Pricing effects of the electricity market reform in Brazil

Abstract

We examine electricity market reform in Brazil. From 1998 until 2004, the largely hydro-powered market featured a forward market in which bilateral contracts were negotiated. In March 2004, this was partially replaced by a centralised clearing of forward positions, with the objective of stabilising electricity prices. We develop a theoretical model for the Brazilian forward electricity market, showing how generator entry would be affected by the two regimes. We then model monthly prices using a two-state Markov Switching model, allowing offtakes to affect prices, volatility and transition probabilities. Consistent with our theory, we show that while the reforms decreased volatility in some regions and states, the market became both more likely to enter a high price state, and more likely to remain in that state for a protracted period.