Analysis of Hourly Price Granularity Implementation in the Brazilian Deregulated Electricity Contracting Environment

Brazil's electricity market is the largest in Latin America and the ninth largest in the world. It has been implemented as a mixed market in which regulated and deregulated contracting environments coexist. The volume of transactions in the deregulated market has experienced steep growth over the last few years, and it is expected to surpass the regulated market. Different programs to diversify the country's energy matrix have been devised, especially by the integration of intermittent renewable sources aiming at safely addressing the deregulated market expansion. Consequently, such energy policy path has prompted the need to increase the granularity of the Brazilian deregulated market's spot price, namely Difference Settlement Price (DSP). The DSP had been weekly defined accounting for three loading levels and four submarkets and, as of 2021, it has been hourly defined accounting for four submarkets; the weekly DSP has been shown to be inefficient in actually signaling prices based on ex ante marginal cost of operation of the interconnected Brazilian power system. Besides such granularity alteration, Brazil has also undergone a severe hydrological crisis in 2021 that lead to significant lower water inflows into major hydrographic watersheds and, as a result, most hydroelectric power plant reservoirs hit a 91-year-low. The described scenario is relevant to energy economics since it depicts a momentous paradigm shift experience in a such a large electricity market. In this study, we present the first hourly DSP behavior analysis since its implementation in the Brazilian electricity market and explore its statistical characteristics and relationships with exogenous variables throughout the year of 2021. Additionally, we discuss the hourly DSP's volatility observed in the year of 2021 and how it has resulted in price spikes. At last, we compare the behavior of the Brazilian hourly DSP with energy prices of five other countries' electricity markets. Despite being a significant market improvement, the DSP granularity increase per se could not accurately represent the actual marginal cost of operation over the year of 2021 since, besides instabilities observed in the hourly DSP, market intervention mechanisms had to be applied by Brazilian regulatory agencies to minimize the hydrological crisis' impacts