Electricity is traded in Brazil via the Environment for Regulated Costumers (ACR), the Environment for Free Regulation (ACL), or the Wholesale Market or Settlement Price for the Differences (PLD)
Regulated Market in Brazil
Utilities purchase electricity in the ACR market to supply captive and special costumers. The contracts are signed with generators that have previously won competitive energy auctions. This process is controlled by the National Agency of Electric Energy (ANEEL from its acronym in Portuguese).
Most of the Auctions are type A1, A3, and A5, which means that winner generators will supply the energy contracted after year 1, 3, and 5 as of the date of the contract. A1 contracts refer to energy from existent plants while A3 and A5 imply expansion projects to be built in the future. Two distinct types of contracts results from these three auctions: Quantity Contracts and Availability Contracts.
Quantity Contracts are awarded to generators who offer fixed prices, which are mostly large hydro plants. On the other hand, Availability Contracts have variable pricing according to fuel costs, which generally are thermal plants that are affected by the volatility of fuel prices. For reliability purposes, they are paid even if they don’t generate energy.
ANEEL also launches Reserve Auctions, which are aimed to assure energy surplus for captive consumers and are carried out at ANNEL’s discretion according to energy demand projections. These, along with Dedicated Renewable Energy Auctions have been used to promote non-traditional renewable energies. These kinds of auctions are attractive for wind and solar developers. They don’t have to compete with other technologies but only between them.
Dedicated technology auctions eliminate the competence between renewable technologies, in which small hydro would benefit due to extended hydro sources in Brazil and their longstanding expertise.
Free Market in Brazil
ACL allows free and special consumers to buy energy directly from generators through Power Purchase Agreements (PPAs). After PPAs dispatch, both generators and consumers can sell and buy their surplus and lack of energy in the PLD or wholesale market.
PLD is similar to the spot price in the sense that is a marginal price, but it does not reflect the real electricity cost at a given time. Instead, this indicates the electricity price in the long-term, taking into account precipitation forecast, reservoir levels, and thermal production costs. PLDs are beneficial for thermal and small hydro developers since they reduce price volatility, caused by fuel cost instability and extreme weather events.
Power Purchase Agreements
PPAs are also a stable and attractive structure that reduce investment risks. They allow generators that fall short during auctions to still participate in the electric market. In general, the Brazilian power market permits developers to participate through different ways: auctions, PPAs, and wholesale market. Particularly, non-traditional renewable energy has dedicated auctions and are highly encouraged by the government’s desire to reduce its dependence on large hydro, which is strongly affected during drought periods.
Contact Latam Energy Advisors to find out more about the opportunities for power suppliers and industrial consumers in Brazil. Latam Energy Advisors is a specialist in reviewing power purchase agreements and mitigating risks with counterparties.
Paola Moreno, Senior Consultant, Latam Energy Advisors LLC