During 4Q23, the number of power purchase agreements (PPAs) or electricity supply contracts whose energy price is linked to the spot price, marginal costs or CMg (variable price) reached record levels. Of a total of 62 contracts signed in said period, 53 were at fixed energy prices, 9 of them were at variable prices, representing 15% of the total, a percentage that contrasts with the fact that during a similar period of the previous year (4Q22) there were no No contract signed at a variable price was recorded, similar to what was observed in previous years.

Regarding contracted power, these nine variable price contracts represented 62% of all contracted power during 4Q23. It should be noted that three of these contracts were between related companies. One of them was signed between two entities owned by the Chinese government (supplier and customer) and two others were between entities belonging to the same local economic group. If we adjust these 9 contracts for the linking effect, in order to capture the most competitive behavior of the installment market (free users), we notice that these 6 remaining contracts continue to represent a record despite the fact that the contracted power involved in them falls from 62% to 12%.

The growing participation of forward contracts at variable prices would be mainly in response to: i) an efficient market (with lower marginal costs) in relative equilibrium, which in the event of any change in supply (or demand) conditions, the market adjusts quickly via increase in spot prices, ii) the speed of investments in efficient supply has not responded to the speed of demand growth, and, iii) the growing demand for electricity has been generating serious challenges in the installment market, which results in a change in negotiating power towards sellers (suppliers) who are transferring market risk (spot price) to the client, volatility that clients are not in a position to adequately manage (especially when spot prices are observed above US $ 400 MWh) 𝗽𝗿𝗶𝗻𝗰𝗶𝗽𝗮𝗹 𝗲𝗿í𝘀𝘁𝗶𝗰𝗮 𝗱𝗲 𝘂𝗻 𝗣𝗣𝗔 𝗾𝘂𝗲 𝗲𝘀 𝗹𝗮 𝗱2 ? 𝗼𝘀 𝗱𝗲 𝗺𝗲𝗿𝗰𝗮𝗱𝗼.

In January 2024, the picture would have changed since the participation of PPA contracts at variable prices would once again be zero. It will be necessary to see if it is maintained in the following months and in dry periods (low river flow). In this context, exploring on-site PPA contracts, such as the implementation of solar panels, already provide a very competitive alternative, since in geographical areas with abundant solar resources, base rates are beginning to be seen below 40 USD/MWh.

Source: Lumina Energy – Linkedin