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April 20, 2021

What Is PLD and How Does It Affect Electricity Tariffs?


PLD stands for Settlement Price for Differences. Understanding PLD is essential for those negotiating energy in the free energy market or wanting to better understand how the tariffs and rates they pay are determined.

PLD corresponds to the value used to settle the differences between the volumes of electricity contracted and the amounts actually measured in the Short-Term Energy Market (MCP) transactions, which are managed by the Electric Energy Trading Chamber (CCEE).

What Is PLD?

PLD is the electricity spot market price.

As mentioned, PLD is used to settle energy differences, meaning it is used to reconcile the differences between the energy that was contracted and the energy that was actually produced and consumed.

Each month, the CCEE conducts an accounting process, and to determine and settle these differences, it uses the PLD, which it calculates.

In 2020, the PLD was calculated based on three load levels: heavy, medium, and light. Each represented periods of high, medium, and low consumption, respectively.

Starting in January 2021, PLD began to be calculated on an hourly basis, and its name was changed to Hourly PLD. This change allows for a more accurate representation of energy costs by considering load variations and generation sources, thus optimizing energy price signals to market agents.

What Is Hourly PLD?

Hourly PLD was adopted in line with the global trend toward more granular pricing, where costs are allocated more precisely to those responsible. This improved representation contributes to greater efficiency in the sector, leading to overall cost reductions.

Prices are set daily for each hour of the following day, based on the Marginal Operation Cost. The process also takes into account the application of maximum (both hourly and structural) and minimum limits for each settlement period and energy submarket. Previously, the calculation was done on a weekly basis.

With this change, the price of energy is more closely aligned with its actual generation cost, which fluctuates over time depending on the availability of energy sources. For example, a solar plant may have lower costs but operates only during the day, while a natural gas thermal plant can operate at any time. Consumption patterns are also considered in these analyses.

How Is PLD Calculated?

PLD is calculated by the CCEE using mathematical models that aim to find the balance between the current benefit of using water for hydroelectric power generation and the future benefit of storing it, measured in terms of the expected savings in fuel costs for thermoelecttric power plants.

Higher use of hydroelectric power can lead to lower immediate system costs, as this source is generally cheaper. However, overuse of hydroelectricity could increase energy prices in the future by raising the risk of energy shortages.

Thus, using computational models such as DESSEM (daily), DECOMP (short-term), and NEWAVE (long-term), the PLD is calculated based on the following factors:

  • Current reservoir levels at hydroelectric plants;

  • Rainfall forecasts;

  • Electricity demand;

  • Projection of intermittent generation variability (wind and solar);

  • Fuel prices for thermal plants;

  • Commissioning of new projects;

  • Transmission and generation availability.

How Does PLD Affect Electricity Tariffs?

Like free consumers and generators, utilities must settle energy surpluses and deficits through the CCEE. If a utility is under-contracted, it will have to purchase the required amounts to serve its market at PLD prices, and these costs will be passed on to electricity tariffs/rates.

On the other hand, if the utility is over-contracted, the excess energy that is not needed to meet its market demand is settled at the PLD.

The impact of these movements on tariffs depends on the differences between the PLD at the time of settlement and the energy price defined at the time of contracting. If the difference is favorable to the utility, the effect will be positive for consumers in the tariff process, and vice versa.

PLD is also used in calculating the cost associated with hydrological risk, meaning the risk that hydroelectric generators may not be able to generate all the energy they have sold. Regulated consumers bear the hydrological risk for about 70% of all energy contracted by distribution utilities. Therefore, PLD can also impact tariffs/rates when accounting for these risks.

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