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Lessons learned with the Brazilian experience with energy auctions

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Rafael Ferreira, Head of Wholesale Prices, Brazilian Power Market Operator (CCEE)

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Lessons learned with the Brazilian experience with energy auctions

  1. 1. Lessons learned with the Brazilian experience with energy auctions Joint International Conference “Auction Support Scheme in Ukraine for Renewable Energy Development” February 2019 Rafael Ferreira Head of Wholesale Prices Brazilian Power Market Operator (CCEE) rafael.ferreira@ccee.org.br
  2. 2. • Some results of energy auctions in Brazil • Selected lessons learned from the Brazilian experience • Combining legal stability with auction design flexibility • Allocating technical responsibilities and creating checks and balances • Fundamental trade-offs in auction design • Final remarks Agenda
  3. 3. • Auctions to award long-term power purchase agreements (PPAs) used as main means of ensuring generation capacity expansion in Brazil since early 2000’s. • More than 70 GW of generation capacity additions made feasible via these auctions. • Auction demand segmented per technology, virtually all technologies already targeted. • Auctions have been a key element in renewable energy policy, notably since 2009 when first auctions targeting wind power projects were held. Some results of energy auctions in Brazil
  4. 4. • Some results of energy auctions in Brazil • Selected lessons learned from the Brazilian experience • Combining legal stability with auction design flexibility • Allocating technical responsibilities and creating checks and balances • Fundamental trade-offs in auction design • Final remarks Agenda
  5. 5. • The Brazilian primary legislation on energy auctions: • Deals with the necessary elements to ensure legal stability and transparency for the auction process and also includes elements that allow potential investors to form reasonable expectations on the long-term demand for energy PPAs, including: • Goals and high-level schedule of auctions; • Guidelines on eligible sellers and buyers; • Mechanisms to ensure creditworthiness; • Guidelines for allocating risks among sellers and buyers. • And also allocates responsibilities for determining the detailed design of auctions via secondary legislation (decrees and ordinances, regulations, etc.). • In Brazil, the secondary legislation deals with choices on qualification requirements, contract design, bidding and winner selection protocols, remuneration mechanisms, etc. • This has helped Brazil quickly adapt its auction design to changes in the electricity industry and in its economic environment, while maintaining the interest of investors. Combining legal stability with auction design flexibility
  6. 6. • To ensure that the flexibility provided by the secondary legislation did not result in a perception of risks by potential auction participants, Brazil: • Introduced a robust system of checks and balances among the governmental and para-governmental bodies responsible for auction design choices: • The primary responsibility for the design choices delegated to the secondary legislation were allocated to the technical bodies most fit to deal with them. E.g.: auction guidelines → energy ministry; contract design → regulator; etc. • Inter-institutional forums, with representatives of all of these institutions, serve as means to discuss choices on auction design elements. E.g.: the Special Commission for Energy Auctions (CELEE). • Ensured that decisions on auction design go through a due process, involving: • Obligation to execute regulatory impact assessment; • Public consultation mechanisms with proper antecedence. • This was facilitated by the robustness of the Brazilian power sector institutional framework. Allocating technical responsibilities and creating checks and balances
  7. 7. • Policymakers in Brazil learned that there are fundamental trade-offs in auction design: • Market-based decisions × administrative guidance; • Simplicity × complexity of the design; • Allocation of risks to project sellers (project developers) × buyers (consumers). • Policymakers have benefited to reflect about where the current priorities lie, within the continuous spectrum spanning between the two extremes in each of the dimension above. • This facilitates making the auction design choices and communicating them to the general public in an effective way. • A practical example, showing how auction design can (and should) evolve in time: • The first Brazilian auctions were more tilted towards the extremes “simplicity” and “allocation of risks to buyers”, since experience was scarce and fostering investor participation was a priority. • The current design moved towards the center of the spectrum, as competition increased and more complexity was needed to cope with an evolving power industry. • For instance, qualification requirements became stricter to curb problems with underbuilding. • Hurdles to the participation of smaller projects are not seen as an large issue, as other renewable policy mechanisms (e.g., net metering, discounts in distribution tariffs) cater to these projects. Fundamental trade-offs in auction design
  8. 8. • Some results of energy auctions in Brazil • Selected lessons learned from the Brazilian experience • Combining legal stability with auction design flexibility • Allocating technical responsibilities and creating checks and balances • Fundamental trade-offs in auction design • Final remarks Agenda
  9. 9. • By using auctions to award long-term PPAs for more than a decade, the lessons learned in Brazil include several successes and challenges. • For this short presentation, three lessons were selected based on the understanding that experiences related to the elaboration of primary legislation would be of utmost interest for this conference. • However, we reiterate that CCEE and other Brazilian institutions would be more than glad to discuss other topics related to our experience with auctions. • Naturally, the lessons presented here are deeply affected by the specific economic and sociopolitical context of Brazil. Final remarks
  10. 10. Thank you!

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