New energy price dynamics open space for generation expansion

The current price dynamics in the Free Energy Market is creating new expectations for generators and power plant developers. Projects that were previously on hold are beginning to become viable again as energy prices rise over the long-term horizon.

For some time now, the expansion of wind and solar energy sources has been taking place in Brazil thanks to long-term contracts (PPAs) signed between generators and large consumers in the Free Energy Market. However, with prices remaining at minimum levels since 2022, this type of negotiation has lost strength.

The energy price scenario began to change at the end of 2023, even before the start of the wet season (November-April). At that time, the reservoir in the Southeast/Central-West region, which concentrates 70% of the country's hydroelectric plants, was above 60%.

“Basically, all possible scenarios within a statistical analysis indicated that this reservoir would end the wet period close to 80%, taking into account the recovery history. The market was convinced that storage in the Southeast would reach comfortable levels”, stated Vinícius Medeiros, Head Trader at Ecom Energia.

However, the lack of rainfall in recent months in the main river basins has frustrated the expectations of agents, resulting in an increase in the price of energy. The country is currently facing one of the worst wet periods in its history.

“Predicting these tail events is very difficult. The market was surprised by this summer without significant rain. The comfortable storage we once had is no longer there. Now, we are reviewing our scenarios and it is very likely that storage in the Southeast will end the wet period at around 68%, a value much lower than initially expected”, assessed Medeiros.

According to Henrique Leme, founding partner of Decid consultancy, at the beginning of 2023, prices for the years 2024 to 2027 were on average between R$85,00 and R$90,00 per MWh.

Currently, the price of conventional energy (hydroelectric and thermal) is being negotiated for around R$ 155,00 per MWh for the years 2025 to 2028. In the case of incentivized energy (wind, solar, PCHs and biomass), the values ​​rose from R$111,00 per MWh to R$188,00 per MWh.

“Long-term prices are starting to stimulate a market that was on hold, which is the PPA market, which was greatly harmed due to low prices. There is still a lot of uncertainty about what the long-term price will be, but the current moment is more favorable for an expansion of generation. Everyone is paying attention to this to prepare for new opportunities”, said Leme.

For Medeiros, aspects that were completely off the agents' radar are once again being considered at the beginning of the year.

“Last year, based on the future price curve, it was not possible to make any new projects viable. However, due to frustration with the current wet period and the new price level, agents are already carrying out new analyses. We see an incentivized energy price reaching R$180,00 per MWh in the long term. Depending on the operational and investment costs, this price already makes some PPAs viable”, said the Ecom specialist.

For consumers who are not familiar with the price behavior in the Free Energy Market, there is no reason to worry. Trading in this environment remains advantageous, although the benefit has decreased compared to 2023.

According to Medeiros, if last year the difference between the tariff and the price on Mercado Livre reached 40%, currently consumers can still significantly reduce their electricity bills by at least 25%.

Since January, the Free Energy Market has been open to all consumers in Group A, that is, those connected to medium and high voltage. This new phase has attracted thousands of companies looking to save on their energy bills. So-called retail consumers generally buy incentivized energy, which also puts pressure on the price of this product.

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