Brazil will examine its power pricing model within the next 30 months, as power consultancy PSR begins a study to diagnose possible improvements or find a completely new paradigm.
Brazil currently uses a price per cost model, a calculated price that looks at the cost for generating power, not the value of that power in the market, with computing tools estimating the power clearing price depending on inputs, such as rain levels and rain estimates. Brazil's chamber of electric energy commercialization (CCEE) hired PSR to study the model and propose changes in regulation, market modeling and relationships with market participants.
Among the topics PSR will cover is a diagnosis on pros and cons of adopting a market pricing model that draw on supply and demand data from market participants.
"Our aim is to level the knowledge on both pricing models and remove passionate opinions about them," CCEE's executive-manager for prices, models and energy studies Rodrigo Sacchi said.
Several attempts at adopting a market pricing model have been proposed in the two decades since Brazil liberalized the power market, but all failed to come to fruition. This new round may be more successful as it will promote a transparent debate on the challenges and potential for both models, Sacchi said.
The study — which which will cost R33mn ($6.8mn), paid for by the World Bank — has four main objectives: evaluate the current model and its improvement opportunities; study and propose a power dispatch model in a market price model; propose a road map and implementation proposition for the transition to a market price model; involve the consumers into the process, with training and workshops about the propositions.
The study will not necessarily lead to a change in the pricing models with the decision sitting with government agencies — such as mines and energy ministry MME, grid operator ONS and power regulator Aneel — CCEE said.
"No model is perfect. We must analyze both models and decide which are the imperfections we would rather have to live together with," Sacchi said.
But the decision-making must consider concerns already identified by CCEE, such as power supply reliability, who will monitor the market participants to curb market power abuses, how to guarantee water levels in hydropower reservoirs and avoid careless actions from hydropower generators that could threaten price and supply stability, and how to incentivize the power market to respond to changes in price and demand.
The possibility of a shift to the market price model can help Brazil's power industry depend less on regulatory fixes or unorthodox actions, according to Secchi.
"If we have an inadequate power price signal, we usually will see more use of thermal power generation out of the merit order," he said.
