Brazil begins path toward power capacity market

The Brazilian government will conduct its first power capacity auction in December, seeking companies willing to build generation capacity to begin serving demand in 2026.

The market is meant to handle the challenges of integrating intermittent power sources like wind and solar into the grid. But critics of the auction say its costs will be unfairly borne by consumers, and concerns are mounting that the plan will not add capacity soon enough to handle tightening supply in the short term.

Plans for the new market to be paid for by all Brazilian consumers is a model that is widely used for other government projects, such as the reserve power tenders held throughout the 2010's to expand wind power and small hydropower plants.

Brazilian authorities decided to add the capacity market feature through an auction, which was welcomed by many participants in the country's energy system. The ordinance published by the Ministry of Mines and Energy allows operators of dispatchable power sources, like natural gas or diesel-fired plants, to offer new or existing capacity to the system as a reserve source during times of peak demand.

The auction will contract new or existing generation projects starting with the lowest cost per MW added to the system, beginning in 2026 through 15-year contracts. The actual power generation from the added capacity will not be sold in this auction, but power providers able to sell it separately either under long-term contracts with specific end users or on the open market using a spot price.

"The capacity auction is a correct measure to deliver a service that the system needs, which is peak demand supply," said Luiz Augusto Barroso, chief executive of energy consulting firm PSR and the former president of a Brazilian public energy planning company. "But it is a measure that should be temporary until Brazil implements the permanent measure that is the separation between capacity and energy, as established in legislation that awaits definition in the Congress."

Costs passed on to consumers

The auction costs will be paid for through a new fee added to residential and business power bills, but the size of the fee will not be known until the auction is held. The fees collected by power distributors will be put into an account managed by the Brazilian Chamber of Power Commercialization to pay for the contracts sold in the auction.

Members of the country's power industry see the plan as a needed step towards reliability, but expressed concerns about the unknown costs to their consumers.

"The capacity market is positive and attributes value to the generation sources that assure peak consumption, maintaining the regularity of the system", said Claudy Marcondes, risk director at 2W Energia, a trading company that helps large power users buy energy in the open market. "However, this is another charge that is being created and burdens the final consumer's tariff."

The capacity expansion is needed, said Fillipe Soares, technical managing director at Brazilian association of energy-intensive industries(Abrace). "But the government decided on how to conduct all the process: to calculate the capacity need, to promote the auction, to assume a new charge in the consumers' name from 2026 on," he said. "The Brazilian power consumer will pay for all this uncertainty with no hedging possibility. This kind of procurement is worrisome."

With the auction, incentive will be given to entrepreneurs to build new thermal power plants, said Alexei Vivan, lawyer and president of the Brazilian Association of Power Companies (ABCE). Although this could be accomplished without an auction held by the government, Vivan does not consider the Brazilian free market mature enough to be expand without this incentive.

As the capacity market will not be in effect until 2026, industry is increasingly wary of tightening power supplies in Brazil. There is likely enough power generation to meet Brazil's needs this year, with 68,325MW/d of generation. But the growth of intermittent, renewable sources of power generation — now at 12pc of total power generation — risks a lack of capacity that is able to ramp up quickly during peak demand or to maintain grid stability. Hydropower plants provide about 61pc of Brazil's power and have typically provided this ready reserve of power. But Brazil is facing the driest year in 91 years, putting limitations on reservoir operations.

By Flávia Pierry