Reform in Brazilian electricity industry: the search for a new model

The objective of this paper is to analyse the background of the reform process in the Brazilian Electricity Industry and to examine the adequacy of the new energy policy being implemented as a way to restore the level of investment, in particular private investment. The Brazilian experience of market-oriented reform questions the ability of the operational competition to ensure long-term security-of-supply. This experience shows that the competitiveness of the new projects depends on the costs structure of the power sector. When the power sector is based on cheap hydro-based generation capacity, new projects for electricity generation tend to have higher costs than the installed capacity. In this case, long run marginal cost of expansion tends to grow, creating important political obstacles for implementing a free market for electricity. As the government hesitated in letting all electricity produced to be priced at the marginal cost level, new projects have problems in getting power purchase agreement contracts. New investment and the reserve margins decreased, exposing the country to a power shortage. This paper has shown that the reform process in Brazilian electricity industry opens the way for a more coherent energy policy. If well implemented, the new model can help reduce the risks for new investments, preserving a central role for the private sector in the industry's expansion.