Spot Price Formation in the Brazilian Wholesale Electricity Market: Challenges and Perspectives

Energy Commercialization - CCEE). Thus, the adequacy of the PLD depends on the accuracy of system operator's forecasts and the results from the optimization model employed. In the way of adapting to energy transition landscape, this paper aims to highlight the main challenges of the cost-based market paradigm and to present perspectives for future improvements in the

Brazilian wholesale electricity market’s design.

Based on international experiences, this paper discusses the possibility of adopting a hybrid pricing paradigm—primarily cost-based, but with bid-based elements—allowing market agents to submit offers within specific limitations. This hybrid model could improve the accuracy of price calculation with better information from the market agents while still ensuring security of the market transactions and of the energy system supply. Another important perspective for improving the Brazilian wholesale electricity market design would be the adoption of the twosettlement arrangement to clear the market. Still, considering the Brazilian particularities, other mechanisms would be necessary to implement this new paradigm, such as (i) the virtual reservoir mechanism to coordinate the hydraulic cascades, (ii) the security bids mechanism (tied to the virtual reservoirs) to avoid long term supply risk, and (iii) the market monitoring mechanism. Those improvements are tested in a simplified representation of the Brazilian system showing the benefits to the Brazilian short-term market by enhancing economic signals for market’s agents and promoting more efficient use of energy resources.