Eletrobras capitalization signed into law

President Jair Bolsonaro has signed a bill converting Provisional Measure No. 1,031 of February 23, 2021 into law, with certain vetoes. Among other provisions, the new law establishes the capitalization of Eletrobras and promotes regionalized contracting of gas-fired power plants and the extension of Proinfa contracts.

Law No. 14,182, of July 12, 2021 (Law No. 14,182/2021) provides that Eletrobras will be privatized by increasing the company’s capital, with the public subscription of common stock and the Federal Government ceding its subscription rights.

In addition, the increase in capital may also be followed by a secondary public offering from the Federal Government or the companies it controls.

Among the conditions for capitalization established by Law No. 14,182/2021, it is worth highlighting the corporate restructuring for maintaining Eletrobras Termonuclear (Eletronuclear) and Itaipu Binacional under the Federal Government’s direct or indirect control, and new electricity generation concession agreements for the Sobradinho, Tucuruí, Curuá-Una, Mascarenhas, and Itumbiara hydroelectric plants under an independent power production framework, as well as for those plants under the control of Eletrobras currently operating under a quota framework as outlined in Federal Law No. 12,783/2013.

In the spirit of turning Eletrobras into a true corporation, Federal Law No. 14,182/2021 also establishes that Eletrobras’ bylaws must be amended to prohibit any shareholder or group of shareholders from holding more than 10% of shares with voting rights; prohibit shareholders executing agreements in regard to voting rights; and provide for a special class of preferred shares (golden shares) owned by the Federal Government with veto powers in corporate resolutions.

Contracting of gas-fired power plants

Federal Law No. 14,182/2021 also provides for regionalized contracting of gas-fired power plants. This must take place through capacity auctions in each of Brazil’s main geographic regions, as follows:

• Northeast: 1,000 MW in the metropolitan areas of states which do not have a natural gas supply point in their capital;

• North: 2,500 MW in state capitals or metropolitan areas where it is viable to use proven reserves of natural gas in the Amazon region, ensuring the supply of at least two capitals that do not have a natural gas supply point;

• Midwest: 2,500 MW in state capitals or metropolitan areas that do not have a natural gas supply – with an inflexibility of at least 70% for natural gas – for the delivery of 1,000 MW of gas-fired energy generation in 2026, 2,000 MW in 2027, and 3,000 MW in 2028, with a 15-year supply period; and

• Southeast: 2,000 MW, of which 1,250 MW is for states with a natural gas supply and 750 MW is for States in the Superintendency for the Development of the Northeast’s (Sudene) area of influence without a natural gas supply – with an inflexibility of at least 70% for natural gas – for the delivery of 1,000 MW of gas-fired energy generation in 2029 for states with a natural gas supply and 1,000 MW in 2030 (250 MW for states with a natural gas supply and 750 MW for states in Sudene’s area of influence without a natural gas supply point), with a 15-year supply period.

Extension of Proinfa Agreements

Regarding hydroelectric energy generation, Federal Law No. 14,182/2021 also sets forth a 20-year extension for contracts arising from the Brazilian Incentive Program for Alternative Electricity Sources (Proinfa). It also requires the contracting of hydroelectric power plants with an installed capacity of up to 50 MW to represent a minimum of 50% of declared demand by distribution utilities participating in ANEEL’s Power Auctions A-5 and A-6 (to be conducted until 2026), until a total of 2,000 MW is contracted. Upon reaching this mark, the hydroelectric market stock in future auctions must be a minimum of 40%. In addition, Federal Law No. 14,182/2021 provides that hydroelectric power plants participating in Auctions A-5 and A-6 will not be entitled to discounts on wheeling charges.

President Jair Bolsonaro has vetoed certain parts of Provisional Measure No. 1,031/2021. The vetoes include: the possibility of current of former employees of the Federal Government purchasing its remaining shares; prohibiting the extinction, incorporation, merger, and change of domicile of Eletrobras subsidiaries after the privatization process; and the need for the Federal Senate to approve newly appointed members of the Board of Directors of the National Grid Operator (ONS).