Understand the changes in your electricity bill with the new tariff flag

The National Electric Energy Agency (Aneel) announced on Tuesday (31) to creation of a new tariff flag, the Water Scarcity Flag. It reflects rising power generation costs amid the worst water crisis in 91 years and should impact the electricity bill.

But what are these tariff flags? How are the rates? Why is the electricity bill going up so much? How does the bonus announced by the government work? Clear these and other questions below:

What is the tariff flag system?

The tariff flag system was created in 2015, another high season in electricity bills. The idea was to make the variations in electric bills more transparent to the consumer. Before its establishment, any higher energy generation costs were passed on to consumers only in the following year. With the change, variations in these costs are reflected in the month-to-month bills.

Until this week, the system involved four flags: the green, the yellow, the red level 1 and the red level 2. Now, the Water Scarcity Flag is added to them.

What does each flag mean to the electricity bill?

According to Aneel, the color system of the flags was inspired by the colors of a traffic light. The idea is to encourage consumers to slow down consumption, slower in yellow and faster in red, to reduce energy demand and, with that, generation costs.

The green flag appears on the electricity bill when there are no unfavorable conditions for power generation. As a result, there is no addition to the tariff for the consumer.

The yellow flag, on the other hand, signals that some conditions that make energy generation more expensive have started to appear. As a result, the tariff is increased by R$ 1.874 for each 100 kilowatt-hour (kWh) that is consumed in the month.

THE Red flag signals a worsening in power generation conditions. Level 1 of the banner represents an increase of R$3,971 for each 100 kilowatt-hours (kWh) consumed. Level 2 represents an increase of R$ 9,492 for every 100 kilowatt-hours. The higher the level, the higher the generation costs.

Now, the Water Shortage Flag will represent a charge of R$ 14.20 more for each 100 kilowatt-hours consumed. If before, with the level 2 red flag, the most expensive so far, consumers would pay BRL 69.49 per 100 kWh consumed, for example, now they will pay BRL 74.20 kWh, an increase of 6.78%.

André Braz, economist at the Brazilian Institute of Economics at FGV, observes that the value of the red tariff flag 2 had already gone up in June 2021. Previously, it was R$ 6.24 for every 100 kWh consumed. Adding the red flag readjustment and the creation of the Water Scarcity Flag, he points out a 127% increase in this tariff between July and September this year.

He says that having a new flag makes sense, as it avoids creating too large a distortion in the value of the Tier 2 red flag compared to the previous ones. According to him, if the value of the new flag were placed on the red level 2 “it would not be possible to use it in the future, unless it was reduced”.

1 in 10

Who chooses which flag will be used on the electricity bill?

The banner that will appear on the consumer’s electricity bill is defined monthly by Aneel, the government agency responsible for regulating and supervising the generation, transmission, distribution and sale of electricity in Brazil.

The meetings take place at the end of each month, to define the rate that will appear on the electricity bill in the following month.

Although the creation of the Water Shortage Flag was made by Aneel, the agency followed a determination by the Chamber of Exceptional Rules for Hydroenergy Management (CREG). The organ was government created in 2021 to coordinate the fight against the water crisis.

When will the Water Scarcity Flag come into effect?

Aneel informed that the Water Shortage Flag will come into effect as early as September, and should remain on electricity bills until at least April 2022.

Braz states that “the chances of review [da nova bandeira] are small” because reservoir numbers are very low, and should remain so. “Experts already anticipate that even with more rain, it won’t be enough to recover the numbers.”

the consumers of Roraima and some remote regions of the country will not pay the fee, as they are not part of the so-called National Interconnected System, which distributed the energy generated throughout the country. In addition to them, the beneficiaries of the social tariff will also not have the additional value of the new brand, paying the value of the red flag level 2 with a discount.

What factors are causing the electricity bill to go up?

The main responsible for the recent rises in the electricity bill, and for the need to create the new flag, is the water crisis that started this year. The term means that rainfall rates are well below what is desired.

Brazil generates much of its electricity from so-called hydroelectric plants. In them, the water stored in reservoirs turns turbines that then generate the energy. With less rain, the reservoirs of these plants are losing volume and, as a result, generate less energy.

dam;  water crisis
Country faces the worst water crisis in 91 years / Source: JOEL SILVA/FOTOARENA/ESTADÃO CONTEÚDO

To maintain the level of energy generation, avoiding blackouts, for example, the government needs to resort to other sources of generation. The most common is the thermoelectric plant, in which energy is generated by burning something, usually coal or diesel oil. The problem is that the operating costs of these plants are higher, and they are passed on to consumers in the electricity bill through the flag system.

“At a time like now, with little rain in winter and reservoir levels compared to 2001 and 2002, it is necessary to use thermoelectric plants”, explains Braz. He points out that Brazilian thermoelectric plants burn mainly diesel oil, which has also become more expensive amid the rise in the Petroleum.

As the energy distribution system is interconnected, the increase in electricity bills ends up being passed on to all consumers, not just those who live in areas where the production of hydroelectric plants has fallen, for example.

What are the effects of the new banner for the economy?

The new banner announced by Aneel has a direct effect on consumers: the higher the energy bill in a home, the greater the impact of this extra charge. This increase should reflect on inflation rates, including the Broad Consumer Price Index (IPCA), considered the official inflation of Brazil.

Furthermore, there is another indirect effect of this increase. “More expensive energy makes products and services more expensive, and even if the banner goes out of circulation, these prices will not necessarily drop,” says Braz.

“The greater the number of months it is kept active, the more it compromises the inflation”, says the economist. According to him, the market’s expectation seemed to be for an additional charge greater than that announced with the new brand, but the value exceeded that projected by Braz. With this, the economist also raised his projection for inflation in 2021, which, according to him, could exceed 8%.

What is the voluntary energy reduction program?

With the new banner, the government also announced the creation of a voluntary energy consumption reduction program, which involves a bonus for those who cut consumption between September and December.

The minimum consumption reduction to join the program is 10%, and payment is limited to 20%. That is, even if you reduce it by more than 20%, you will receive the bonus equivalent to just that percentage.

The premium for consumers will be R$50 for every 100 kW reduced in consumption and will compare the average consumption this year with last year. The Ministry of Mines and Energy gives the following example:

  • If a family consumed 120 kWh in September 2020, 130 kWh in October, 110 kWh in November and 140 kWh in December 2020, its average will be 125 kWh
  • If the next consumptions of this family are 105 kWh in September, 110 kWh in October, 100 kWh in November and 110 kWh in December 2021, its average consumption during the calculation of the program will have been 106.25 kWh
  • This family will have reduced their consumption by 15% compared to the average for the same months last year
  • At the end of the program, the family will be entitled to receive R$37.50 as a bonus

According to the government, the forecast is that around 20% of consumers will join the program, which would be equivalent to R$ 340 million per month, or 914 MW (mega-watts) of consumption.

*Under the supervision of Thamara Kaoru