May 31, 2021

What Is the Relationship Between Energy Auctions and Tariffs?

Energy auctions are the main mechanism used for contracting electricity in Brazil. Through these regulated energy auctions, public service utilities—concessionaires, licensees, and authorized entities of the National Interconnected System (SIN)—ensure that they can fully supply their markets in the Regulated Contracting Environment (ACR).

The Electric Energy Trading Chamber (CCEE) is responsible for holding these energy auctions in Brazil, delegated by ANEEL, with the criterion for determining the winner being the lowest cost. The electricity auction system aims to promote efficiency and reduce costs, allowing the best energy supply contracts to be established.

Want to learn more? Check out the article below!

How Do Energy Auctions Work?

Energy auctions are based on two key elements: the evolution of energy consumption and the available energy for contracting (from existing power plants or projects that can be implemented within a certain timeframe). The utilities provide the demand projection to the Energy Research Company (EPE), which also maps out new projects available for contracting and defines the products (type of energy and term) to be offered to the market.

The electricity procurement process is conducted by the CCEE, which uses the lowest energy price auctions criterion to determine the winners, aiming for efficiency in energy contracting. This process ensures that auctioned energy contracts are signed with the most cost-effective suppliers. Currently, all energy auction processes are conducted online.

Participating in the auctions are power generators that are already in operation but have volumes available for contracting, or entrepreneurs interested in developing new generation projects. This structure allows for dynamic energy cost negotiation between generators and utilities, fostering a more competitive and efficient energy market.

How Do Auctions Affect Tariff/Rate Values?

The average cost of these various auctioned energy contracts is passed on to consumers through electricity tariffs/rates. These costs form part of the tariff/rates components that are re-evaluated annually by ANEEL during tariff revision or adjustment processes. If, during a specific period, a utility contracts energy at a lower cost than the average of its contracts, this places downward pressure on auctioned electricity rates. Conversely, if the contracted energy price exceeds the average value, it results in upward pressure on tariffs.

These effects demonstrate how the energy market pricing mechanism works in practice. The results of energy price auctions have a direct impact on the final electricity tariffs paid by consumers, showing the relevance of a well-structured electricity auction system for ensuring affordable energy rates.

Did you enjoy learning about the impact of energy auctions on tariffs and rates? Be sure to also check out our article on what PLD (Settlement Price for Differences) is and how it affects electricity tariffs.