Energy call options auctions for generation adequacy in Brazil

Abstract

this paper discusses the implementation of auctions of long-term energy call options in Brazil as part of the instruments adopted in the country to ensure supply adequacy. We address the problem of comparing call options with different strikes, quantities and premium and describe the solution adopted in Brazil. We then address the bidding strategies of Gencos to set the optimal strike price and option premium for a thermal plant taking into account uncertainty in fuel supply. Case studies are provided to illustrate the approach.Index Terms--Power system economics, power system planning, call options.

Hedging Renewable Energy Sales in the Brazilian Contract Market via Robust Optimization

“…A direct consequence of this structure is that the spot price in Brazil does not provide a clear economical signal for the entrance of new generation as economic theory suggests [14]. In this sense, a strict rule was established to create incentives for the entrance of new generation: all consumers, both regulated and free, should have contracts that back up 100% of their loads.…”

“…For hydro units, the FEC is evaluated as the maximum demand that can be supplied within the worst hydrological condition of the historical record of inflow, being thus a probabilistic variant of the well-known concept of "firm energy" [41]. In the case of thermal plants, the FEC is assessed by means of a simulation procedure using the official dispatch model and is dependent of the operating cost given by the unit [14]. With regard to renewable units, the FEC represents a quantile of the historical production, typically being the 10%, 25% or 50% quantile of the renewable unit production [24].…”

“…The novelty of this auction, with respect to the one made in 2004, is that the contracts auctioned were energy call options in which the thermal generator needed to bid both its strike price and the option premium [43]. The final result were 3.2 avgGW contracted [14]. Another important auction carried out in 2009 were a single product were auctioned for a specific technology, the wind power.…”

“…In (3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14), the inner optimization problem (minimization problem) is performed over a set F of credible distributions given by the agent. In this sense, considering an appropriate F, the solution obtained by (3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14) can be interpreted as the best solution (maximization problem) for the worst distribution function that could be chosen within F (minimization problem).…”

“…Similarly to other countries, the new rules were designed to encourage competition in generation and retailing, leaving the distribution and transmission sectors still regulated activities with provision for open access [13] [14]. Following the main guidelines, the current power sector model relies on a combination of competition and planning to guarantee supply adequacy and provide a "safe" environment to attract new investors.…”