The combination of cost and supply models is indicated by experts as the most appropriate solution for the evolution of energy pricing in Brazil.
According to Erick Rego, a researcher and consultant at USP (University of São Paulo), the cost model is characterized by the centralization of decisions, from the operator to the agents, but it has limitations in this process. On the other hand, the supply model is more decentralized, with decisions flowing from the agents to the operator, but it requires attention to the risk of exercising market power.
“What has evolved are hybrid models, which extract value from agents’ decentralized information without giving up prudence and centralized supervision,” highlighted Rego.
On Wednesday (27), Rego participated with other experts from the electricity sector in the 3rd META II Workshop, promoted by CCEE (Electric Energy Trading Chamber). The event is another phase of the rounds of discussions on the evolution of energy pricing in Brazil. The META II project has a budget of US$ 11,7 million, resources made available by the World Bank.
According to Rodrigo Sacchi, executive manager of Prices, Models and Energy Studies at CCEE, the goal of META is to promote the modernization of the energy and mining sector in order to cooperate with Brazil's sustainable economic growth. The project began in June 2023 and is expected to be completed in November 2025.
The four main concerns of the Meta project are:
1. Create instruments capable of inducing an adequate demand response based on energy price behavior;
2. Promote safe operation with regard to minimum levels of reliability of the electrical supply;
3. Develop price offering mechanisms that coexist harmoniously with the optimized dispatch of hydroelectric plants;
4. Finally, create strong regulation and well-defined mechanisms for monitoring and controlling market power.
Cost-based pricing versus bid-based pricing
In the cost-based pricing model adopted in Brazil, the National System Operator (ONS) is responsible for auditing the operating costs of each agent and selecting those that offer the lowest cost, always ensuring system security. In this model, dispatch decisions are centralized in the ONS.
On the other hand, in the supply-based model, used in European and North American countries, market agents declare their own costs. Even so, optimization models are used to close the market, ensuring efficiency and balance between supply and demand.
The following figure illustrates each of the models:
Alexandre Ramos, Chairman of the Board of Directors of CCEE, stated that among the main results already achieved in the META II project is the conclusion that the hybrid models of pricing based on cost and supply are clearly the most appropriate for the Brazilian market. “We found that this approach allows for greater economic efficiency and encourages the adoption of technologies that favor an increasingly clean and diversified electricity matrix, contributing to energy security and the fight against climate change.”
Double settlement in the short-term market
Furthermore, there is consensus among experts on the need to implement double ing in the short-term market. This approach would include one ing in the operation scheduling phase (ex-ante) and another in the post-operation phase (ex-post), encouraging generators to agree, in the scheduling, on the price and quantity of energy they will produce the day after the actual operation.
Currently, generators inform the ONS (National System Operator) one day before the operation, the quantity and price of energy for the following day. However, it is common for deviations between supply and demand to occur on the day of the operation, which ends up not being reflected in the price.
“The great benefit of the double settlement system is that if the agent keeps track of the value and quantity offered in real time during the operation’s scheduling phase, he will be guaranteed to receive the price set in the schedule. This way, all agents will have an incentive to increasingly try to get the quantity they will produce right the following day, because they will be guaranteed to receive the price set in the ex-post settlement. Otherwise, if the agent makes a mistake, he will not know whether the price will increase or decrease in the ex-post settlement. So there is less risk for him and more predictability for the schedule,” explains Fernando Colli, deputy executive secretary of the Ministry of Mines and Energy.
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