with Luiz Eduardo Barata, President, CCEE: Chamber for the Commercialization of Electric Energy in Brazil
You have been the president at CCEE since 2011, supporting Brazil’s trading system for electricity. How has energy trading evolved since CCEE started in 2000 and what has been your focus since you joined?
Before the creation of CCEE, another entity under the name of ASMAE – Brazilian Wholesale Electric Energy Market Administrator – had the responsibility to organize the trading of electricity. In mid-2004, CCEE became a company under federal law, created to manage the commercialization of the electricity market. Through this process our involvement became much larger, especially with an increasing number of “Free Consumers”.
Given the power shortage which took place in 2001 and the need for energy rationing, the energy market needed restructuring and we needed to change all the rules relative to it. In 2002, very few players were present in the energy market –around 100 – mainly large generators, distributors, and traders. When the government changed in 2003, a big discussion spread as whether to maintain or change the energy model. From a series of meetings and discussions, the energy model was restructured to ensure more security, long term vision, price reduction, and fair market conditions to the investors.
Until 2004 our activities were twofold – determine spot price and accountability measures of energy trading. However when the new power model started in 2004, this brought to our agenda two new environments – RCE (Regulated Contracting Environment) and FCE (Free Contracting Environment). We are responsible for the whole market which includes these two environments.
Today the free market represents only 26 percent of the whole market, and has a lot of potential to grow in the coming years. This market could reach over 40 percent, given the current eligibility criteria. Therefore, two important players contributed to our growth; free consumers and special consumers (free consumers with lower demand, until 3MW). Special consumers today represent nearly half of the players.
CCEE is a very important actor in the energy market, as well as ONS, ANEEL and EPE. We gather every month at the CMSE (Electric Energy Monitoring Committee) to evaluate the financial equilibrium of our market, trading model and discuss improvements to make with a long term vision. Of course, our journey has been challenging. When we started we were only managing 100 players whereas today we have more than 2500.
How have you been able to efficiently manage such a large number of players?
In fact, we are today trying to reduce their number by creating a special broker who would be in charge of part of these members. Dealing with a very large portfolio of clients implies an administrative backlog and a tight operational follow-up which is hard to maintain. The idea here is for CCEE to keep managing the largest clients and for the broker to manage the small suppliers and free consumers. In this sense we would separate the free market between retailers and wholesalers. This type of model is common around the world.
This new project and initiative should be operational starting 2014.
In the regulated market, your role is to promote the auctions purchase and sale of energy, as well as to manage the contracts in these auctions. How have you been able to communicate on this matter?
Every auction bid goes through the same process and involves the same authorities every time. When an auction is to be done, EPE -Energy Research Company – together with the Ministry of Mining and Energy define the amount of energy that is needed for the country. Also, in collaboration with ANEEL, they engage a large scale participation process to attract the highest number of participants to the auctions. When these steps are fulfilled, CCEE provides the commercializing platform, defines the rules of the auction and invests all of its human resources and capabilities to make the auction as efficient as possible.
This whole step by step process is important; however EPE, MME and ANEEL have a very important responsibility since they decide on the initial price that will open the auction. For instance earlier this year, we witnessed a real failure in an auction bid because the opening price was already too low and insufficient to be attractive to any investor. Therefore, our market is like a puzzle, where every piece must combine with the other to achieve a master piece.
How is CCEE reinforcing its footprint in a Brazilian electricity market which is highly unstable?
We recently established a partnership with two European entities, one clearinghouse named ECC AG – European Commodity Clearing – and one power Exchange Company EPEX SPOT SE – European Power Exchange – to bring a higher level of maturity, security, transparency, and expertise to our local market which is needed in Brazil.
On the one hand the clearinghouse controls credit and performance risk by evaluating and monitoring the creditworthiness of its respective counterparts. Also, it will effectively guarantee contract performances and standardize the default risk, relieving the market participants form the need to investigate the creditworthiness of those with whom they trade. On the other hand, the power exchange provides a market place where exchange members send their orders to buy or sell electricity in determined delivery areas.
Both of these partners will help us strengthen the trading environment through rules and mechanisms that promote fair business relationships for all segments (generation, distribution, trading and consumption).
What are the steps to take the Brazilian electricity market to the next level in the coming years?
Several important issues have been discussed to move towards a more competitive market design allowing quality of price formation, financial security and general competitiveness. Therefore with our international partners ECC AG and EPEX SPOT SE we have developed an action plan establishing five measures to follow to create a smarter Brazilian Electricity market for the future.
The first measure would be to get a PLD – settlement price for the differences – closer to real-time operation. Simply we would need to move our weekly scheduling to a daily one to improve the competitiveness of the electricity market. Second, we need to develop products to smooth the market functioning to increase the reliability of the functioning of the wholesale market. Third, we must implement clearing solutions to reallocate the risk, protecting the trader against counterpart defaults. Fourth, we will create a clear separation of wholesale and retail market, as well as incorporate demand response. This measure will lead to an efficient implementation of demand response programs, give that these programs differ for wholesale and retail markets. Finally, our last measure will be to organize market surveillance so as to avoid too much volatility in the market and increase market security.
Setting the right electricity market and rules is one thing, but defining our power model and energy matrix is another. This is why we must collaborate at all times to make sure we align on the right priorities for the country.