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Aurora Energy Research has identified five key challenges in the current regulatory framework that could impact the auction: the high tax burden, the classification of grid usage charges for storage systems, the allocation of arbitrage revenues, uncertainties regarding the remuneration of ancillary services and the lack of definition regarding the association with solar plants. Brazil’s Ministry of Mines and Energy has launched a public consultation to gather input on the design of the battery capacity reserve auction, scheduled for June this year. However, pending regulatory uncertainties over battery storage could hamper investment. “Currently, regulatory uncertainties combined with a tax burden representing 25% of battery CAPEX increase project costs, which are ultimately passed on to consumers. International experience shows that batteries can reduce system costs by participating in ancillary services and through arbitrage. However, the proposed auction model prevents developers from capturing these latter revenues, redirecting arbitrage profits into a dedicated fund to finance the model,” says Matheus Dias, Research Associate at Aurora Energy Research, a global provider of energy analytics. The consultancy identified five key challenges in the current regulatory framework that could affect the auction: the high tax burden, the classification of grid usage charges for storage systems, the destination of arbitration revenues, uncertainties about the remuneration of ancillary services and the lack of definition regarding the association with solar power plants. “Brazil has the opportunity to develop a competitive energy storage market, but current rules could push project costs beyond the ideal level. Simulations indicate that hybrid projects, such as solar + BESS, could offer prices 19% lower than off-grid battery systems, but their eligibility for the auction is still unclear,” says Dias. “In addition, allowing developers to retain arbitrage revenues and participate in ancillary services would allow batteries to compete on a level playing field with other technologies, such as thermal, while reducing costs for consumers. Without these adjustments, the auction risks poor competition and unnecessarily high costs for both the system and consumers.” See the breakdown of the challenges identified by Aurora Energy Research: Tax share of battery CAPEX : Taxes currently account for 25% of the CAPEX for lithium-ion batteries, significantly increasing project costs. In a capacity market model, these costs are ultimately passed on to consumers. Providing tax incentives similar to those applied to solar cells and inverters could reduce the tax burden by up to 68%, allowing bids in the capacity auction to be 13% lower compared to the current situation. Defining the grid usage charges category : The absence of a specific regulatory framework creates uncertainty about which grid charges apply to batteries, whether they should be classified as consumers or as generators. This distinction is essential because average charges vary significantly between subsystems in Brazil, affecting the competitiveness of batteries and creating implicit location signals that can influence project allocation. Destination of arbitrage revenues : The Ordinance suggests that revenues obtained from market arbitrage (loading and discharging cycles) be allocated to CONCAP, a public account used to fund capacity payments, rather than being retained by developers. Allowing developers to capture arbitrage revenues could reduce bids in the capacity auction by 17% in the Northeast and 9% in the Southeast (assuming the application of network tariffs for generation). In the current model, the ONS determines the timing of discharging but not the timing of loading, which can lead to suboptimal strategies and increase overall system costs. Definition of participation in ancillary services and their remuneration : The ordinance does not clarify how batteries could participate in ancillary services, nor how they would be remunerated. Internationally, battery storage plays a key role in these services due to its fast response (milliseconds to seconds), high precision, bi-directional capability and location flexibility. In several markets – such as France, Germany, Poland and Belgium – ancillary services represent the main source of revenue for batteries, with up to 95% of the total. Fast Frequency Response (FFR) service is the main source of revenue in 70% of the countries analysed. Allowing batteries to participate in ancillary services could significantly reduce bids in capacity auctions and consequently system costs. Eligibility of batteries associated with solar plants (Solar + BESS) in the auction : The ordinance does not specify whether energy storage projects together with solar generation (e.g. solar + BESS) can participate in the auction. Simulations performed with the Chronos model indicate that hybrid solar projects with batteries could bid 19% less than stand-alone battery projects. |
