Position Paper: Regulatory Modernization for the Sustainability of the Brazilian Electricity Sector in Light of a Generation Matrix with High Integration of Uncontrollable Renewable Sources - 2024

(Translation to english using AI engine – GPT4o – version not fully revised by the author)

Alexandre Street

Department of Electrical Engineering, PUC-Rio

Founder, LAMPS PUC-Rio

Rio de Janeiro, August 20, 2024

Updated: March 8, 2025, with new references from recent articles

Reviewed by: Luiz Augusto Barroso, PSR Consulting

Objective

The purpose of this document is to provide input to the working group of the National Academy of Engineering (ANE) for the development of its position paper on the regulatory modernization needs of the Brazilian electric sector. To this end, the author makes the entire content of this document freely available for use by ANE for this purpose while also reserving the right to use it freely.

Abstract

The Brazilian electric sector, once robust and predominantly supported by a hydrothermal generation matrix, faces challenges that highlight the exhaustion of the current regulatory framework, established in 2004. Technological and behavioral changes, particularly the increasing penetration of uncontrollable renewable sources such as wind and solar power, require an urgent review of the system’s planning, operation, and pricing. The lack of adaptation to new realities has led to market distortions, where excessive subsidies hinder competitiveness and drive up consumer tariffs. This position paper advocates for a profound restructuring of the sector, focusing on the creation of a modern regulatory environment that promotes efficiency, sustainability, and economic fairness. The transition to a modernized electric sector is imperative to avoid a larger systemic crisis that could compromise the commercial and institutional sustainability of the country, severely impacting the economy and end consumers. Broadly speaking, it proposes, in a non-exhaustive manner:

i) a comprehensive review of the governance of computational models and their data (which determine system operation and energy pricing);
ii) a revision of the market design that recognizes the new operational reality, its opportunity costs, and the balance between supply and demand for different operational attributes/services (energy, flexibility, and ancillary services); and

iii) the implementation of a new sectoral pact that grants all consumers freedom of choice while gradually eliminating subsidies to create a competitive, efficient, and meritocratic market environment.

Preamble

The Brazilian electric sector, traditionally robust and supported by a predominantly hydrothermal energy matrix, has faced significant challenges in recent years, exposing the exhaustion of the current regulatory framework. The foundations of the existing regulatory system and market design date back to 2004. However, technological and behavioral advances have significantly altered the assumptions upon which the current regulatory framework was built, creating major distortions and disincentives.

On the supply side, the rapid expansion of new uncontrollable generation sources, such as wind and solar power (both centralized and distributed), has significantly changed how the system should be planned, operated, and how its resources should be priced. On the demand side, advancements in communication have brought the electric sector closer to consumers. Technology has enabled consumers to better understand their electricity bills and express, to some extent, their consumption preferences. Today, some eligible consumers in the free market can choose their energy supplier, payment conditions, and even invest in generation. Meanwhile, residential consumers who remain under regulated tariffs can purchase energy or invest in distributed generation (DG), which offers a quasi-free market experience.

However, these profound changes have occurred on economically unsustainable regulatory foundations. Excessive subsidies distort competition among generators. Additionally, past planning and operational practices, along with outdated market mechanisms, have proven insufficient to strike an optimal balance between security and cost for end consumers. The consequences of these distortions include:

imbalances in competition among energy sources,
the loss of self-regulation capacity through prices aligned with operational reality,

unnecessary investments alongside the failure to undertake critical investments, and

high final tariffs for consumers.

In this context, restructuring and modernizing the electric sector are essential to ensure a balanced, efficient, and sustainable system in a fair and meritocratic manner. Failure to modernize will lead to a severe crisis in the sector, threatening both its commercial and institutional sustainability, with inevitable physical and financial consequences for consumers and the broader economy.

The following sections outline key priority areas for regulatory modernization in a non-exhaustive manner.

1) Pricing System, Competition, and Long-Term Sustainability

The integration of uncontrollable renewable sources, such as wind and solar power, increases the demand for specific operational services, including flexibility in daily generation variability and reserve provisions to manage wind and solar uncertainty. It is crucial that the regulatory framework properly values these attributes, compensates providers accordingly, and fairly charges the agents responsible for generating the need for such services. Thus, improving computational models is fundamental.

Computational models used in planning, operation, and pricing play a decisive role in the technical and financial decisions of market agents. These models determine everything from energy production and remuneration for each source—thus defining investment returns—to supply security and consumer pricing. If these models fail to accurately reflect reality (whether due to data errors or inadequate modeling), they cease to properly recognize and value the services provided by different generation sources. This creates vast gaps between the services rendered and the prices paid, resulting in significant disincentives and risks for all agents.

To ensure that consumers pay fair prices for electricity and that the system operates reliably, these models must be continuously monitored and adapted to the sector’s evolving realities. Short-term pricing models (such as the Settlement Price for Differences—PLD in Brazil) serve as the electricity market’s clearing system worldwide. The key difference between countries lies in the realism embedded in these models, the frequency of their use to provide granular price signals, and the methods by which market agents’ data are processed. These factors make all the difference.

From the perspective of system planners, network expansion depends heavily on generation expansion, which is market-driven. Given that transmission expansion (which takes 4 to 10 years) currently lags behind generation expansion (which takes 1 to 5 years), proactive transmission planning must be robust to possible generation expansion scenarios. There is extensive literature on this topic (see [Moreira 2017] and [Velloso 2020] for a technical discussion). The current model is reactive rather than proactive in directing generation investments to optimal locations. The sector fails both in providing locational signals through tariffs and in offering concrete incentives for generation expansion in regions most relevant to the system.

Financially, the absence of well-designed real-time, short-, medium-, and long-term markets to correctly price and compensate the main attributes of generation—(i) capacity and energy, (ii) flexibility, (iii) ancillary services, and (iv) emissions levels—has created a massive gap between revenues and expenses, known as the missing money problem. This issue, where generators fail to recover production costs through revenues, is a primary reason for the lack of investment in storage solutions and the failure to tap into consumer flexibility to balance generation and consumption. This weakens sector attractiveness, creates severe regulatory instability, and fuels an ongoing cycle of regulatory demands that erode confidence in institutions. The result is a continuous and growing pursuit of subsidies, generating an unsustainable spiral that must be halted immediately—otherwise, energy costs for end consumers will keep rising.

To break this cycle, new regulatory and operational levers are required. These include:

Strengthening sectoral institutions (ONS, CCEE, EPE, and ANEEL) with improved technical capabilities and accountability,
Ensuring that computational models used for pricing align with reality,
Properly pricing system services and attributes,
Developing instruments that support investment in a technology-agnostic manner to foster innovation, and
Creating a fair market environment with clear rules and equal competition opportunities.

In a context where the governance of software that calculates prices and storage strategies—based on centralized calculations, future projections, and predefined risk aversion profiles—becomes highly sensitive and difficult to reach a consensus on, the only viable alternative is transitioning to an offer-based market scheme. This market is already a reality in Brazil, as both thermal power plants and consumers can submit bids in the post-DESSEM stage to cover load ramping between 4 PM and 8 PM.

In this model, market participants take responsibility for defining their own future projections, risk profiles, and production availability, submitting this information to the system operator. Although this scheme is often met with concerns about the potential for market power abuse, various studies have demonstrated that high levels of contracted energy, such as those observed in Brazil, are more than sufficient to mitigate this risk [Joaquim 2025]. Furthermore, numerous market monitoring mechanisms have been widely discussed and tested worldwide, making this transition a natural choice.

Nonetheless, regardless of whether hydropower bidding is conducted centrally or through decentralized offers, the accounting mechanisms, software, pricing models, and governance of data and computational models must be improved. Only through these enhancements will the system be capable of naturally stimulating or restraining renewable investments, attracting flexibility assets and services in an optimal manner—without resorting to additional subsidies. The following sections detail these initiatives.

1.a) Strengthening Sectoral Institutions (ONS, CCEE, EPE, and ANEEL)

Define a strategic governmental position to strengthen, ensure impartiality, and prevent interference in sectoral institutions.
Develop a renewal, expansion, and technical enhancement program for sectoral institutions through network-based academic training programs.
Establish research areas operating in a networked structure among all institutions. These research areas will serve as channels for long-term alignment between institutions.
Create a program for allocating R&D funds to allow sector companies to finance training and research programs within institutions. These funds would receive automatic approval, exempt from penalties or reductions, with companies able to allocate up to 50% of their designated funding to selected priority topics, respecting balance limits among areas. Sectoral entities would be required to report progress through annual research seminars, ensuring alignment with industry-relevant topics.

1.b) Governance of Computational Models and Data

Ensure that input and output data from computational models used in operational planning align with reality.
Establish new monitoring processes to detect atypical deviations and biases in advance.
Develop public dashboards with objective and transparent metrics to measure the discrepancy between forecasts and actual outcomes across various planning horizons.
Create an advisory board of experts (including national and international professionals with proven expertise in computational modeling and market design) and working groups of highly renowned technical specialists to discuss governance and technical issues related to data, models, and their applications.
Promote open forums for discussing technical and regulatory issues.
Establish comprehensive and continuously updated test databases for models, allowing researchers and market participants to replicate and evaluate methodologies, data, and models.
Implement a continuous monitoring process for alternative models through benchmarking and academic forums.
Develop an open-source mirror model for benchmarking and a standardized format for submitting new development proposals.
Ensure transparency and independence in the selection of the most appropriate modeling framework for ONS, CCEE, and EPE.
Align models, data, and criteria across expansion planning, operational planning (in its multiple stages), real-time operation, and pricing.

1.c) Revision of Short-Term Pricing

Define key network services and their timeframes to assess whether the pricing system correctly identifies, compensates, or charges agents for each service, such as: (i) energy, (ii) flexibility, and (iii) ancillary services, with hourly markets for the following day and short-term markets extending to real-time (e.g., every 15 minutes, see [Ribeiro 2023]).
Establish technology-agnostic and equitable pricing systems that objectively determine how each source should be compensated or charged for the services it provides or consumes. See real-time balancing market examples in [Itaú BBA 2025], slides 17 and 18, and [Street March 2025].
Expand pricing systems to include flexibility and ancillary services. Given the strong interrelationship between ancillary services, flexibility, energy, and complex interactions with the network, leading global benchmarks (see [Ribeiro 2023]) indicate the necessity of co-optimizing these services in the day-ahead and real-time markets. Meanwhile, emission-related attributes can be internalized by market participants through carbon trading markets (see [Muñoz 2021] for a discussion on the Chilean market).
Incorporate operational actions taken by the system operator into energy pricing models (from medium-term planning to daily scheduling). Develop a convergence plan between ad hoc interventions and optimized planning. This step ensures that suboptimal solutions implemented after day-ahead clearing are integrated and co-optimized with key system resources, allowing prices to more accurately reflect the actual marginal operational cost.
Enhance intra-day market mechanisms, currently formalized on an ad hoc basis in the post-DESSEM stage, to develop real-time prices and dual settlement (day-ahead and real-time) to ensure economically fair compensation for energy sources based on actual system needs.
Accelerate demand response programs and leverage distributed flexibility resources following international best practices, academic literature, and market price internalization mechanisms.

1.d) Integration of Generation and Transmission (G&T) Expansion Planning with Market Incentives

Revise G&T planning models to consider new operational and climatic uncertainties, operational policies, security criteria, multiple resource attributes, market trends, extreme event resilience, and the actual market conditions that will sustain expansion.
Establish bridges and connections via incentives between G&T expansion plans and auction designs.
Review tariff allocation criteria to enhance the connection between transmission expansion and generation investment incentives.
Internalize opportunity costs associated with various market agents (generation sources, hybrid plants, consumers, storage facilities) and network constraints in long-term remuneration mechanisms.

1.e) Separation of Reliability Product (Firm Capacity) and Mechanisms to Ensure Long-Term Supply Sustainability

Provide system planners and operators with flexibility and tools to ensure the availability of all attributes necessary for meeting supply criteria. Contracts can be structured specifically or jointly through medium- and long-term auction mechanisms.
Develop transparent and accurate indicators to realistically quantify each source's supply capabilities and the system’s demand for attributes (energy, ancillary services, flexibility, climate goals, etc.).
Publicly disclose system conditions across various dimensions (cost, security, flexibility, emissions, etc.) through dashboards with open methodologies and reproducible data.
Establish an official study and monitoring group responsible for defining and discussing methodologies, processes, and assessment indicators for system conditions, ensuring transparency and public access. The group should comprise representatives from sectoral entities (ONS, EPE, CCEE, and MME), academia, and international consultants, under neutral and independent leadership.
Periodically recalculate reliability indicators based on the validity of their underlying assumptions, ensuring their alignment with operational realities.

2) Consumer Freedom of Choice

One of the fundamental pillars of justice is freedom. Therefore, energy justice can only be achieved in an environment where all consumers have complete freedom to choose their energy suppliers. This principle is crucial for fostering fair competition between centralized and distributed generation, a key issue for a balanced and sustainable energy expansion. In this context, every consumer should be granted the right to choose their electricity provider or to generate their own power independently. However, exercising this right must not impose costs on others; costs should always be allocated based on causality. In a market with proper economic signals and fair competition, planning will support the market in identifying system needs and can be used to restore governance in the energy sector. True competition that benefits consumers is based on the price of each service provided, rather than on escaping from misallocated costs and subsidies.

Currently, all subsidies and compensations for regulatory or operational inefficiencies are passed on to the final tariffs paid by consumers. Residential consumers are the most affected by these distortions. This situation has created a major contradiction: a system that generates and transmits electricity at low costs but applies the highest tariffs to the most vulnerable consumers, namely residential users. This tariff bubble has driven large and medium-sized consumers to migrate to the free market to escape inefficient and subsidy-laden tariffs. At the same time, residential consumers, unable to make the same transition, have resorted to a parallel market for the allocation of distributed generation (DG) credits (see [Street 19/06/24] for further details). Since this market also includes cross-subsidies—shifting the cost of network usage to other consumers—the resulting profit margins have incentivized an exponential growth in DG, exacerbating issues for other consumers and causing significant problems in distribution networks.

Furthermore, the various subsidies granted to DG obscure locational price signals and the essential service provided by distribution networks to consumers who inject excess solar generation during the day and withdraw power at night. Finally, the continued bundling of energy supply and grid services under the regulated framework of distribution companies has worsened the situation. As regulatory limits on migration to the free market are lowered, consumers transitioning to the free market leave their former suppliers behind in the regulated market while simultaneously funding new generation projects in the free market—often unnecessarily. Thus, through a combination of excessive subsidies and an outdated regulatory framework that fails to reflect the sector’s new reality, the largest energy oversupply in recent years has been created.

It is important to note that implementing the regulatory changes proposed in this document, particularly those involving subsidy reductions, is a complex political challenge that requires a new sectoral pact. However, market liberalization has strong public appeal and resonates politically since there is no idea more compelling or just than that of consumer freedom of choice. Since implementing market liberalization will inevitably spark a sector-wide debate on subsidy redistribution and cost allocation, it is timely to use this moment to negotiate a new sectoral agreement. In this new pact, regulatory changes will be presented as the necessary pathway to ensure a sustainable transition to an open market. The following initiatives stand out in this regard:

2.a) Governance, Agenda, and Implementation of the Market Opening Process

Include market liberalization in government policy and ensure a technical discussion shielded from unilateral, non-technical biases.
Base all decisions on technical grounds, benchmarked against relevant international references, and reviewed by an independent panel of national and international experts through public hearings and broad discussions with society, academia, and industry.
The Ministry of Mines and Energy (MME) should lead the process, defining responsible committees, working groups, monitoring methodologies, and a public agenda and timeline.
Ensure active participation from consumer advocacy groups and involve highly experienced technical experts to maintain broad diversity and representation.
Set reasonable deadlines with a maximum timeframe of four years, defining a phased implementation schedule for liberalization and new regulatory guidelines.
Use the technical proposals developed in Public Consultation CP33 as a starting point, considering their execution, governance structure, and the lessons learned from this process.

2.b) Open, Transparent, and Competitive Retail Market

Implement the concept of “open energy,” ensuring consumers own and benefit from their energy data. Create protocols for data storage, access, and protection.
Develop standardized online certificates for a wide range of consumer and independent producer needs, from basic attributes such as payment reliability to more sophisticated aspects like demand response quality, DG generation performance, and energy consumption patterns.
Create transparent, auditable online certificates for service providers. Ensure that both suppliers and their products are evaluated based on objective metrics that assist consumers in making informed choices.
Establish a minimum set of rules for launching new retail energy products. Ensure that consumer contracts provide clear examples illustrating consumption and generation scenarios, highlighting differences, advantages, and drawbacks compared to the standard reference tariff model.
Use the “open energy” concept to enable suppliers to provide personalized comparisons using consumers’ own data, demonstrating the benefits of new tariffs and programs such as demand response initiatives.
Create a supplier-of-last-resort (SoLR) mechanism to guarantee service continuity for consumers in emergency situations, such as supplier insolvency or operational failures. The SoLR should also facilitate smooth transitions for vulnerable consumers who struggle to adapt to regulatory or market changes. The SoLR framework must be carefully designed to prevent arbitrage attempts while ensuring consumer protection.

References

[Street Março 2025] "Em busca da flexibilidade perdida", [MegaWhat] MegaWhat, 07/03/2025.

[Street Fevereiro 2025] "A Saga da Expansão por Subsídios no Setor Elétrico" [Valor Econômico], Valor Econômico, 14/02/2025. [PDF do manuscrito]

[Joaquim 2025] J. D. Garcia, A. Street and M. V. Pereira, "Long-Term Hydrothermal Bid-Based Market Simulator," in IEEE Transactions on Energy Markets, Policy and Regulation, doi: 10.1109/TEMPR.2025.3537665. https://www.lamps.ind.puc-rio.br/publicacao/hydro_market_simulator/

[LAMPS PUC-Rio 2022] Alexandre Street, “Reflexões sobre a governança dos modelos do setor elétrico e seus dados” em http://www.lamps.ind.puc-rio.br/noticia/modelingrisk/. Veja também o conjunto de artigos e ocorrências sobre as mudanças de governança dos modelos: https://www.lamps.ind.puc-rio.br/noticia/modelgovernance/

[Muñoz 2021] Muñoz, Francisco D., Carlos Suazo-Martínez, Eduardo Pereira, and Rodrigo Moreno. "Electricity market design for low-carbon and flexible systems: Room for improvement in Chile." Energy Policy 148 (2021): 111997.

[Ribeiro 2023] Ribeiro, Luíza, Alexandre Street, Davi Valladão, Ana Carolina Freire, and Luiz Barroso. "Technical and economical aspects of wholesale electricity markets: An international comparison and main contributions for improvements in Brazil." Electric Power Systems Research 220 (2023).

[Moreira 2017] A. Moreira, D. Pozo, A. Street and E. Sauma, "Reliable Renewable Generation and Transmission Expansion Planning: Co-Optimizing System's Resources for Meeting Renewable Targets," IEEE TPWRS, 2017.

[Velloso 2020] A. Velloso, A. Street, D. Pozo, J. M. Arroyo and N. G. Cobos, "Two-Stage Robust Unit Commitment for Co-Optimized Electricity Markets: An Adaptive Data-Driven Approach for Scenario-Based Uncertainty Sets," IEEE TSE, 2020.

[Street 23/04/24] "Repensando a gestão energética e o papel das fontes", Valor Econômico – (23 de abril de 2024).

[Street 19/06/24] "Revolução no varejo elétrico desafia regulação", Valor Econômico – (19 de junho de 2024).