Electricity Markets in Brazil

Electricity Markets in Brazil

The electric sector in most of Latin America and Caribbean countries was liberalized during the decades of 1990s and 2000s. This liberalization consisted of energy reforms that allowed, for the first time, the entry of private capital, the development of competitive markets, and the end of state companies.

In Brazil, this process was different than in other countries in the region. It was not completely set up as an open market. The state is still a major player. Electrobras, a state-owned company, generates 40% of the Brazilian electricity and controls 60% the transmission system.

The Key Players

In the Brazilian electric sector, there are three figures for generation: Generation Public Service Concessionaire (PSC)Independent Electricity Supplier (IES), and Auto Suppliers (AS). Most of the traditional large hydro plants are concessionaires, while most of wind, biomass, solar and cogeneration plants are IES or AS. Consumers are split in three groups: Captive Consumers, Free Consumers, and Special Consumers

Captive Consumers consists of all residential users and small costumer connected to the grid at low voltage demanding less than 500 GWh/year. Free consumers are mostly industries or any other customer with a capacity of 3 MW or higher at any voltage level. Special Consumers can act as Free or Captive Customers conditioned to buy part of its demand from non-traditional energy sources.

Electricity is traded through the Environment for Regulated Costumers (ACR from its acronym in Portuguese), the Environment for Free Regulation (ACL from its acronym in Portuguese), or the Wholesale Market or Settlement Price for the Differences (PLD from its acronym in Portuguese).

Regulated Market

Utilities purchase electricity in the ACR market to supply captive and special costumes. The contracts are signed with generators that previously won competitive energy auctions, launched, and 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 different kinds of contracts result from these three auctions: Quantity Contracts and Availability Contracts. On one hand, Quantity Contracts are awarded to generators who offer fixed prices, which are mostly large hydro plants. On the other hand, Availability Contracts have variable prices according to fuel prices, which generally are thermal plants that are affected by fuel prices volatility. 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. On one hand, 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 result benefited due to extended hydro sources in Brazil and their longstanding expertise.

Free Market

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 like 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, considering precipitation forecast, reservoir levels, and thermal production costs.

This PLD particularity results beneficial for thermal and small hydro developers since it reduces prices volatility, caused by fuel cost instability and extreme weather events.

PPAs are a stable and attractive figure that reduce investment risks. They allow generators that fall short during auctions to still participate in the electric market. In general, the versatile Brazilian electric market permit developers to participate through different ways: auctions, PPAs, and wholesale market.

Non-traditional renewables energies have dedicated auctions and are highly encouraged by the government due to its desire to reduce its dependence on large hydro, which is strongly affected during drought periods, as it happened during the nineties.