Brazil rainfall brings relief for energy prices

Rainfall in early October in Brazil caused a drop of around 30% in the price of energy in the short-term market, helping to dispel fears of a water crisis that had been worrying consumers and companies.

The estimate comes from local energy trader Armor Energia.

According to electricity trading chamber CCEE, the price for settling differences (PLD) – the main reference in the free power market – is around 470 reais (US$82) per MWh.

The level of stored energy in Brazil's main hydroelectric subsystem (southeast/center-west) is around 41%, according to system operator ONS. 

Higher rainfall has a direct impact on the cost of energy in the hydroelectric-dependent country. With the latest rains, it is possible that watchdog Aneel will reclassify the rate flag to red level 1 for November from the current red level 2, the highest rate, predicts Armor's executive director, Fred Menezes.

The flag system indicates generation conditions and costs for power consumers. When production at hydro plants – which produce cheaper energy than thermal plants – is favorable, the regulator activates the green flag and when there is lower water availability, the yellow or red flags may be activated which leads to higher prices.

The recovery of the reservoirs and a consequent reduction in energy prices in the medium and long term will depend on rainfall in the wet period that is beginning now and extends until March 2025. 

Menezes said the price of long-term PPAs has not yet been impacted by the improvement in hydrological conditions but he says caution is needed on the part of investors planning to develop greenfield power generation projects.

“There is currently an oversupply [of energy] in the market and, with the country's long-term interest curve rising, we need to consider whether new projects will have enough consumers and an attractive return,” he told BNamericas.

If, on the one hand, the reduction in energy prices benefits consumers, on the other, it can make it difficult to make new generation projects viable, which depend on an attractive PPA to justify investments.

That is what happened during the almost three years in which the PLD remained close to the floor at about 60 reais/MWh, due to high rainfall in the summers of 2021-22 and 2022-23. With this year's severe drought, however, the PLD has risen sharply, changing the outlook.