite efficiency and competition serving as the organizing principles for electric power reform, social and environmental considerations have steadily gained priority within energy planning. This article first analyzes the political and institutional context that gave rise to regulatory reforms in the power sector since the 1990s. The pre-existing hydropower infrastructure, both physical and institutional, is demonstrated to have created important constraints on the adoption of alternative forms of energy. Against this backdrop, it examines the factors that have enabled the share of wind and solar in the Brazilian energy supply. A central focus lies with the role of regulations and regulatory agencies that were created to govern the electricity sector. In particular, it is argued that regulators have undertaken innovative changes to encourage the use of renewable energy within the scope of their mandate. Consequently, rather than dismissing such regulatory choices as problems of weak legitimacy, future studies should unravel how regulatory agencies can ensure the long-term economic and environmental sustainability of electricity sectors in Latin America. © 2017 Elsevier Ltd. All rights reserved.

1. Introduction Utilities regulators in Latin America were created beginning in the late 1970s to facilitate the privatization of state-owned enterprises and to foster competition. By adopting the examples of early reformers in industrialized countries, regulators in the global south have been inserted into the debate of what constitutes “good regulation” (Baldwin et al., 2012). On the one hand, economic theories have influenced approaches for evaluating systems of regulation. Such theories stress that the obligation of regulators is restricted to achieving industry efficiency and maintaining independence from political pressures (Foster, 1992). On the other hand, others have argued that regulators were established not only to enact economic objectives, but to address additional societal concerns such as social distribution and environmental conservation, and that a mixed set of goals is an inevitable part of any framework (Prosser, 1999, 2010; Owen, 2006). Dubash and Morgan (2012, 2013) notably emphasize that that the neat distinction between efficiency and social interests

may not take into full consideration the unique social and political conditions facing infrastructure sectors in developing countries. The challenge of reconciling the advancement of politically and socially important goals with maintaining the legitimacy of their mandates often requires that regulators innovate new ways to achieve non-efficiency aims. This is particularly true when regulatory goals are incompatible with the underlying policy regime. One such example in the region is the promotion of a more diversified power supply in Brazil. The Brazilian electricity sector is distinguished from other countries by its strong reliance on hydroelectric power, which supplies up to 95% of the country's electricity during heavy rains. A commonly accepted view on this issue is that the country consequently has a natural endowment in hydrological resources, which it should continue to exploit where possible. However, energy regulators, in part, have undermined this account by supporting increases in the participation of wind and solar. The regulatory momentum behind renewable energy in Brazil provides insights into how regulatory agencies in Latin America internalize broader sustainable development duties. The first section of this article summarizes what has been referred to as the

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standard model for electricity reform in developing countries. The concept of “regulatory innovation” is introduced to explain how regulators devise new methods to resolve regulatory problems in quite unanticipated ways by reform designers. By then turning to power sector reforms in Brazil, the institutional context is shown to have shaped how regulatory processes have unfolded over time. The final section highlights how regulators advance the uptake of wind and solar energy. I conclude by recommending that future studies unravel the enabling features of energy governance in Latin America. 2. Re-regulating the power sector in Latin America The 1980s marked the beginning of a fundamental rethinking of the public ownership and provision of basic services in Latin America. According to Gratwick and Eberhard (2008), while there was no set blueprint, what gradually crystallized was a standard model for power sector reform. Informed by earlier developments in primarily industrialized countries, such as the United States, the United Kingdom, and Norway, private sector participation was highlighted as the means to improve sector performance and make electricity production more efficient and less costly (Gratwick and Eberhard, 2008, p. 3949). These initial experiences of reform pioneers became the reference point for the developing world (Dubash, 2003, p. 145). In industrializing countries, reforms sought to respond to poor financial management and technical delivery, which were argued to be compromising efficiency (Jamasb, 2002, p. 1e2). With the tendency for states to withdraw from direct service provision, engaging the private sector necessitated a governmental capacity to manage public-private relationships. Regulatory agencies were seen as the institutional foundation that was needed to strengthen the unbundling and commercialization of electricity sectors (Vogel, 1996; Wilks, 1996). In Latin America in particular, it was hoped that agency autonomy would insulate utilities from other parts of government that could impose arbitrary actions and consequently discourage private investment. Financial independence would furthermore empower the regulatory agency in its capacity to dispense the right incentives to reward or punish performance and establish reliable and efficient rules (OECD, 2008). Finally, this new layer of electricity policy, regulatory in its orientation, would be administered by a professional class of experts equipped with a more competent understanding of technical issues, rather than untrained politicians or civil servants (Gausch and Spiller, 1999, p. 77; Jordana and Levi-Faur, 2004; Levi-Faur and Jacinct, 2007). 2.1. Regulatory innovation within reforms Born out of this larger “reinventing government” movement was the idea of innovation and its role in regulatory reform. Public agencies were told that innovation would become one of their “core activities” to devise smarter and more effective ways to deliver services (Osborne and Gaebler, 1993). However, an operational definition of innovation for public administration is difficult to define: there are many competing notions of the concept, in the same way that there are competing images of regulation (Black, 2006a,b, p. 3e4). Moreover, as Grant et al. (2010, p. 9) astutely observe, this leads to a fundamental tension between expectations that regulators will be consistent, predictable, and impartial, and yet also innovative. One image is that regulatory innovation is seen as the refining of the technologies of regulation. Black offers a normative neutral definition: “the use of new solutions to address old problems, or new solutions to address ‘new’ (or newly constructed) problems, but not old solutions to address old problems.” Regulatory

innovations, in Black's mind, are changes in the performance of regulatory functions, institutional structures, and organizational processes which have an impact on the regulatory regime (Black, 2006a,b, p. 15). They can consist of more radical forms of institutional restructurings, like the creation of new regulatory agencies or independent commissioners. They may further involve the introduction of techniques, such as new mechanisms or standards by which regulatory objectives are enforced. “Paradigm shifts” are also innovations that concern changes in the goals of policy and understandings on which the policy is based (Hall, 1993). Instead of adjusting the tools and enforcement strategies within the current regulatory strategy, implied is a shift to a new regulatory style e for example, by moving from a command-andcontrol regime to more market-based approaches (Baldwin and Black, 2008). The concept of regulatory innovation gains additional meaning when applied to the ways in which regulators address broader values or welfare aspects in their work.1 The view that economic, social, and distributive goals are typically inseparable has gained traction with proponents that first chartered the standard power model. Scholarship has shown that the regulatory decision-making of the Office of Gas and Electricity Markets (Ofgem) in the United Kingdom (Haber, 2010, p.126; Owen, 2006; Prosser, 2000, 2010) and the Federal Energy Regulatory Commission (FERC) in the United States (Bateman and Tripp, 2014; Knee, 2011) pursue environmental aims, at times explicitly by regulators, despite official policy that excludes such rationales. Prosser (2010) emphasizes how the broader policy environment engendered by the Labour Government gave Ofgem new duties to reduce emissions and enable investments in alternative energy. Focusing on the importance of legal discretion, Buzbee (2016) shows how regulatory choices about federalism have been used in strategic ways to foment change in environmental law in the U.S. during periods of legislative gridlock. In Latin America, few have addressed the regulatory agency as an essential unit within energy governance. Much of the existing literature rests on detailing the funding and technical arrangements in electricity sectors. What is often unquestioned is that such regulatory policies may run counter to principles of economic efficiency on which many regulatory regimes were founded. For example, regulations and public policies which ensure that all citizens have access to modern energy services have been implemented across Latin America (Estache et al., 2002; Jannuzzi and Goldemberg, 2014). Many countries have also promoted renewable energy sources to reduce carbon emissions and improve energy security. When these programs are referenced in regards to how or by what claims to legitimacy regulators have taken up these objectives, the conclusion is usually resoundingly that agencies are neither capable nor intended to handle such matters. This disagreement about the social or political rationales for regulation remains at a normative gridlock. In the meantime, and on the ground, regulatory agencies move forward in their functions that often contribute to socially and politically relevant policies. 2.2. An institutional approach to regulatory innovation An institutionalist approach is brought to this study to explain the regulatory innovation that has enabled wind and solar energy in the Brazilian energy supply. This article explores the reasons why

1 As Black (2000) notes, while quintessentially an interdisciplinary subject, the debate about pursuing values under regulation seems often to have been surrendered to welfare economists.

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A. Bradshaw / Utilities Policy xxx (2017) 1e9

the energy regulator has prompted distinctive organizational processes to these two energy sources, and how they arrived at the systems they devised. While it is acknowledged that a variety of overlapping institutions and participants inhabit the regulatory space, this analysis privileges the regulatory agency in maintaining a special position and expertise. In many cases, regulators determine the correct balance of different principles to reach a judgement about the “public interest.” The authoritative discretion of regulators can thus, under certain conditions, create opportunity structures that open up the possibility of moving along new policy paths. This can happen in ways unanticipated by conventional theories on regulation or power reforms, as this article intends to demonstrate. 3. Power sector reforms in Brazil Independent regulation arrived in Brazil, as it did in many countries in Latin America, as part of a larger program of electricity reform and restructuring. The independent regulator was vested with the fundamental role to depoliticize the sector and set the stage for market-oriented energy policies. Historically, decisionmaking within the Brazilian electricity sector has been highly centralized, with distribution and retail supply predominantly owned by state governments. With the creation of Eletrobras in 1962, the central government owned and managed the transmission system and also generated much of the electricity (Bajay, 2006). Monopoly under government control was seen as the best means to extend electrification to society, supported by the technologies available at the time (de Oliveira, 2007, p.40). By the 1980s, the exhaustion of this institutional model based on strong public sector involvement led to a search for alternatives. In the shock of the oil crises and ensuing economic instability, the electricity sector had incurred high amounts of debt. Politically appointed managers of state-owned companies had performed poorly and had done little to protect environmental quality as they built ever-larger hydro projects (de Oliveira, 2007, p. 45). In 1993, spurred by a shifting political ideology of privatization, the Brazilian government decided to reduce its role in producing and supplying electricity. President Fernando Henrique Cardoso’s administration initiated a restructuring process that aimed to stimulate competition and attract private investors to generate and supply electricity. By 2003, around 70% of distribution assets and 30% of generation capacity were privatized.2 The National Privatization Program introduced independent regulatory agencies in Brazil as modern forms of market regulation. In addition to founding the energy regulator, Aneel, other federallevel institutions were established to complement this new model for energy planning. Among these include the National Operating System (ONS) in 1998, the body responsible for the operation of the National Interconnected System (SIN). In 2004, Lula's government created the Energy Research Enterprise (EPE), a semi-autonomous planning and research agency linked to the Ministry of Mines and Energy which carries out long-term expansion of the electricity sector (Hochstetler and Trajan, 2016). In summary, the shift away from the state-ownership model deviated in many important ways from the standard model for rebuilding the power sector. According to de Oliveira (2007), the result was that a new hybrid power model was implemented which combined “reformed elements.” The strategy envisioned for a sector increasingly owned and operated by private investors

2 The large generation and transmission utilities owned by Eletrobras d Furnas, Chesf, Eletronorte, Cemig and Copel d continue to be state-owned (see Bajay, 2006).

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emphasized the regulatory role of the Brazilian state. The primary purpose of Aneel was to regulate the new electricity market, provide a check to the power of the Ministry of Mines and Energy, and introduce professionals with technical expertise to administrate electricity issues. Given that sector regulation had remained in the hands of the president and specific ministries prior to this, the privatization of regulation marked a key change in the way in which Brazil managed its networked electricity grid (Amann and Baer, 2005). 3.1. Institutional forerunners to Aneel The prevailing institutional context in Brazil influenced the design and vision for the energy regulator. As previously mentioned, the Brazilian electricity sector was structured around the highly centralized planning of the country's hydroelectric resources. Since the 1960s, a time of rapid expansion of the public sector, the military government had been focused on exploiting its river basins to generate electricity for economic development. In need of a centralized agency to further its interests in hydro-based electric power, the National Department of Water and Electric Energy (DNAEE) was founded in 1965 with the purpose of managing
trico; Abers and Keck, 2006). freshwater resources (Aneel, “Hiso From the 1970s onward, hydropower grew to represent over 80% of Brazil's electricity production, where the world average wavers above 16% (IEA, 2014). Eletrobras had used its control over state funds for building power plants and pursued vast projects such as the Itaipu hydroelectric dam. The expansion of hydroelectric utilities also stimulated the growth of first-rate university programs in engineering and related scientific fields (Abers and Keck, 2006, p. 606; de Oliveira, 2007, p. 31). At the federal level, the reform of the electricity sector centered on how to renovate existing institutions to meet the challenges of privatization. Over the 1980s, DNAEE became increasingly seen as bureaucratically costly and an underperforming organization (Nunes, 2007, p.63). Moreover, having been subordinated to operating as an administrative arm of the Ministry of Mines and Energy, it was absent of any kind of independence or autonomy. By 1995, an organizational alternative which could safeguard investor confidence and transparent decision-making was already being discussed within the department. The image of the new utilities regulator was framed in contradistinction to DNAEE: it would have its own characteristics and independence separate from the interventionist tendencies of the larger administrative bureaucracy (de Oliveira, 2007, p. 32; Nunes, 2007, p. 63; Ribeiro et al., 2009). 3.2. Aneel: institutional structure and public service obligations Aneel was enacted in December 1996 under Law No. 9427, replacing DNAEE and initiating Brazil's administrative tradition with public regulatory bodies removed from the traditional ministerial structures. As the independent agency responsible for the governance of the electricity sector, Aneel was endowed with the purpose to, “regulate and supervise the production, transmission, distribution and sale of electricity in accordance with the policies and guidelines of the federal government” (Law No. 9427, Art. 2). The agency is formally under the umbrella of the MME but is financially and administratively independent from the government through charges levied on electricity generators and distribution companies. A board of five directors is elected by the President and confirmed by the Senate for four-year terms (de Oliveira, 2007, p. 51; Prado, 2012). To ensure accountability and oversight, Aneel presents its accounts to the Federal Court of Accounts (TCU), which are also made publically available on its website.

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The practice of public consultation is another facet that aims to make the regulatory process more transparent and accountable to government and civil society. Aneel interacts regularly with the Senate and Chamber of Deputies during public hearing and technical meetings to summarize its activities and provide clarifications. Furthermore, Aneel must also consult with the public and gather input prior to the establishment or amendment of any sector regulation; the main channels for public engagement being the Consumer Advisory Council and Public Hearings (Aneel, 2016a,b). Advisory councils express concerns regarding tariffs and quality of electricity supply and are formed by representatives of the five main consumer classes: residential, rural, government, commercial, and industrial. In turn, public hearings shine light on the agency and give greater visibility to its actions. While its role as neutral arbiter is emphasized, Aneel was also conceived as contributing to the achievement of other objectives that support the public interest. These practices were based on underlying ideas about the appropriate role of the state in the economy (Gilardi, 2004, p.81).3 The independent regulator was placed at the center of the service regime to manage the private sector, but also to direct regulated utilities to perform public ends. For instance, Aneel has a duty to comply with the social and environmental guidance from government ministers and existing legislation. Under the National Energy Policy Council (CNPE) (Law No. 9478, Art. 1), the duties required of Aneel include …II - to promote development, expand the labor market and enhance energy resources; III - protect consumer interests with regard to price, quality and availability of products; IV - protect the environment and promote energy conservation…VII identify the most appropriate solutions for the electric power supply in different regions of the country; VIII - use alternative energy sources through the economic use of available inputs and applicable technologies. Although the importance of competition is addressed, the other matters mentioned, as well as the breadth of the legislation, provide a basis for the energy regulator to take social and environmental considerations into account. In this context, Brazil has experienced a new growth of public service regulations in relation to the privatized utilities (Prosser, 2000). For instance, following a major energy crisis in 2001, Aneel realized its first major order and required households to save 20% on their electricity bills. The agency then created a public benefit fund and obligated electricity concessionaires to invest in research and development and energy efficiency programs, referred to as the Program for Research and Development (P&D) and Program for Energy Efficiency (PEE), respectively. In the case of energy efficiency, one of the obligations is for the utility company to invest in at least 0.5% of its net operations income on activities aimed at reducing electricity consumption. Aneel sets the standards for the range of activities covered by PEE and P&D projects and has the discretion to accept or reject proposals according to pre-determined benchmarks. The energy regulator thus has responsibilities that exceed the traditional regulatory tasks of rate-setting and overseeing the contracts of power concessions. This broad set of statutory requirements grant Aneel considerable scope for discretion within existing legislations. However, the agency prefers to maintain a presence of impartiality in public

3 A summary of Fernando Henrique Cardoso's (1998) views on this issue can be found in the essay, “Notes on the Reform of the State.” Such views are also reflected earlier in the 1988 Brazilian Constitution, which declares that electricity is a universal right, whether it is directly provided by the state or by private concession.

decision-making. Representatives have repeatedly distinguished their regulatory duties from the federal government, mainly the Ministry of Mines and Energy, emphasizing the long-term mandate of the regulator in contrast to the four-year mandates of the federal government. Regarding electricity generation, Aneel disavows that it makes decisions which explicitly seek to diversify the energy matrix, or that it weighs environmental criteria in its capacity as regulator. In the interest of establishing their own legitimacy within the energy sector, regulators tend to draw attention to their role in facilitating energy auctions and reducing barriers so that projects come online within projected timeframes (D. Rabelo, presentation, Oct. 28, 2014). The agency deploys an effort to portray an apolitical, technical façade to politically sensitive decisions (Dubash and Rao, 2008, p. 326). It ignores how government regulation and Aneel's approach already influence the existing state of affairs, erroneously viewing the status quo as a neutral baseline not actively shaped by regulation. 4. Diversifying a hydropower dominance The market-oriented approach adopted in the late 1990s was technology-neutral: in theory, any energy source could be considered a fair candidate. At the same time, several arguments were being made for cleaner and more diversified electricity sectors that drew on advances in renewable energy technologies. Following the Rio-92 Conference, international and domestic stakeholders advocated for testing more environmentally friendly technologies such as wind, solar, and biomass in Brazil. The fact that Brazil had already tapped into 75% of hydroelectric potential had also been cited as a reason to branch out into alternative energy options. Despite mounting pressures to diversify, the pre-existing hydropower infrastructure, both physical and institutional, continued to create important constraints on the adoption of alternative forms of energy. First, this had to do with the long-term costs of hydropower production: after initial dam construction, the cost of energy is typically very low in comparison to other major electricity sources, hence making it difficult for new technologies to enter the generation market (Cavaliero and da Silva, 2005; del Río and Unruh, 2007). Furthermore, the incipient regulatory structure had inherited institutional endowments from the previous system. A professional elite of electrocrats which hailed from the engineering and political culture cultivated during the golden age of hydropower had been carried into the new regulatory regime (E.P. Silva, personal interview, June 15, 2016). For them, continuing to build up the hydroelectric sector was part of common practice. For example, during restructuring, Aneel passed a resolution to incentivize small hydropower, giving special operational discounts to plants with installed capacities of up to 30 megawatts (Aneel, 1998). Other types of renewable energy facilities, such as wind farms, have had to adapt to these standards that were originally intended to guarantee the expansion of hydropower. The necessary political will to make more systemic changes to the electrical supply system was precipitated by energy crises. Until 2001, there had been no significant incentives for renewable energy technologies in Brazil. Beginning in July of that year, a severe drought had reduced the water levels of hydroelectric dams, resulting in major disruptions and power rationing (Tolmasquim, 2000). The crisis called into question the broader policy environment that had strongly relied on the stable performance of the country’s hydrological resources. The policy impetus which emerged from the crisis led to the enactment of the Emergency
lica). In 2002, Proeo
lica was Program of Wind Energy (Proeo encompassed by the Program of Incentives for Alternative Energy in Electricity (Proinfa) which set an initial feed-in tariff (FIT) to add 1100 megawatts (MW) each of wind, small hydro, and biomass-

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based electricity to the system. Thus, what Brazil refers to as “alternative renewables” were first promoted to reduce the system’s over-reliance on large hydro (Hochstetler and Kostka, 2015, p.80). The government also accelerated the construction of thermoelectric power plants to stabilize supply levels. In 2004, a legal framework to utilize energy auctions as a mechanism to ensure supply adequacy in the country was introduced. The regulatory framework also allows the use of auctions for the development of specific technologies. While many auctions have been restricted to hydro, technology-specific auctions have been conducted for wind, solar, and biomass (Batlle et al., 2010). The auction process is led by Aneel under the guidelines of the MME. Aneel holds regular auctions for licenses to supply electricity to the national grid, with both public and private generation firms participating; those that promise to supply electricity at the lowest prices win.4

5. The role of the energy regulator in promoting non-hydro renewables The fundamental tenets of the original hydropower model still guide energy planning in Brazil. At the same time, regulatory legitimacy and swells of public support have increasingly abetted non-hydro alternatives. A drought in 2015, which primarily affected the country’s southern and central states, provided a renewed stimulus for non-hydro renewable energy sources. Within this context, it is important to underscore how the energy regulator has used these new opportunities to alter long-established policies and relationships with regulated utilities. First, when public support for non-hydro renewables has waned, the basic commitment of the agency to regulatory stability has been responsible for sustaining contracts and technical decisions that govern renewable energy. Beginning in 2016, there has been an oversupply of power due mainly to above-average rainfall that has filled hydroelectric dams, along with reduced power consumption. This has contributed to contradictions between the priorities of the Brazilian government and those of the energy regulator as they co-manage the sector, such as the planning of technology-specific auctions. A few days before the scheduled date, the MME cancelled the only reserve energy auction for wind and solar in December 2016, citing a reduction in national energy demand for the following year (EPE, “Queda de demanda,” 2016). These government decisions based on short-term predictions present challenges for Aneel, requiring the agency to find responsive ways to maintain the credibility of the wider institutional framework which oversees investments in wind and solar. Furthemore, since its creation, Aneel has been given greater influence in the siting, construction, licensing, and operation of generation facilities, especially in acquiring responsibilities for actions that had been pursued by the MME. To understand what this means for regulatory practice, it is important to distinguish between mere influence and the autonomy that regulators enjoy in the formulation and administration of policies. Regulators receive policy guidance from government ministries, but also exercise discretionary power in which they are granted a capacity to pursue come goal in a policy area in ways that best promotes that goal, or in areas where rules are absent, ambiguous, or conflicting (Forsyth, 1999). According to Black (2006a,b, p.157),

4 Similarly, the Brazilian National Development Bank (BNDES) provides credit for many projects at subsidized rates. However, important obstacles to attaining financing from the BNDES include the lack of a domestic supply chain to manufacture component parts and materials and ensure compliance with local content restrictions. For this, see Hochstetler and Kostka (2015).

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Table 1 Installed power capacity in Brazil.

Hydro Thermoelectric Nuclear Wind Solar Total

Installed Capacity (GW)

% of Total Capacity

98.03 41.12 1.99 10.47 0.02 151.63

64.65% 27.12% 1.31% 6.90% 0.02% 100%

a This figure includes large hydro (92.61 GW), small hydro (4.94 GW), and central hydroelectric generators (0.49 GW). b Thermoelectric capacity includes coal, gas, petroleum, and biomass plants. c Distributed generation is not included. Source: Aneel Generation Information Bank (BIG) (2017)

Competing priorities and limited resources mean choices have to be made as to what aspects of regulatory remit a regulator will try to achieve, and those that it will not. The choice is far from new, nor is it necessarily to be deplored or derided e it is an escapable fact of regulatory life. What is new is not the existence of the choice, but the clear articulation of its inevitability and on the terms in which it is being made. In seeking to explain innovation, the following two case studies document how the participation of wind and distributed solar has arisen from distinct decision-making processes between regulators and other institutions. In the case of wind, government, regulators, and the regulated wind industry have now partnered together. Regulatory developments can be better characterized as a “collaborative enterprise” (Prosser, 2010; Gray and Silbey, 2014), whereby regulators work with organizational actors in the wind sector as a collaborator seeking to achieve the public interests behind regulation. In comparison, the regulator’s distinct interpretation of its mandate has advanced the distributed generation and solar sectors, prioritizing consumer interests over the regulated interests of distribution companies. Distributed generation presents an innovative change to the regulatory structure as it significantly challenges the traditional electric utility business model and how the grid is planned and operated. 5.1. Wind energy Following the launch of the Proeolica and Proinfa programs, Brazil's wind energy production started to expand rapidly. In 2015, wind power was the fastest growing energy source in the country: wind represented 39.3% of total supply growth, followed by hydropower (35.1%) and thermal energy (25.6%). Brazil is currently ranked 10th globally in terms of installed wind capacity, and wind energy accounts for 6.9% of the Brazilian energy matrix (see Table 1). Industry stakeholders generally agree that wind power is a suitable alternative form of energy that should be promoted. This is related to its alignments with the underlying hydro-based structure. Wind energy lends itself to a centralized power paradigm. Such as the Brazilian model, which centers not only on power generation but control of the grid. For critics of hydro, wind represents a way of reducing dependence on hydropower without altering the traditional system (Greenpeace Brazil, personal interview, July 5, 2016). Yet, wind power is also seen as a way to complement the hydropower base and contribute to supply reliability. A large percentage of wind generation potential tends to peak in the dry season, just when water levels of dams decrease. Conversely, a problem of wind power is its production intermittency. The amount of energy that a plant can generate varies greatly under different wind speeds. These periods of low wind capacity

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are partially offset by the storage capacity of large hydro reservoirs in the Northeast, providing an operational flexibility that could facilitate their technical and economic integration into the electricity network (Cunha et al., 2012). The technical characteristics of wind power are seen as reinforcement to the existing regime in addition to bolstering energy security. The most important tool for contracting wind power has been the auction-based approach to energy planning. The first exclusive reserve auction for wind power took place in December 2009. The auction attracted a large number of investors, wind equipment manufacturers, and government-owned companies; a total of 13,000 MW in wind power projects were contracted in the auction. The structure of the 20-year contracts required the delivery of completed projects by July 2012, which were tailored to the peculiarities of wind power generation. In particular, specific accounting mechanisms allowed wind farms to compensate for seasonal and inter-annual wind fluctuations. The excellent results obtained in the 2009 auction surpassed most expectations and confirmed that wind power was very close to being competitive with other renewable energy sources. In 2010, wind power was allowed to compete on equal grounds with small hydro and bioelectricity projects in two energy auctions, for delivery in 2013. A final auction took place in December 2011 to contract energy for delivery starting in 2016. As projects contracted during the first three auctions neared completion, the wind industry began to run into problems associated with the construction of transmission lines. When developers build energy projects, they must connect those projects to the transmission grid if they hope to move their electricity to major demand centers. Prior to the intensified development of wind resources, Brazil had the practice of constructing transmission lines within two years. As power lines were extended to the northern and southern extremities of the country where wind production was concentrated, far from demand centers in the urbanized southeastern region, transmission lines began to take
lica, personal interview, Jan 28, roughly four years to finish (Abeeo 2016). As a result, wind farms would be ready for operation, only to have no power lines in place to connect them to the grid, resulting in severe bottlenecks. The government decided that future participation in energy auctions would require proving conclusively that projects had access to transmission lines (CERNE, 2016). Untangling the problem of creating the necessary transmission lines for interconnection has been a regulatory partnership between regulators, government, and the wind industry. The president of the Ministry of Mines and Energy and Aneel decided that they needed a solution to transmission lines that would continue to make wind energy an attractive source for investments. By December 2015, MME and Aneel had a proposal to couple the auctions of wind farms with the construction of transmission lines, though it was unclear how investors would view this proposal and how it would be implemented. The MME turned to the Brazilian
lica), the industry association Wind Energy Association (Abeeo responsible for representing the domestic wind energy sector. Once composed of a small staff which represented the first wind farmers
lica now works across the productive change to in Brazil, Abeeo include wind farm managers to suppliers of wind turbines and
lica is seen as having equipment. According to industry peers, Abeeo high legitimacy in representing the wind sector. The trade association was asked to study a model for wind power producing companies to invest in transmission lines. According
lica, the association to Elbia Gannoum, the president of Abeeo created a working group to design a plan to present to the government. In the meantime, Aneel worked with wind companies to

achieve compliance while facilitating a resolution to the transmission problem. The agency decided not to give into industry requests to wave fines for further project delays, reasoning that this could encourage companies to relax the management of their ventures. However, it responded by working on ways to grant greater financial incentives to companies for constructing transmission facilities within the existing rules and regulatory framework. Aneel also continued to monitor companies through a specialized subsector, the Superintendent for the Management of Electricity Services (SFE), asking companies to regulatory provide updates on the interconnection of wind farms and transmission lines (Aneel, 2016a,b). According to Dubash and Rao (2008), this problem-based approach to regulation significantly departs from the hands-off and quasi-juridical style often emphasized in the literature. Rather than relations between regulator and the regulated being analogous to a contract, they form part of a complex network of interaction between stakeholders who form the broader regulatory space. Aneel’s decisions are certainly not always regarded as positive and can be constructed as an obstacle, especially from the perspective of project developers. The agency’s receptiveness to regularly meet and consult with industry stakeholders to produce compliance, however, make it a collaborative actor in the regulatory process. Technically the principal lobbyist for the Brazilian wind sector, the wind industry association is also considered to be a highly credible actor with considerable experience and expertise to work with regulators and government ministers to resolve problems that arise. 5.2. Solar energy and distributed generation One of the sunniest countries in the world, Brazil has experimented with utilizing its sunlight to generate electricity for the past two decades. The Energy Development Program for States and Municipalities (PRODEEM) and Luz Para Todos (‘Light for All’) were both launched by the MME to bring electricity to primarily rural and isolated communities that were off the main grid (Goldemberg et al., 2004, p. 88). However, these programs did not significantly contribute to building up the domestic solar market. Distributed generation, or small-scale generation at the point of consumption, was implemented on a provisional basis. Solar energy also did not benefit substantially from Proinfa, and currently represents only 2% of electricity generation. From the perspective of Brazilian consumers, the growing interest behind distributed generation revolves around several issues. First, as recognized by the Brazilian government since the 1990s, distributed generation offers the possibility of expanding electricity access to previously isolated communities and potential improvements in energy efficiency. Secondly, smart grid and distributed generation technologies embody an alternative vision of how consumers can reconfigure their traditional relationship with utilities companies. Unlike wind energy, the decentralized nature of the technology is considered to provide a counterbalance to the longstanding model in Brazil of highly centralized power generation associated with investments in transmission and distribution. According to a Greenpeace Brazil representative, the 2016 energy crisis also had the effect of increasing consumer awareness of the fact that the use of emissions-emitting coal and gas-powered thermoelectric plants was being reflected in higher electricity bills. Therefore, in addition to environmental sustainability and energy security, public support for distributed solar energy is based on the prospect of increased choices in energy services and independence from traditional utilities. At the federal level, the oftentimes uncoordinated approaches of the ministerial and planning branches of government fail to

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A. Bradshaw / Utilities Policy xxx (2017) 1e9

provide a concrete vision of solar energy. The medium- and longterm scenario planning of the MME and EPE for 2016 has been optimistic and include an objective of 8.7 GW of PV installations in the 10-year Energy Plan (PDE). This is double of what was stipulated in last year's version of the plan (EPE, 2016). Meanwhile, while the Minister of the MME may publicly express a positive orientation toward renewables, other ministry constituents can hold opposing views. This happens to be the case with the current MME President and Executive Secretary, where the latter has expressed unwillingness to maintain subsidies for alternative renewables (Greenpeace Brazil, personal interview, July 5, 2016). Together, with the unpredictable scheduling of solar auctions, this has not created ideal setting which signals credibility and a coherent vision on the part of the government to attract investments in solar energy. In circumventing inconsistencies at the ministerial level, the regulatory innovation of Aneel for solar energy resides in its concentrated efforts to reduce barriers to distributed generation. The creation and revision of distributed generation regulations is an example of how Aneel uses it discretionary power to promote solar energy through small-scale installations. The milestone for distributed generation in Brazil was Normative Resolution No. 482, approved in April 2012. Resolution 482 formalized the rules for the compensation of distributed generation systems. Customers can install solar photovoltaic panels, in addition to other sources, and inject surplus energy into the system. The credits generated can then be used to offset electric bills through a system known as netmetering. Thus, the policy of government and the prerogative of regulators in regards to solar are not necessarily in conflict. Rather, Aneel has chosen to act on the positive guidance that it has received from government, society, and the MME to advance solar and distributed generation technologies within the scope of its mandate. Resolution 482 established the minimal regulations to kickstart a distributed generation market. The cost of producing solar energy had also begun to diminish on a global scale, assuaging doubts that still lingered about the realistic potential of solar technologies. Domestic experience with solar technologies and distributed generation were growing, and it became apparent that solar energy systems could be made accessible to a variety of consumers. However, concomitant changes to regulations were needed. Since 2012, Resolution 482 has undergone two amendments: the first in December 2012 (Res. No. 517), and the the second in November 2015 (Res. No. 687), which took effect in March 2016. Aneel had to mandatorily consult civil society groups and interact with stakeholder groups before any changes were finalized. Various consumer groups provided technical notes about the state of distributed generation in the country. In acknowledging the societal importance of distributed generation, Aneel also hosted a conference in Brasilia in April 2014, entitled “Micro and Minigeneration Seminar e The Impact of Normative Resolution n
482/2012” (Aneel, 2015). In the regulatory arena, opposition to changes in existing regulations has been centered on the ways in which net-metering would impact concessionaires. As previously highlighted, distributed generation represents a shift in paradigm, testing the highly centralized model from which distribution companies have carved out their operations. In addition, utilities companies have little incentive to grant access to the network. Although the generation source may be owned and managed by a customer or third-party operator, the utility ultimately remains responsible for the overall grid connection as well as the routine operation and maintenance of the meter and related equipment. Brazilian distributors have expressed their reluctance to incorporate distributed generation in various ways. For example, distribution companies have

7

been known to cause delays in connecting systems to the grid. Although connection times have varied by distributor, Aneel estimated that the average connection time between 2013 and 2014 was 160 days, although cases existed where this was over 400 days (Aneel, 2015). Before the passage of the new regulations, a final public hearing in December 2015 allowed stakeholders to express their concerns and provide information for Aneel. Stakeholders who favored a more progressive interpretation for Resolution 687 were concerned about the various subgroups of consumers that would still be excluded without additional regulatory provisions. Distribution companies, who were generally opposed to the changes, contended that their financial viability would be undermined under the new model. They argued that net-metering consumers use distribution networks to transport the power from the location where the energy is produced to where the energy is consumed, at a cost to concessionaires. At the final public hearing to discuss the resolution, this view was represented by Light, the concessionaire of Rio de Janeiro, which argued that the distributor would pass on this cost to consumers who did not own a distribution system. The Brazilian Association of Electricity Distributors (ABRADEE), the industry group which represents distribution companies, also challenged the revision of Resolution 482, arguing that Aneel was overreaching its authority (ABRADEE, 2015). The final version of Resolution 687 was regarded by stakeholders who defended the changes as a forward-looking piece of regulation on the part of Aneel. Under the new rules, limits on the installed capacity of units increased from 1 MW to 5 MW. Utility companies were also obligated to connect generating units within 49 days. Furthermore, to the chagrin of distribution companies, Aneel augmented tax benefits for solar power deployment. In particular, the agency increased the existing discounts in transmission and distribution system usage charges for owners of distributed generation systems.5 In justifying its decisions, Aneel cited that not doing so would infringe on the “non-discriminatory treatment to all users of the transmission and distribution systems” (J. Coelho, 2015). Moreover, in referencing the same article to affirm its constitutional authority to support solar energy, Aneel has used the scope of its mandate to devise solutions to the emergent challenges of distributed generation in Brazil. In lieu of clear guidelines for how to address the regulatory issues that arise from inserting the new technology into the electricity system, Aneel has had to defend how these new rules and regulations would benefit energy consumers. In effect, the energy regulator has been both reactive and proactive: Aneel has crafted the regulations that govern distributed generation from the extensive process of consultation and responding to industry concerns, while exercising a more robust interpretation of its mandate. Besides largely siding with owners of distributed generation systems on the issues of installation, allowable capacity, and transmission pricing, the new rules further allowed solar energy systems to be used beyond traditional rooftop generation. Consumers can now generate energy far from their consumer unit through virtual net-metering, aggregated netmetering, and community sharing. In particular, aggregated netmetering allows condominiums and apartment buildings to install a generating unit and distribute the credits among the units. ~o This regulatory change is impactful for urban centers such as Sa Paulo and Rio de Janeiro where condominiums comprise a significant portion of housing stock (see Table 2).

5 These include discounts on the Transmission System Usage Rate (TUST) and on the Distribution System Usage Rate (TUSD).

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8

A. Bradshaw / Utilities Policy xxx (2017) 1e9

Table 2 Number of accumulated distributed generation connections.

7000 6017 6000

5574

5000 4165 4000 2737

3000 1807

2000 1159 1000 4

6

15

41

564 297 429 73 123 193

775

0

Source: Aneel (2016c)

Lastly, the agency has acted in critical secondary ways to facilitate the expansion of distributed generation. Aneel has utilized its discretion in overseeing the qualification standards for energy efficiency and R&D programs as an opportunity to steer domestic developments in solar energy. In conjunction with the revision of Resolution 482, since late 2015 Aneel has launched several public calls for projects focused on solar energy, such as photovoltaic systems, general research, and improvements in energy efficiency using solar energy (Aneel, 2015). According to a solar project developer, this has created added supports to increase regulatory credibility, demonstrating a clear and concerted effort on the part of Aneel to saturate the energy matrix with solar (personal interview, July 10, 2016). The agency has also demonstrated aggressive positions on other policy areas that affect the success of solar energy and distributed generation, such as taxation. For example, different federal and state taxation policies (namely, “PIS,” “COFINS,” and the “ICMS”) have prevented solar from being profitable. Although the agency was careful in stating that tax policy is not under its jurisdiction, the opinion offered by Aneel was that taxation should focus only on the difference, if positive, between the final values and energy consumption surplus injected..

arisen directly from inside the regulatory regime and Aneel’s strategic interpretation of its mandate. These regulatory lines of action target different facets of the well-established hydroelectric system, carving out an opening for wind and solar within the larger policy context. Nevertheless, this article acknowledges the potential drawbacks of conceding more authority on public policy issues to regulatory agencies in Latin America. Indeed, such agencies could be used as mere “arms of the state,” or to pursue an unrestrained range of aims at the cost of sectoral performance. However, this article does not unquestioningly concede that, therefore, such agencies are “captured” or necessarily afflicted with weak legitimacy, which could mean a reaffirmation of the standard model and economic justifications for regulation. In conclusion, regulation for environmental and sustainability reasons can be worthwhile, and a collaborative partnership between regulators and government can be a way to ensure that the core functions and benefits of independent economic regulation are not undermined. The evidence of how energy regulators in Brazil respond to their to their mandate to promote wind and solar energy suggests that this can be achieved.

6. Conclusions

References

A key question raised by regulatory reforms is what issues policymakers choose to address, and how. As Haber (2010) notes, more interesting cases, and the one on which this article has focused, is that of politically or socially important policy goals incompatible with the basic tenets of the new regulatory regime. The development of wind and solar energy has been demonstrated to be one such goal in Brazil. The institutional context that has been shaped by a highly centralized hydropower system has been essential in determining how the current energy transition is taking place. This article argues that regulatory innovation within power sectors reform has had an important role in overcoming the technological and institutional lock-out of wind and solar. Despite efficiency and competition having served as its organizing principles, the Brazilian energy regulator has used its technical expertise and authoritative discretion in an effort to change the current state of energy infrastructure. Bottlenecks in the interconnection of wind facilities have been gradually untangled by an intuitional arrangement between regulators, government ministries, and industry groups. In the case of solar, the motivation to facilitate the diffusion of distributed generation technologies has


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Amanda Bradshaw ([email protected]) is a doctoral candidate in the Graduate School of Architecture, Planning, and Preservation at Columbia University and a Visiting Research Scholar in the Graduate Program in Energy Planning at the State University of Campinas (Unicamp).

Please cite this article in press as: Bradshaw, A., Regulatory change and innovation in Latin America: The case of renewable energy in Brazil, Utilities Policy (2017), http://dx.doi.org/10.1016/j.jup.2017.01.006