Novo Mercado de Gás – The Brazilian gas market enters a new era

The New Gas Law lays the foundations for a gas market in Brazil that fosters competition among market participants and improves efficiency. The Novo Mercado de Gás (New Gas Market) reform programme is expected to enhance the physical flexibility of the gas system, enable gas to be delivered more quickly, and facilitate the integration of a higher share of intermittent renewables into the Brazilian energy system. In the longer term, an open, competitive gas market can more easily adapt to a multi-gas system that includes and deploys low-carbon gases. At the request of the Brazilian government, the International Energy Agency (IEA) has been providing technical advice based on international experience to inform and shape the country’s gas market reform programme from day one. 

The New Gas Law provides the legal framework for the transition from a vertically integrated to a liberalised and competitive market structure, based on four key principles:

• Unbundling: Gas network operators cannot be directly or indirectly controlled by companies involved in other activities along the gas value chain, including exploration, production, importation or commercialisation.
• Third-party access: Market participants should be granted access on a non-discriminatory basis under a regulated regime in the case of transport pipelines and a negotiated regime in the case of essential facilities such as gathering pipelines, processing plants and liquefied natural gas (LNG) import terminals.
• Entry–exit transport system: Moving from the current point-to-point gas transport model to a network access regime will allow shippers to book entry and exit capacities independently from each other, enhancing the flexibility of the gas system.
• Transparency: Network operators provide market participants with operational transparency by available transport capacity and tariffs related to transport services.

An open, competitive gas market could greatly benefit Brazil’s economy and boost its recovery from the global economic crisis caused by the Covid-19 pandemic. Brazil is among the countries with the highest natural gas prices for the industrial sector, which accounted for over 45% of the country’s gas consumption in 2019. 

Brazil’s gas prices are high mainly because of price-setting mechanisms embedded in sales contracts. Because these are typically linked to oil products, they do not necessarily reflect the underlying supply-demand fundamentals of the Brazilian gas market. Enhanced competition on the wholesale market and the establishment of natural gas hubs – where effective and transparent price discovery takes place – could push down domestic industrial gas prices. Brazil’s Ministry of Economy estimates that domestic gas prices could decrease by 40% in the coming years as result of gas market reforms. This decrease could significantly improve the international competitiveness of the industrial sector, which accounts for one-fifth of Brazil’s GDP, and increase the country’s industrial GDP by 8.4%, according to estimates by the government.

Gas market reforms are complex and lengthy, involving many different interested parties. While successful market design choices are rarely replicable from one country to another, international experience can help to orient policy makers so that they design solutions adapted to their country’s particularities. Calling on international experience is also instrumental in creating consensus among everyone involved and ensuring their engagement – a critically important component for any successful reform process.

Brazil joined the IEA as an Association country in October 2017, in line with the IEA policy of “opening the doors” to major emerging economies. Since then, collaboration has expanded to a wide range of topics. These include not only energy efficiency and clean energy innovation but also power and natural gas markets – areas that are undergoing considerable reform in Brazil.

Since 2018, the IEA has been providing technical advice to Brazil’s natural gas market reform process by facilitating access to international best practices. This sharing of international experience has informed crucial policy and regulatory discussions as well as market reform implementation. Thanks to the support of the United Kingdom’s Prosperity Fund, the IEA led a multi-year technical dialogue and peer review process. This has involved more than 25 natural gas experts representing government, academia and the private sector from ten IEA member countries, as well as a wide variety of Brazilian stakeholders. In 2018 the IEA published the report, Towards a Competitive Natural Gas Market in Brazil, which will be followed by the white paper, “Implementing Gas Market Reform in Brazil: Insights from European Experience” to further disseminate international best practices.

The key principles formulated in those papers – unbundling, non-discriminatory third-party access, an entry–exit system and transparency – are reflected in the New Gas Law adopted by Brazil. They will play a key role in the transition towards a more open and competitive gas market.

The principles formulated in the New Gas Law will need to be translated into a detailed regulatory framework defining the common rules of the daily operating regime of the New Gas Market programme, including gas network services, hub design and market surveillance.

The creation of a well-functioning wholesale market requires common rules, known as network codes, which regulate third-party access to the gas system and the services provided by transmission companies. For example, European network codes and guidelines include rules for allocating capacity, managing congestion, setting tariffs, balancing services, interoperability, transparency and data exchange. Their development should be driven by the regulatory authority in close co‑operation with the unbundled transmission system operators and the market area managers. 

In tandem with network codes, the design of trading hubs will play a vital role in developing the market in the coming years. To ensure that traded volumes and liquidity increase, it will be crucial to clearly define hub access rules, designate a hub operator and determine the services the hub operator shall provide in addition to title transfer. A hub operator can enhance the short-term flexibility and the physical firmness of the hub by providing a range of commercial services to market players.

It will also be essential to establish the legal and institutional framework of market surveillance – the monitoring of wholesale gas trading to detect and prevent market manipulation. Market surveillance is particularly important in the early phases of hub development, when liquidity is still low and the risk for market manipulation by a dominant player is high. Supervision of the market and detection of anti-competitive behaviours by an independent institution can also play an important role in building trust among participants.

International experience-sharing can further support Brazil’s Novo Mercado de Gás reform programme in the crucial next steps of developing network codes, establishing trading gas hubs and by sharing best practices and lessons learned relevant to market surveillance. 

As well as fostering competition among market participants and improving efficiency, the New Gas Market reform programme is expected to facilitate the integration of a higher share of intermittent renewables into the Brazilian energy system. By enhancing the flexibility and short-term deliverability of the gas system, the reforms will enable gas-fired power generation assets to provide fast-responding back-up capacity to balance intermittent renewable energy sources such as wind and solar, which are rapidly becoming an important part of the Brazilian power generation mix. According to Brazil’s Ten-Year Energy Expansion Plan 2029, the share of intermittent renewables in the country’s electricity mix is expected to reach 20% by 2030. Gas-fired generation could also play an important role in increasing the climate resilience of Brazil’s hydro-dominated power system, as the variability of hydrological inflows is expected to increase in the coming decades.

The deployment of renewables in combination with gas-fired power generation will reduce reliance in the power sector on more carbon-intensive fossil fuels, such as coal and oil products. Coal- and oil-fired generation capacity is expected to decline by close to 70% by 2029. 

In contrast with the commercial and operational rigidities of a vertically integrated model, the regulatory framework underpinning an open and competitive gas market could facilitate the inclusion in the gas system of several low‑carbon gases – such as biomethane, hydrogen and synthetic methane – as well as enabling their cost- and time-efficient trading. The effective deployment of low-carbon gases would further require supporting schemes and market rules on the non-discriminatory application of blending limits, interoperability, enhanced data exchange and quality-neutral gas trading. This longer-term prospect should be further taken into consideration when the current regulatory framework is developed.

This successful collaboration between the IEA and Brazil extends well beyond Brazil’s Novo Mercado de Gás. It has become a model for several IEA projects with Brazil, including on power sector modernisation and carbon pricing, as well as similar projects with other key emerging economies around the world. The IEA remains firmly committed to supporting Brazil’s Ministry of Mines and Energy by providing inputs to its ambitious projects, facilitating access to international expertise and best practices, and drawing on the IEA’s leading expertise across all fuels and all technologies to enable Brazil to achieve its objectives for a secure, sustainable energy future.