Battery Capacity Reserve Auctions: Financial Modeling Amid Pending Tax Reform Regulations

Article examines the interplay between tax rules, energy regulation, and competitiveness in energy storage auctions

On December 2 and 4, 2026, Brazil will hold its first Capacity Reserve Auctions in the form of power dedicated to Battery Energy Storage Systems (BESS). The winning bidder will be selected based on the lowest price and will receive fixed revenue over a 15-year period in exchange for making capacity available in the form of power.

In a highly competitive auction, with dozens of interested parties and projects of varying sizes, tax optimization, which should be reflected in the financial model, directly affects implementation costs, capital structure, and the price that bidders are able to offer.

Given the proximity of the auction and the interaction between tax and regulatory rules applicable to the energy sector, investors are likely to enter the bidding process facing a certain degree of uncertainty arising from a combination of tax reform provisions that are still pending regulation and unresolved sector-specific issues.

As of January 2027, CBS (Contribution on Goods and Services) will be levied in place of PIS and Cofins, which will be abolished. In 2029, IBS (Tax on Goods and Services) will begin to be levied, gradually replacing ICMS and ISS. Therefore, although bids for the BESS Capacity Reserve Auction will be submitted before the new tax system takes effect, they should already reflect the impact of the new rules.

Under item 10.9 of the auction notice, when determining the revenue amount to be submitted in its bid, the bidder “must include all costs necessary for the provision of the service and implementation of the Energy Storage System (SAE), including tax costs, except for CBS and IBS, which, under the tax reform, are not included in the sale price of the service.”

This provision is important for financial modeling purposes. Bidders may disregard IBS and CBS on the revenue submitted in their bids, but they must consider and price in the financial impact of recovering IBS and CBS levied on their purchases.

This requires an understanding of two relevant legal issues: (i) how IBS and CBS relief will apply to the project’s own acquisitions (CAPEX); and (ii) the taxation, or deferral of taxation, of IBS and CBS on the revenue received in exchange for making capacity available in the form of power.

Regarding the first issue, it is important to consider that Law No. 15,269/2025 expressly included energy storage systems among the projects eligible for the REIDI regime for PIS and Cofins purposes, limiting the tax expenditure to BRL 1 billion per year between 2026 and 2030 and making it conditional on an allocation in the Annual Budget Law (LOA).

It is commonly stated that REIDI, established by Law No. 11,488/2007, can reduce a project’s total cost by up to 11.75%, although the actual reduction depends on the mix of services, domestically sourced goods, and imported goods.

The limit established by Law No. 15,269/2025 has never been effectively applied and remains subject to controversy regarding how it should be calculated.

In fact, since PIS and Cofins will be replaced by CBS as of January 2027, and Article 106 of Supplementary Law (LC) No. 214/2025 created a REIDI regime for CBS purposes, the legally relevant question has shifted. The issue now is whether the BRL 1 billion limit and the requirement for an allocation in the LOA will continue to apply under the new CBS regime, or whether they were restrictions specific to PIS and Cofins that do not survive under the new tax system.

The uncertainty arises because the CBS regime for capital goods relief differs significantly from the PIS and Cofins regime in terms of its constitutional framework. Under PIS and Cofins, the relief was established by ordinary law and has consistently been regarded by case law as a tax incentive, meaning that restrictions and conditions imposed on its use were considered valid.

In the case of CBS and IBS, however, the Constitution itself, in Article 156-A, paragraph 5, item V, requires tax relief on the acquisition of capital goods, which may be implemented through full and immediate tax credits, deferral, or a 100% reduction in the applicable rates.

This creates a degree of interpretative tension between the former PIS and Cofins tax regime and the new IBS and CBS framework. How can a BRL 1 billion cap on REIDI be considered valid if the Constitution itself already guarantees immediate recovery, deferral, or relief from IBS and CBS?

And how can the requirement for a budgetary allocation be justified as a condition for the tax relief if the government itself estimates zero tax expenditure for REIDI in the 2027 Annual Budget Bill (PLOA)?

As to the second issue, Congress had already introduced a deferral mechanism for the electricity sector in the original version of Supplementary Law No. 214/2025. Tax collection was concentrated at the distributor level in the regulated market, at the seller level in the free contracting market, and at the purchaser level in multilateral transactions.

This approach took into account the specific characteristics of the sector and reduces the risk of tax credit losses along the supply chain. Subsequently, Supplementary Law No. 226 amended Article 28 of Supplementary Law No. 214/2025 and established a specific deferral rule for transactions involving electricity, or rights related thereto, covering imports, generation, trading, distribution, and transmission.

BESS projects contracted under the Capacity Reserve Auction are unlikely to fall neatly within these traditional categories. Although the system consumes electricity when charging the battery and injects electricity when discharging it, the purpose of the auction is to ensure the availability of capacity and power. This service is remunerated through fixed revenue, while operations remain entirely under the control of the National Electric System Operator (ONS).

Although capacity availability benefits the system as a whole, it does not appear, at least expressly, within any of the traditional categories covered by the deferral rule: imports, generation, trading, distribution, or transmission.

This uncertainty has a direct impact on cash flow because the tax treatment of capacity revenue determines how long the financial cost associated with credits accumulated during the project’s implementation will continue into the operating phase. If the deferral does not apply to this revenue, the project may immediately offset its own credits. If the deferral does not apply to this revenue, the taxpayer will accumulate CBS credits, and the financial impact of recovering those credits will need to be reflected in the model.

The lack of regulations does not prevent the development of a sound financial model based on financial and contractual assumptions that account for these unresolved issues and uncertainties. The first step is to treat REIDI as a variable in the model, with CAPEX projected under at least two scenarios: one in which qualification for the regime removes consumption taxes levied on equipment and services, and another in which the project pays CBS during implementation and subsequently recovers it as a tax credit.

Although all scenarios ultimately result in the “recovery” of CBS and IBS paid, the mechanism and timing of that recovery differ, affecting the project’s cash flow and the financial cost associated with waiting for the taxes to be recovered.

Contractual structuring is equally important, as contracts should establish suppliers’ obligations and rights under each of these scenarios. Future qualification for REIDI is likely to be a complex process that depends on supplier cooperation. Suppliers are responsible for issuing tax documents without separately stating the tax, providing the information required for qualification, and adjusting their prices to reflect the tax relief.

Supply and construction agreements should therefore be drafted from the outset to operate under any of the possible tax relief mechanisms: suspension under REIDI, full and immediate tax credits, deferral, or a zero tax rate.

In practice, this means establishing prices both with and without the tax benefit, with automatic pass-through of the relief to the project; requiring suppliers to cooperate with the qualification process and correctly issue tax documents; defining who bears the tax in the event of an error or loss of eligibility; and allowing the agreement to be assigned to the special purpose vehicle that ultimately holds the qualification.

Advance payments to suppliers, a common practice in the equipment sector, require particular attention. Unlike the current regime, Supplementary Law No. 214/2025 subjects advance payments made before the supply takes place to IBS and CBS. Such payments are common in high-value contracts, and advances made before REIDI qualification could result in taxes that would not subsequently be covered by the regime. Where the manufacturing schedule allows, linking payments to milestones occurring after qualification can reduce this exposure.

In the BESS Capacity Reserve Auction, the legal risks described in this article and their respective probabilities can be reasonably priced into the project. An excessively conservative approach that treats every uncertainty as a certain loss reduces the competitiveness of the bid.

Conversely, an excessively aggressive approach that assumes the most favorable outcome on every issue could undermine the project’s profitability over the 15-year contract term if adverse tax consequences arise that were not properly mapped. The appropriate balance lies in assigning a well-founded probability to each scenario and reflecting it both in the financial model and in the contractual provisions agreed with suppliers.