SAO PAULO & NEW YORK--(BUSINESS WIRE)--A new energy spot price ceiling will reduce most Brazilian renewable energy projects' expenses on energy volume purchases by more than 50%, according to Fitch Ratings. Renewable energy generation projects in Brazil have to replace shortfalls in generation volumes by purchasing power from the system at spot prices. More than 70% of Brazil's domestic electricity production is produced by renewable plants.
The decline in the ceiling will be particularly positive for wind and hydroelectric power projects. Critical drought conditions over the past two years have triggered the use of the more expensive thermal plants. And spot prices skyrocketed, reaching the ceiling established by the regulator. The spot price ceiling for 2015 will decline to BRL388.48 per MWh (USD149.97) from the 2014 ceiling of 822.83 per MWh (USD317.64).
Brazilian wind power purchase agreements (PPAs) often stipulate that wind farm volume shortfalls are settled at the higher of either the PPA price or the spot energy price. For hydroelectric, the Energy Reallocation Mechanism (ERM) shares output risks among the country's plants by reallocating generation surpluses from those above their PPA commitments to those that fell short, priced at the system's overall marginal cost of production per MWh. When the overall system is in deficit, ERM members purchase the volume shortfall at the spot price and split the cost proportionally. The ERM has been utilized during the record drought and below-average rainfall in Brazil for the last two years. From January to September 2014, ERM members were at a consolidated shortfall of approximately 12.7%. The average spot price during this period was BRL630.1 per MWh (USD243.52).
In our view, the new ceiling is a better reflection of current thermal plants' marginal costs of production. The new reference point is based on the prices issued by the UTE Mario Lago gas-fired thermal plant. Previously, the ceiling was determined by the marginal cost of production of older oil-fired back-up thermal plant called UTE Camacari.
Additional information is available on www.fitchratings.com.
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