Experts in the electricity sector believe there is an asymmetry in price signals between the regulated and free power markets in Brazil, affecting consumption decisions, the liberalization process and investment plans.
The context is the maintenance, for the second consecutive month, of the green flag for captive consumers by Aneel, while the settlement price of differences (PLD) – the main benchmark in the unregulated market – remains at high levels.
The tariff flag system signals to consumers the real costs of electricity generation. The colors of the flags – green, yellow, or red – defined monthly, indicate whether energy will cost more or less depending on the generation conditions: if hydrology is favorable, the green flag is activated; otherwise, the yellow or red flag is activated due to the higher cost of thermal generation.
Fred Menezes, commercial director at Armor Energia, notes that, in the free market, PLD fluctuations directly impact consumption decisions, contracting strategies, and cost projections, increasing agents’ exposure to volatility and uncertainty. In the regulated market, in turn, the maintenance of the green tariff flag reduces the perception of risk for a significant share of demand.
“This lack of adequate economic signaling limits adjustments in consumption behavior and distorts the load’s response to the system’s real conditions”, explained a press release.
For the executive, the mismatch imposes challenges on the operator’s planning, since a relevant share of demand does not respond to price signals, while consumers in the free market face greater difficulty in predicting costs and in medium- and long-term planning.
Fernando Borborema, energy studies manager at the Delta Energia Group, believes that the current tariff flag methodology places a very heavy weight on the projected generation of hydroelectric plants in the month the flag is triggered, causing the PLD to have a small weight in the equation.
“This format really makes price signaling in the regulated market slow and extremely fast in the free market, creating asymmetries in price signaling between consumer markets,” he told BNamericas.
For him, there are distortions on both sides:
“The PLD seems exaggerated to us, and the flags should respond more to the PLD than to the forecast of hydraulic generation in the month.”
Borborema believes that a reduction in risk aversion in price formation models and an adjustment of the tariff flag methodology would bring economic gains to the free and captive markets and reduce the inflationary impact of the electricity tariff.
In the specialist’s assessment, the poor signaling of electricity prices, especially in the free market, makes investments riskier.
“The free energy market was created to foster price competitiveness and enable a lower energy cost. So, every time this feasibility decreases, asymmetry occurs,” stressed the executive.
Today, in Brazil, most new renewable energy generation projects take place through contracts in the free market.
In addition, the current level of risk aversion and price volatility make it difficult to fully open up the market, which is expected to occur by 2027, when all low-voltage consumers will be able to migrate from the regulated market.
“In the regulated market, however, there is a distortion in the signaling of water scarcity and the frequent activation of tariff flags starting in June”, added Borborema, referring to the driest period of the year.
He also stressed that, in the face of the PLD at higher levels, solar and wind generators are facing the growth of curtailment (generation cuts) and a reduction in the appetite for investment in clean generation.
Walter Fróes, director of the trading company CMU, explains that, in calculating the tariff flag, Aneel considers the GSF (generation scaling factor), which measures the relationship between the hydroelectric power actually produced and its physical guarantee, which is the maximum amount of energy that can be traded. When the GSF is below 100%, it indicates a generation deficit, generating costs passed on to consumers, especially in periods of drought. The PLD, in turn, is more sensitive to the dispatch of thermal plants with higher costs.
“The GSF in February is high because there is a lot of water in the reservoirs, with an expectation of rainfall above the historical average, which justifies the green flag. At the same time, however, there was the dispatch of thermal plants with very high CVUs [unit variable cost] at a time of falling wind generation, which impacted the PLD,” Fróes told BNamericas, adding that changes are needed in the methodology for calculating the tariff flags.
Pedro Moro, market studies coordinator at Thymos Energia, believes that the risk aversion currently incorporated into the price formation models has reached historically high levels.
“In this scenario, a reduction of this parameter, together with a revision of the tariff flag methodology, could generate economic gains for the free market and also for the regulated one, allowing greater alignment of the captive market with the PLD,” he told BNamericas.
He also warned that the PLD at very high levels can bring significant negative impacts for renewable power generators.
“If the plant suffers generation cuts or does not perform as expected at certain times, the generator loses the benefit of selling its energy at high prices. In addition, if it has already committed to delivering this energy under contract, it is forced to buy back the deficit on the free market, paying an expensive PLD, which severely compromises the project’s financial health,” he explained.
BNamericas contacted Aneel for comment on the matter, but had not received a response by the time this report was closed.
(The original version of this content was written in Portuguese)