New power price depends on culture change

Major parties in Brazil's power market are campaigning for a new supply and demand-driven power price model that would split operational risks across multiple participants, moving away from a centrally calculated price.

The project — started by power consultancy PSR, energy company Engie, with support from Brazil's power clearinghouse CCEE and grid operator ONS — proposes a model where ONS would still be responsible for dispatch, but each participant would calculate its price based on its own data and risk information.

Engie market and regulatory affairs manager Eduardo Takamori sees communication among participants as a central strategy to allow the new pricing model to emerge 20 years after the market's liberalization. He said culture change is key for the transition, which is feared by some in the sector and by some government and regulator technicians, even though they consider the current model outdated.

Those proposing the change are developing a computer model that agents will be able to test by simulating real-time negotiations for power with their own prices, with risk assumptions implied.

Even at a price-for-offer model, ONS would still have control over dispatch, Takamori said. In the new scenario proposed by Engie and PSR, the pricing information would indicate the more optimal options for dispatch. Regulators would monitor the market using metrics that would let them know if price offers are reasonable and combine those with other operational parameters, such as assuring water flows for the whole of a river basin and guaranteeing multiple water uses.

There is no need to change the law for the adoption of a price-for-offer system, Takamori said, but the approval of bills that call for studies on the subject, like PL 414, would be welcomed. Changes to things such as the Energy Reallocation Mechanism (MRE) — which charges hydroelectric plants for insurance against periods of drought and shares its costs with all hydropower generators — and the creation of virtual hydropower water storage, for example, would be paramount for the proposed model to be implemented.

Any changes to the power price model would need to be gradual and give the sector time to adjust. The first results of the project are being presented to the market. The final results and formal propositions for the government will be revealed by the end of the year.

Takamori said all changes in culture come with resistance, but the sector must see that the proposed model shares risks among participants as a way to mitigate them.

By Rebecca Gompertz