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INVESTMENT PLANTS: An illusion within everyone’s reach!

By Renato Zimmermann

A warning sign has gone off in the Distributed Generation electricity market due to the large number of people who are building plants in the hope of an extra source of income. "The so-called “investment plants”.

The model works as follows:

The investor builds a plant and a company that sells surplus credits of kilowatts/hours formalizes a rental contract for a long term, allocates these credits to a final consumer who will offset their electricity consumption as surpluses using a mechanism called SCEE ( Electricity Compensation System), provided for in Federal Law and regulated by the ANEEL Regulatory Agency.

In short, this mechanism allows generation made in one location to be compensated in another, as long as generation and compensation occur within the same area of operation of the energy concessionaire. In this mechanism, the concessionaire is responsible for monitoring the regularity of generation and also needs to record monthly, presenting the reading and result of active energy injected and compensated on the energy bill.

In this business model, the energy consumer is attracted by a reduction in their consumption bill without the need to invest or install photovoltaic panels, and at the other end, an investor is seduced into making an investment through the promise of paying a monthly rent. Trading companies act as intermediaries and charge for this service provided.

This article was written to clarify that there are risks that are not being presented to investors and because of this there is an unbridled rush of companies offering this investment model. The movement has intensified since mid-2023 when integrators felt the drop in sales and the need to open new market niches.

We carried out an analysis of some of these commercial offers and from this we found that the projections of economic and financial viability present gains and returns on investment far above traditional investments.

In some offers, earnings are equivalent to 200% of the basic interest rate, the SELIC. Analysts and credit managers have been trying to interpret these movements, concerned about the increase in the volume of people seeking financing to invest in the acquisition of their plants.

Apparently this is very positive for the sector, as the companies that supply generation systems are able to move larger quantities of equipment since these plants have a higher investment value compared to systems purchased to generate and compensate for their own energy consumption.

In some cases, microgeneration plants are offered for R$400,000, while for minigeneration plants the volume can exceed R$10 million. The companies that offer offers to interested investors are known as solar energy integrators, companies that are making sales, visiting their customers, sizing the systems, building and approving the plants with the concessionaires. For these companies, selling plants as an investment was a salvation in sales that plummeted in 2023. A significant drop in sales was caused by the end of the Federal Law's vacancy period, and new sales and installations began to be charged for the use of wire for the excess kilowatt hours that were injected into the public electricity grid.

After evaluating several spreadsheets and feasibility studies of “Investment Plant” offers, we observed that many inherent regulatory risks are not being measured and that they are not yet properly regulated by the regulatory agency, ANEEL. There are many risks to be highlighted, the main one is that many providers are disregarding the lack of definition of rules from 2029 pending definition. The rule provides for the staggering of B-wire charges until the end of 2028 (see table below), but from 2029 onwards, anyone building a solar plant will enter into the new rules without knowing what will happen to their investment from then on.

Another point that deserves attention when evaluating feasibility studies is overestimated future adjustments. Considering energy inflation by taking past tariff increases and implying that this past adjustment will be repeated in the future is very risky. In 2022 and 2023, energy bills increased less than market inflation, that is, the investment had a negative annual adjustment. To apply the annual adjustment, most contracts use the parameter of the energy tariff value where the energy will be compensated, even though it is not permitted by law, there are mechanisms for applying these adjustments without violating legal precepts.

A positive fact about this business model is that it also serves all other ways of buying and selling solar energy systems.

TUSD-Generation charge on microgeneration.

ANEEL Normative Resolution 1,059/23 brought this negative news to microgeneration, including to plants under the old rule. This involves charging a tariff on generation and injection into the network, called TUSD-g. Charges have not yet started because utilities need to exchange their current measuring clocks for a new one that also reads the power injected into the grid. For investment plants, this will result in a drop in profitability as the generator will be the one paying this new tariff. Little is heard about because the dominant issue is the reverse flow of power, but the charging of tariffs on microgeneration will be the sector's new source of complaints.

Opening of Free market.

In the coming years, the low voltage markets, where investment plants currently allocate kilowatt-hour credits, could migrate to the free market. This means greater competitiveness in the electricity sector, which is positive as it will reduce prices, but for investors, this will mean a reduction in rental values received.

Taking Subsidies from ANEEL to review the model.

The Regulatory Agency's role is to promote balance between market agents and monitor whether the rules are being complied with. The Federal Law (14,300/22) in its article 28 says that “MMGD are characterized as energy production for own consumption”. So the directors decided to open a subsidies process to gather more information and evaluate whether this plant leasing model is correct or whether it needs new regulatory commands. In this aspect we are facing a regulatory risk, since thousands of plants were built for rental and extra income and an interpretation and change could bring barriers to the continuity of the framework within this model and could bring frustration to investors who did not even know about the existence of this risk.

Adjustment of energy tariffs.

With increased competitiveness and energy supply, it is possible that energy bills will not be remunerated above market inflations such as IPC and IGPM. This risk exists and must be better assessed. Many simulations carry this adjustment with great optimism, artificially increasing future remuneration simulations. Therefore, considering something above 6% in financial simulations is being very optimistic and in some simulations evaluated, projects showed inflation of 8% and 10%.

Property risks.

Building an investment plant requires at least taking out a property insurance policy, so events such as cyclones, hail, lightning and even theft can be mitigated. However, the risk is patrimonial, in the event of an accident event, the plant will stop generating for a period of time, which will result in financial losses. To mitigate property risks, it is recommended that the investment be made in a safe location with some type of monitoring such as alarms, fences and monitoring cameras to inhibit attempted theft of equipment and cables. It's always good to have someone to respond to alerts in case of an attempted invasion of the plant's perimeter.

Imagining that a plant with 200 modules can generate an average volume of 155 thousand kilowatts/hour per year, this could generate a monthly income for the investor in the range of R$6 thousand per month. From 2025 onwards this value will fall depending on the application of the wire staggered charging rules. But if you consider that ANEEL will define the payment of 100% of TUSD, a scenario that is not ruled out, this value of R$6 thousand could fall to R$2 thousand per month, leading investors to become frustrated and seek clarification. Then a conflict will begin as the points listed above should come as no surprise. If the risks were not highlighted by the seller, someone in the future will demonstrate the flaws in the assessment caused by the concealment or lack of attention to them. Thus, the rental contract may fall into a legal dispute due to damage to the investment.

So it is worth rethinking that given these variables, either the assumptions are in fact more realistic, or future problems in the commercial relationship will be inevitable. When the energy concessionaire arranges for the current bidirectional clock to be exchanged for a four-quadrant clock that will measure the injected power, the TUSD-g charge will begin to be charged on the generating unit's invoice, reducing the profitability of the project carried out by the investor.

Remembering that many people make this investment as a retirement, future recurring income and many families invest expecting this income in the long term. They compromise their savings and then they will not accept blame directed merely at the Regulatory Agency, the government and politicians as this will not bring their dreams back.

Renato Zimmermann

Mentor and Consultant

Youtube Channel:  Energy & Trans

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