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Covid-19 impacts on the energy sector

08/04/2020

COVID-19 impacts the power sector creates numerous uncertainties.

ANEEL’s Board of Directors approved on March 24, 2020, at an Extraordinary Public Meeting, several measures to ensure the continuity of the energy distribution service during the COVID-19 pandemic. The measures will be valid for 90 days and may be extended. The main measures are as follows: temporary suspension of face-to-face public service by distribution utility companies; prohibition of suspension of the energy supply to urban, rural and essential services consumer units in case of lack of payment; and prioritization and preservation of the energy supply to essential services activities (under Decree No 10,282/2020 and article 11 of the Normative Resolution 414/2020) by concessionaires.

ANEEL also issued Ordinance No. 6,310, on March 25, 2020, which provides measures related to the proceeding’s deadlines, suspended for 30 days. ANEEL’s decisions will, however, continue to be published through electronic means. The Ordinance also suspends face-to-face services and establishes that deliberative meetings of the Board of Directors will be exclusively virtual until April 28, 2020. Oral statements may be recorded and forwarded to ANEEL. Finally, the Ordinance provides a 90-day suspension of the delivery deadlines for energy generation, transmission and distribution agents, based on the statements set forth in the Accounting Manual of the Energy Sector (MCSE) and in the Asset Control Manual of the Energy Sector (MCPSE).

After a year of relative frustration in the energy sector in 2019 due to the low demand contracted in the generation auctions, 2020 was met with great expectations in relation to Brazil’s economic recovery and, consequently, the growth of the energy sector. Yet the situation changed radically due to the COVID-19 pandemic.

On March 30, 2020, the Ministry of Mines and Energy issued Ordinance No. 134, which indefinitely postpones all generation and transmission auctions scheduled for 2020, namely: Auction for Existing Energy “A-4” and “A-5” of 2020, Auction for New Energy “A-4” of 2020, Auction for New Energy “A-6” of 2020, Auction for Concession of Energy Transmission Public Service, and Auction for Contracting of Supply Solutions for the Isolated System. 

The global crisis resulting from COVID-19 can also impact construction projects. Delays in these projects that are awarded in energy auctions can result in heavy penalties before the regulator, based on the current and applicable laws and regulations, as well as due to large exposures with respect to the commitments undertaken with other parties in the sector, whether in energy generation or transportation. 

It is important to verify the potential exclusion from liability for any delay (or difficulty or impossibility of fulfilling any other obligation), taking into account that the pandemic could represent an event of force majeure.

In addition, it is essential that there is no mismatch between the force majeure clauses/events provided for in the construction contracts and other contracts under which the developer undertook commitments linked to the operation of the asset. Otherwise, the mismatch may cause substantial exposure either by the developer or by the supplier/construction company. 

With respect to the energy free market, contracts negotiated between large consumers and energy generators or traders usually provide for force majeure clauses that exempt the party who fails to comply with certain obligations. However, due to the closure of several industries, as recently reported, we may see the activation of these force majeure clauses, which could lead the sector to a new wave of “judicialization”.  

Energy planning, at least for the short and medium terms, is being reconsidered. New legal and regulatory extraordinary measures may become necessary.  

We recommend that companies operating in the energy sector (i.e., generators, transmission companies, distribution companies, traders and consumers) monitor eventual new measures and the impacts of the pandemic, as well as the conditions agreed upon under their contracts and the current regulations, to mitigate risks to the maximum extent possible.   

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