Insight
Thermal power auctions in Brazil - Part II: why the current gas pricing framework fails
Report summary
To win a PPA in a thermal power auction in Brazil, developers design strategies based on their inflexibility, capital cost, and fuel price declaration. The current gas price formula is based on reference fuel prices calculated by the Energy Planning Agency of Brazil (EPE) for indices such as Henry Hub, NPB, JKM and Brent. The winning bids are tied to their original price declaration for the lifetime of the PPAs.
Table of contents
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Executive summary
- The methodology to set the fuel price in auctions enables choosing fuel benchmarks
- Fuel price formula parameters don’t need to be related to actual contract
- Inflexibility during the dry season enables higher fixed revenue for players that choose JKM and NBP indexation
- Associated pre-salt gas players can take advantage of fixed parameters to hedge gas supply
- Counterbalancing Argentinian and Brazilian demand is the best choice for players looking into Bolivian gas
- Why EPE fails both in the methodology to obtain price forecasts and the timeframe
- Uncertainties in EPE’s natural gas reference prices
- Reference price is misaligned with plant life and neglects seasonal effects
- Assessing economic impact of the current framework
- Improving the current framework is key to enable system expansion while assuring lower costs to end users
- Aligning reference prices with PPA periods and considering seasonality would improve the current framework
- Agendas of thermal power auctions and the gas market reforms needs to be aligned
- Incentivizing fixed fuel price declarations will reduce PPA risks
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Appendix I
- Fuel price component of CVU
- Fuel price component of fixed revenue
- Reference prices are used to evaluate prices in the auction
- Coefficients are locked for the life of the PPA, but actual prices vary
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Appendix II
- Long-term PPA total cost assessment
Tables and charts
This report includes 11 images and tables including:
- Illustrative figures of a 500-MW power plant with dry season-declared inflexibility and JKM indexation
- JKM and NBP assumed by EPE for the latest power auctions
- Historical spread between TTF and JKM prices
- Timeframe of the PPA vs the timeframe used by EPE to calculate reference price for the A-6 2019 auction
- Total PPA cost for different indices between 2025 and 2040 for the same fuel price in the auction
- Fuel price indexation formula
- EPE reference price formula
- Where:
- Dimensionless coefficients calculation for equivalent fuel price for the auction based on EPE reference prices
- Wood Mackenzie year-average price forecast
- Expected PPA prices based on Wood Mackenzie price forecasts
What's included
This report contains:
