Free market drives power expansion but not reliability

Brazil's free market will be responsible for 83pc of the 45GW of power generation expansion the country expects to add to its matrix by 2026, with mostly renewable and intermittent sources.

An analysis by electricity resellers' association Abraceel determined that 97pc of investments in solar power are directed to the free market, while the regulated market is responsible for 89pc of investments in thermoelectric power.

The interest in investing in renewable power goes beyond promoting decarbonization, as the government also is offering a series of incentives, most notably discounts in transmission and distribution tariffs to those generators. That means free market clients will contract intermittent sources — which might be considered environmentally friendly but cannot generate power on a moment's notice as they depend on external factors such as sunlight and wind.

While the free market is not mainly investing in thermal plants, it is reaping the reliability benefits of thermal dispatch readiness and getting it at a discount. This is also making power more expensive for smaller consumers, who cannot access the open-market since there are minimum consumption thresholds, and must pay for reliability costs that the free market customers do not face. Furthermore, power distributors continue to open contracts for thermal generation that they will still be responsible for when their larger customers are able to transition to open-market contracts — adding even more costs to the remaining regulated power market customers.

Power sector modernization bill PL 414, which partially address the issue, is still stuck in the lower house, while congressional representatives cannot reach agreement on the cost-sharing of natural gas pipelines to serve thermal generators as determined by the law privatizing state-controlled Eletrobras.

There is widespread consensus among market participants that the costs to add thermal generation to the power system should be shared across regulated and free-market clients, according to University of Sao Paulo Polytechnic School professor Dorel Soares Ramos. For that to become a reality, the government would need to encourage investments in thermal power, through capacity power auctions or other incentive mechanisms.

Ramos added that there are technological solutions to improve renewable power growth reliability that the system needs, such as the development of wind plants with energy storage. But it must be economically feasible, and it must be determined when thermal power would be a more cost-effective alternative, he said.

By Rebecca Gompertz