Costs in the electricity sector threaten to "extinguish" the rush to the free energy market.

A groundbreaking survey conducted by energy operator Bow-e with over 200 consumers across the country, which NeoFeed had first-hand access to, reveals that 72.6% of respondents would like to decide which company to buy electricity from starting in 2028.

This is the date when the option will be available to all residential consumers with the opening of the free energy market – currently restricted to large and medium-sized industries and companies, with prices up to 30% lower than those offered by energy distributors in the regulated market.

The surge in interest in the free energy market contrasts with a growing warning in the sector: the opening planned for 2028 may not deliver significantly lower tariffs compared to current rates in the regulated market, which includes residential consumers served by energy distributors.

Distortions in electricity pricing, exacerbated by the more frequent activation of thermal power plants and by models that artificially inflate the cost of energy, threaten the promise of lower tariffs.

In other words, if nothing changes, residential consumers may gain the right to choose, but they are unlikely to find competitive prices in the free market compared to today's prices. The trend is for the discount rate to shrink at the time of opening to as little as half of what is currently practiced in the free market compared to the regulated market.

The survey by Bow-e – a Bolt Group company specializing in distributed generation (DG) and energy subscription sales for residential customers – also draws attention for another finding: about 60% of consumers are unaware that they will be able to choose their energy supplier from 2028 onwards.

Currently, the free market serves approximately 85,000 high-voltage consumer units, generating around R$ 283 billion annually. These include industries, shopping malls, large commercial establishments, hospitals, and data centers, for example, responsible for 42% of all electricity consumed in the country. Businesses, services, and small companies served at low voltage, but with significant loads, will be able to join in November of next year.

Starting in November 2028, other low-voltage consumers – including residences – will be able to migrate. The potential is immense: the current composition of 85,000 consumer units in the free market could theoretically jump to 90 million customers, multiplying the current size by more than 1,000 times when consolidated, with an initial potential for new annual revenues of approximately R$ 12.5 billion, with gradual expansion expected over 2 to 3 years of new consumer onboarding.

Therefore, the opening in 2028 is a historic opportunity, but one surrounded by significant structural challenges, captured by Bow-e's research.

“The data shows that there is a spontaneous demand for freedom of choice even before consumers are aware of the regulatory change,” says Ciro Neto, CEO of Bow-e. “This means that the sector's challenge will not be to generate interest, but to broaden access to information so that people understand how the market works and, based on that, make informed decisions when the opening occurs.”

In a scenario of tight financial constraints for family budgets, the determining factor for changing energy suppliers, as confirmed by the research, is the price of the tariff, cited by 67.4% of respondents as the main selection criterion. Quality of service (11.6%), energy from renewable sources (7.4%) and benefits programs (7.4%) follow.

"Price will naturally be the gateway to competition, but as the market matures, factors such as quality of service, transparency, and added services become crucial for retaining consumers in the free market environment," he concludes.

Expensive energy

The problems currently faced by the electricity sector , including the liquidity crisis of trading companies, coupled with short-term market volatility and the risk of contraction in long-term contracts, add uncertainty to the future.

A recent survey by the Center for Public Leadership (CLP) – a non-partisan organization dedicated to training leaders and improving public policies – provides insight into the bottlenecks in the electricity sector.

The study assessed the cost of residential energy in 138 countries, adjusted for PPP (purchasing power parity), when the exchange rate is used as a reference to buy the same quantity of goods and services in each country.

Under this methodology, the Brazilian tariff is US$ 0.357 per kilowatt-hour (kWh), approximately R$ 1.83. This value exceeds that practiced in about 70 countries, including China (US$ 0.155/kWh); Canada (US$ 0.146/kWh) and Norway (US$ 0.095/kWh).

In other words, Brazil has a more expensive residential electricity bill than many other countries, despite having one of the cheapest and cleanest electricity grids in the world – by 2025, almost 90% of electricity generation will come from hydroelectric, wind, and solar power plants. The bottleneck becomes apparent when considering that the effective cost of generation represents only 30.4% of the bill paid by the consumer. Almost two-thirds of the bill is made up of charges, taxes, and network costs.

The CLP study simulated scenarios for reducing these costs and concluded that, in the most ambitious scenario, a structural reform in the electricity sector could reduce tariffs by up to 32%.

Revising the Energy Development Account (CDE, which passes costs on to electricity bills) and sector subsidies, for example, would reduce tariffs by 10%. Combating technical and non-technical losses (such as energy theft) in the system would bring the reduction to 19%, while a broader regulatory reform, without changes to the tax burden, would lead to a 23% reduction. To achieve a 32% tariff reduction, it would be necessary to halve the tax burden.

“Brazil doesn’t primarily suffer from a lack of cheap generation,” says Daniel Duque, head of technical intelligence at CLP, who authored the study. “The problem is that a significant portion of the final price of electricity stems from regulatory choices, charges, and taxes that distance the tariff from its real cost.”

Accumulation of charges

For Ciro Neto of Bow-e, this contradiction — cheap generation and expensive tariffs — is central to the debate in the Brazilian electricity sector.

“Low-voltage consumers, who historically financed the low tariffs of high-voltage customers in the free market through the payment of charges that subsidized renewables, have lost the right to the discount on incentivized energy with the new regulation,” he emphasizes. “This is a structural injustice: when these residential consumers could benefit from the incentive they helped build, the benefit was eliminated for new entrants.”

Regarding energy pricing with the opening of the free market in 2028, the outlook for residential consumers is not good. The Bow-e executive explains that prices for 2028 are already set based on the Reserved Capacity Auctions ( LRCAP ) held this year and the Celar (acronym for Risk-Adjusted Long-Term Energy Cost).

LRCAP defines the regulatory limit for contracting thermal and hydroelectric power plants to open the market. Celar, on the other hand, is the benchmark indicator that trading companies use to set future energy prices, especially in medium- and long-term contracts in the free market, from 2027 to 2032.

In practice, this means that energy prices for 2028 are already being determined by models that incorporate high risk, especially the activation of thermal power plants, poor hydrology, regulatory uncertainty, and the price volatility of the free market – and are unlikely to decrease.

According to him, the trading companies that anticipated this have already purchased energy at a discount and have predictability in price formation, which should vary according to the contracts signed. "With an average adjustment of utility tariffs estimated at 8%, we project a discount between 5% and 12% for the end customer in the free market in 2028, much lower than the 30%–35% observed in the opening of the high-voltage market," he warns.

Short-term measures evaluated by Ciro have the potential to reduce system costs, but still in a limited way. The first is the adoption of smart meters and the Open Energy model, currently under public consultation at Aneel, the regulatory agency for the electricity sector. These devices allow for hourly consumption measurement and assign a value to energy according to the actual load behavior, opening up space for energy efficiency and tariffs more aligned with usage.

The second measure is the battery auction, designed to reduce the activation of thermal power plants during peak hours, thus smoothing out the tariff.

Although promising, the combined effect of these initiatives is not expected to generate reductions greater than 20% for the end consumer: "These are important measures to mitigate costs, but insufficient to reverse the structural upward trend caused by price distortions and increased use of thermal power plants," he says.

Energy operators will have to grow in a turbulent environment until the free market is fully opened to residential consumers. Bow-e, which currently serves around 30,000 customers, projects reaching 1 million by 2031/2032 — only 1% of the addressable market, which shows the enormous potential available.

To support this expansion, Ciro Neto states that the focus will be on reducing the Customer Acquisition Cost (CAC) – the total amount a company spends to acquire a new customer – and automating customer service.

The executive predicts strong consolidation among trading companies. "Today there are between 300 and 400 agents, and the expectation is that only the most prepared will survive," he says. The combination of pricing and modeling errors has already led several companies to bankruptcy protection, highlighting the natural selection underway in the sector.