The impact of the generation mix on the current regulatory framework for hydropower remuneration in Brazil

Abstract

The impact of the generation mix on the two ongoing regulatory frameworks for hydropower remuneration in Brazil is analysed. In the first, Energy Allocation Mechanism (EAM), individual operational risks are mitigated by a risk-sharing principle within a hydro pool structure. The second, Insurance Call Option Obligation (ICO), is an insurance approach which enables the hydro generators to transfer their risks to the consumers. The frameworks are assessed for three long-term scenarios, with a varying share of non-hydro renewables and thermal sources in the generation mix, using a Stochastic Dual Dynamic Programming (SDDP) approach. The results indicate that the generation mix may considerably influence EAM performance and hydropower economic feasibility. An increase in base-load and peak-load thermal generation influences EAM performance negatively, while the penetration of RES does not yield significant impacts if its expansion is met by equivalent increment in load. The ICO approach drives significant transfer of wealth from consumers to generators, which can be addressed by adapting the insurance premium setting criteria, as presented in this study. Finally, ICO design may lead to an overall improvement in the market level welfare, when compared to the EAM, if a criterion of equivalence is set as a preferable design goal.