Curtailment: the cross-subsidy that threatens the energy transition

The accelerated expansion of wind and solar generation in Brazil has been producing, at peak generation hours, more energy than the system can absorb — whether because of transmission-grid limits or insufficient demand in those periods. To preserve system stability, the National Electric System Operator (ONS) has been ordering cuts to contracted generation — so-called curtailment. The underlying question, which mobilizes investors, regulators and courts, is simple and carries billion-real stakes: who pays this bill?

The thesis that the burden should fall on the generator, currently debated in the sector, is legally fragile and economically dangerous. Shifting to energy producers the cost of a dispatch decision that benefits the system as a whole amounts, in practice, to instituting a cross-subsidy: some finance what should be paid by all.

To understand the controversy, it helps to distinguish two contractual universes. In the trading environment — both the regulated contracts arising from auctions (CCEAR) and the bilateral contracts of the free market — the generator sells a defined quantity of energy and, in return, assumes risks inherent to that commitment: price swings, physical backing, hydrology, modulation. That is the logic of the market, and within it part of the revenue volatility naturally belongs to the generator.

Reserve Energy Contracts (CER), by contrast, are of a different nature: created as a mechanism of systemic security, they do not allocate energy for immediate consumption but contract additional availability for the National Interconnected System (SIN). Cuts determined by grid limitations or by centralized dispatch do not stem from any fault of the generator or from a risk it has contractually assumed. They are system decisions, taken in the interest of the entire community of consumers.

For costs of this nature, the legal framework created a dedicated instrument: the System Service Charge (ESS), paid by all consumers and expressly provided for in Article 1, §10, IV, of Law No. 10,848/2004, which covers generation-curtailment and load-relief schemes. When this cost is shifted to a fraction of the generators, the statutory mechanism is hollowed out and a cross-subsidy is created with no legal basis.

The recent legislative landscape reinforces this reading. Law No. 15,269/2025 regulated specific instances of compensation for curtailment in trading-environment contracts, limited to cuts due to external unavailability and reliability reasons. The Executive vetoed extending compensation to cuts caused by oversupply. As to Reserve Energy Contracts, the law was silent — and that silence does not authorize transferring the costs to the generator. The CER remains governed by the logic of availability and by the ESS mechanism, which the new law did not reform. By choosing to legislate narrowly, Congress confirmed that the redistribution of systemic charges is a matter for legislation, not for administrative act.

The issue is not new to the Judiciary. In 2016, the Federal Regional Court of the 1st Region decided an analogous case and established three premises that remain current: the National Energy Policy Council has no authority to impose financial burdens between sector agents; measures that create subsidies must be submitted to Congress, under Law No. 9,478/1997; and Article 175 of the Constitution reserves to statute the definition of tariff policy and of the concessionaires' regime. In other words, redistributing the funding of the system by administrative act is a matter susceptible to judicial review — and, in several scenarios, challengeable with a relevant probability of success.

The economic consequences reinforce the legal argument. The CER is an instrument of public policy: the State summons private capital to build additional capacity to reinforce system security and remunerates that availability under known contractual rules. Reallocating to the generator, by administrative act, losses arising from systemic cuts raises the perceived regulatory risk, increases the cost of capital in upcoming reserve auctions and compromises the bankability of projects. The effect is paradoxical: in trying to spread the system's operating burden onto the investor, one weakens precisely the instrument that sustains the security it seeks to preserve. Added to this is an equity distortion: many reserve plants are not even part of the basic grid and have no control over the transmission bottlenecks that motivate the cuts. Penalizing them for structural constraints beyond their control is the antithesis of efficient risk allocation in infrastructure.

The solution does not require reinventing the system, but respecting it. Systemic-balancing costs affecting the CER should flow through the ESS, as provided by law. Instances of compensation to the reserve generator should be clearly delimited, restricted to cases such as proven external unavailability. The ONS should ensure technical transparency as to the grounds for the cuts, allowing the correct classification of events. And if reforms to the allocation of reserve charges are deemed necessary, let them be made through transparent legislative or regulatory channels, with impact assessment and respect for the legitimate expectations of those who invested under the prevailing rules.

System security depends less on proclamations and more on contractual predictability. Reserve Energy Contracts are the instrument through which the State summons private capital to sustain grid reliability amid the energy transition. To transfer to them, by oblique means, the burden of decisions arising from centralized operation sends a bad signal to the market — and the cost of that perception will fall, as always, on the consumer, in the form of higher tariffs and a less reliable matrix than the one being announced.