Why Do Electricity Prices Tend to Be High in Brazil?

Main points

The calculation of energy price in Brazil is directly linked to the rain forecast and the levels of reservoirs at hydroelectric plants.
The government had postponed the decision of changing the Risk Parameter.
As a result, energy futures market prices should decrease, but the price paid by the consumer should remain high in the short/medium term.

What impacts the electricity price in Brazil?

The main variables that impact the calculation of electricity prices are the rainfall projections and the levels of the reservoirs of hydroelectric plants.
The calculation also takes into account the energy demand, availability of operation of thermoelectric plants and the limits of energy exchange between regions.
The energy market has a risk aversion parameter known as CVaR.
CVar’s role is to measure supply risks and guide the model in deciding on the best system operation, without compromising current and future supply.

The electrical system and the water crisis

The drought scenario experienced by Brazil is critical,
As one of the ways to contain the water crisis, changes in the parameters that define the price of energy were under discussion.
In other words, the intention was to change the CVaR parameters to make the price model more sensitive to risk
The market was betting on change, so much so that future prices were already being priced taking into account the change.
However, to everyone’s surprise, the government backtracked on the decision and decided to keep the current parameters.
As a result, energy prices are expected to decline from the year 2022 onwards.

However, energy prices will likely remain high

With low water levels in reservoirs, thermal energy generation is increasing, and this is reflected in the price paid by the consumer.
A reduction in prices would require drop in consumption or a recovery in the behavior of the rains (cheaper offer).
However, these two points for reduction seem unlikely at the moment.
With the advance of vaccination and the gradual resumption of economic activity, energy consumption is expected to grow
And the rains are forecast to happen from November on, when the wet season starts in the Center-South Brazil (CS).