Electricity market operation: Transitioning from a free market to a single buyer structure

We examine electricity market reform in Brazil: from the 1990s till 2004 the largely hydro-powered market cleared using a market mechanism, and in March 2004 reformed to a single buyer structure. We model monthly log price differences using a two-state Markov Switching model, allowing water storage and natural inflows to affect both the mean and volatility of changes. Our results suggest that the single buyer structure decreased volatility during stable periods but worsened energy crises. Post-reform, we find that the market is safe from crises for a wider range of stored water/rainfall combinations; however the steady state levels of these variables can lead to energy crises developing.