The impact of the hourly spot market price (PLD) recently adopted in Brazil
Cescon, Barrieu, Flesch & Barreto, Rio de Janeiro
Cescon, Barrieu, Flesch & Barreto, São Paulo
Cescon, Barrieu, Flesch & Barreto, São Paulo
Brazil adopted the spot market price on an hourly basis in 2021 (Preço de Liquidação de Diferenças, in Portuguese, PLD). As a result, its short-term pricing has become more precise in order to reflect the real operation of the power generation system and its costs and constraints, cutting the gap between prices and real generation. This system had already existed in other countries but has only now been adopted by Brazil.
Such a regulatory change has significant implications for Brazil’s power market. Although the full extent of consequences is yet to be seen, some changes are already under implementation or consideration by players and the regulator.
General considerations on Brazil’s power market
Brazil’s power market comprises two environments/markets functioning in tandem. The first is designed for distribution companies who sell power to end users/consumers at large (‘captive consumers’), called the Ambiente de Contratação Regulado or ACR (the Regulated Market). The second, designed for free (or private) consumers, generators and energy trading companies, is called the Ambiente de Contratação Livre or ACL (the Free Market), in which consumers may choose retailers other than their local utility companies through bilateral PPAs between the consumer/energy trading company and the power producer/generator. The Free Market was originally intended to cover large consumers, but regulators and players are currently rolling it out to less relevant consumers and there are plans to include the entire market.
Power generation is increasingly intermittent in Brazil, mostly as a result of renewable sources (wind and solar). In particular, wind farms in certain parts of Brazil, due to wind conditions, only generate power at night, while consumption (and prices) are usually at their lowest. Those same wind farms, on the other hand, have no significant output during the day when consumption and prices are at peak levels. The number of wind farms has grown steadily over the years, from a mere 22.1 MW installed capacity in 2005 to 17,500 MW in 2021. The participation of wind farms in Brazil’s energy generating matrix is expected to rise from current nine to 14 per cent by 2030.
The PLD is the price of energy in the spot market and an agent’s exposure to it depends on the result of their ‘energy balance’, which compares the quantities of generated, consumed and traded power by each player. In this context, the relevant dimensions for spot market exposure are the generation (or consumption) curve, the contractual sale/purchase net balance of the agent and the PLD.
The hourly PLD
The introduction of the hourly PLD (and not weekly, as practiced so far) was discussed in the 1990s following the expansion of such models worldwide. Brazil’s energy matrix did not require it at the time, given a hydroelectric matrix with large reserve capacity, which represented over 70 per cent of the generation capacity. This scenario of predictable energy generation has changed dramatically over the last decade due to several factors, including:
- technological evolution and expansion of the ‘free market’ through inclusion of new consumers;
- the relative reduction of relevance of hydroelectric plants in the national energy matrix and the use of water reserves for human consumption;
- construction of ‘run-of-the-river’ hydroelectric power stations given environmental concerns, in which the production level is highly seasonal; and
- expansion of renewable energy sources in the matrix, especially wind and solar, which are intermittent.
Until 2020, the PLD was calculated in three different tiers according to moments of high, medium or low consumption. Such tiers remained valid throughout the week. In 2021, the PLD began to be calculated and applied on an hourly basis.
The change from three price tiers to an hourly variation is largely due to the higher intermittency of Brazil’s power matrix’s generation. In a context of less predictable generation, prices need to respond quickly to changes in supply as to reflect reality, otherwise market distortions arise. The new context, however, forces players that produce/consume renewables to internalise the costs associated with its intermittency, incentivising consumers and generators to seek strategies to protect themselves against price fluctuations.
Impact on Brazil’s current power market
There are four key impacts from the adoption of the hourly PLD: (1) demand for new energy services; (2) increased sophistication of PPAs; (3) changes to plant and grid operations; and (4) potential renegotiations of PPAs.
Some new business models and opportunities may arise from the hourly PLD. An hourly spot market price incentivises market agents to seek strategies to move their consumption or generation to more lucrative times of the day, or to allocate risk between different players. The result is demand for new kinds of products and services.
One service that is expected to be in high demand is energy storage systems. For this purpose, Brazil’s Power Sector Agency (ANEEL) is currently discussing regulatory changes to allow for the procurement of energy storage services. Those are usually rendered by pumped-storage hydroelectricity facilities but are also expected to include new technologies such as flywheels, hydrogen fuel cells or new-generation batteries. Energy may be stored in times of day when it is cheaper and generated in excess of demand, to be used when intermittent generation is unavailable and prices are high.
Another activity that gains significance in an hourly PLD setting is that of demand response. In demand response systems, consumption is gauged according to the supply of energy available at any given time. The regulatory framework is also under review to allow for greater use and correct valuing of such services.
Energy sources with rapid response times tend to become more central in a higher intermittency context and may enjoy benefits by firing up when hourly prices are high. This is the case of gas-powered thermal power plants, with their short ramp up periods. In this regard, Brazil’s government has been holding regulated auctions for the purchase of energy exclusively from gas-powered TPPs in recent years.
Hybrid plants, that is, those that combine supply from two different sources, are also expected to play a significant role. Until now, transmission system use costs were prohibitive for such configurations because of regulatory barriers. But now the regulatory framework is under review. It should be noted that, in Brazil, solar and wind powered plants are frequently highly complementary (ie, windy at night, sunny in the afternoon). With changes to the way transmission use is charged from hybrid plants, combinations of solar and wind power plants (or solar and hydro) may become highly competitive.
Finally, the recently created Brazilian Energy Trading Market (BBCE) allows players to enter into energy derivatives. This allows better allocations of financial exposure from PLD risks. Consumers and suppliers may protect themselves from negative exposures, while financial institutions may seek gains by buying such risks.
In short, several new services gain economic relevance and present important business opportunities.
Increased sophistication of PPAs
Another impact is the increased sophistication of the business models and PPAs. For instance, PPA modulation clauses gain relevance. Modulation is the hourly distribution of commercial commitments during the day. Modulation may be defined as flat (which is normally preferred by consumers), according to the generation curve of the seller, or according to the consumption curve of the buyer.
With the hourly PLD, modulation clauses in PPAs must be closely analysed. Players and their advisors must understand and consider the characteristics of the generation sources involved. Usually, solar power plants generate power at the higher PLD hours of early afternoon while several wind power plants generate power at the lower PLD hours of dawn – but each project may have its particularities. Adequately capturing such particularities can generate value to one or both parties. It should also be noted that under the current trading rules, modulation may be defined ex-post, some business days after the month of supply – which may allow for more flexible arrangements in PPAs.
Plant and grid operation
The introduction of an hourly PLD also affects grid operations. For example, the decision by the National Grid Operator to fire-up certain thermal power stations will now consider more precise economic data. The operation of such thermal power stations, then, becomes less predictable – and agents need to negotiate their fuel supply agreements accordingly. Suppliers may be required to deliver fuel quickly, or on expected necessities. The National Grid Operator will now also have to organise itself to have people controlling the system every moment of the week.
The hourly PLD may lead to attempts of PPA renegotiations. Recent experience with the Covid-19 pandemic shows that the attempt to renegotiate agreements (and litigate in case of deadlocks) is a strategy to be taken seriously. The hourly PLD has different impacts on the parties involved, depending on how PPAs have been modulated. Parties have incentives to renegotiate and/or litigate depending on the scale of the effects. Brazilian law has criteria for when it is possible.
First of all, under Brazilian laws, parties do not have a vested right to a particular legal regime. As such, it is usual for contracts to address the issue of legislative changes, either allocating risks or establishing when changes may result in an amendment to maintain contractual balance. The judicial review of agreements, particularly B2B contracts, is an exception under the Brazilian system. It is only available when relevant circumstances and impacts exist, and parties fail to reach consensus. There are two main hypotheses.
First is the principle of rebus sic stantibus, provided in Article 317 of the Brazilian Civil Code. If, during the life of the contract, for unpredictable reasons, there is a significant imbalance between the value of the obligation at the time of execution and at the time of performance, parties may ask a court to rebalance it. Brazil’s courts have been careful when applying this.
The second is termination due to hardship (onerosidade excessiva), provided in Article 478 of the Brazilian Civil Code. This allows a party to terminate if its obligation becomes excessively onerous, with extreme advantage to the other, due to extraordinary and unpredictable events. Among other aspects, the multilateral settlement model adopted in the Brazilian spot market adds complexity to this situation.
The hourly PLD is an important change to Brazil’s regulatory system, responding to changes in the energy matrix. Many believe that the hourly PLD is a stepping stone to a true free market, in which all end consumers (not only the larger ones) may opt to engage in the power market. This creates new risks and opportunities to generators, consumers, traders and hedge providers. Moreover, energy transition (with oil companies entering the power sector) and the expansion of the Free Market will cause new agents to be exposed to the risks and opportunities discussed in this article.
 ABEEólica, Boletim Anual de Geração Eólica 2019.
 ANEEL, Sistema de Informações de Geração da ANEEL – SIGA.
 EPE, Plano Decenal de Expansão de Energia 2030.
 During the Covid-19 pandemic, several requests were presented to arbitral or judicial courts for the suspension of take-or-pay clauses, maintenance of contractual performance, application of hardship clauses or other themes related to contractual revision.
 Art 421-A, s III: Contractual revision may only occur in an exceptional and limited manner.
 eg, the Brazilian Superior Court of Justice states that the mere breach of profit expectations is not an unacceptable change in the commutativity of the benefits. (REsp 977.007).
 In Brazil, the energy market is operated by the Power Trading Chamber (CCEE), which functions as a clearing house of power trading. Although CCEE does not take on the risk of any counterparty, the result of its activities is that clearing takes place in a multilateral environment, so the advantage or disadvantage of one party in a PPA may not correlate to a disadvantage or advantage of its counterparty. As an example, both the seller and the buyer may be exposed to the PLD at the same time, and their payments would be cleared to third parties that happen to have an energy surplus within a given month.