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In just a few months the power markets changed substantially in Brazil. Energy contracting is a brand new business!

1. Relative prices have changed

Up until recently, power prices and rates (as established by the regulator) kept the same relative position. Therefore, decision-making for corporate energy users might not have changed for many years. Important new issues occurred:

• The Bolivian natural gas supply, which accounts for about half of the country's demand, is now much more expensive. Other energy sources such as biomass and fuel oil became more attractive than natural gas, in many cases.
• Deregulated energy prices out of traditional suppliers dropped significantly for 2009 and 2010.
• Deregulated energy prices out of subsidized (up to 30 MW renewable power plants) are not so competitive anymore when compared to traditional resources.
• Regulated rates have in many cases become cheaper than deregulated, reversing a long tradition in the market.

2. Decision-makers are demanding new evaluation criteria

Until recently, decisions about energy contracting were associated with finding the lowest cost alternative. Now that relative prices are changing all the time, a new approach is becoming required: risk management. A "basket" of energy prices is now far more attractive because it offers a better chance to achieve a sustainable, safer and acceptable end result as opposed to just selecting one that is cheaper on a specific week or month.

3. High volatility of the SPOT markets

For many years the SPOT was well below the long term firm energy prices. Accordingly, it was a tool to reduce costs for many industrial and commercial energy users who contracted a substantial fraction of their energy needs at the SPOT. About a year and a half ago, the SPOT started to show a huge volatility. Prices oscillated from R$20/MWh to R$500/MWh (1 USD = R$2.3). Now the SPOT has become a very risky option.

4. Regulatory changes

Deregulated energy users must register their contracts at the Câmara de Comercializaçao de Energia Elétrica (CCEE). If the contracted volumes registered are below the expected energy consumption, then the client must deposit a financial guarantee to cover for the difference valued at the SPOT. These new regulations make the SPOT a lot less attractive.

5. Physical projects have become very interesting

Energy management systems, retrofitting, on-peak generation, and load base cogeneration are alternatives that offer a wide variety of investment options (from low-cost-or-no-cost to capital intensive) for almost every pocket size. Given the increasing power costs in Brazil these physical projects have become more attractive than ever!

6. Energy quality is a major factor these days

A systemic deterioration of the energy supply chain (generation, transmission and distribution) is now perceived by most corporate energy users. Voltage fluctuations and unplanned interruptions are now relevant and influencing production costs. Dealing with this matter is very tricky but necessary, given the added costs involved. Utility companies have a natural tendency to deny these problems and since they have very heavy lobbies working on their behalf before the regulator, it becomes quite difficult to negotiate compensation.

7. An important change in Brazil's energy matrix

In the past few years, the thermal component in Brazil's matrix is getting a higher significance (in a country which, until recently, was all hydro). Thermal plants are more expensive to operate because of the fuel. This is significantly changing the average weighted cost of each MWh produced and delivered.

8. Brazilian energy for industrial and commercial energy users is among the most expensive in the world

Supply and demand are balanced at the supply's limit. Because of this fact there is a natural tendency in the recent years to build the fastest power plants (thermal) as opposed to ones that offer minimum costs (hydro). As a consequence the energy costs keep escalating, leveraged by one of the heaviest energy (VAT type) taxes in the world.

9. Regulated rates escalation is unpredictable

The regulator must use a very complicated model to simulate a theoretical utility company with an actual one to determine the escalation every year for each utility company. Very few people in the country know how the model works, so the escalation is always a surprise. In this decade escalation has been way above inflation for years. Surprisingly, though, in the past few years it was below inflation and/or even negative. This is seen as a mixed signal.

10. New role for energy consulting companies

In this more complex and sophisticated environment, energy consultancy has become, in a matter of a few months, a different animal. Clients now demand risk management as opposed to just finding the lowest instant energy cost. They expect structured solutions Therefore, the consultancy, as never before, will be engaged as a business intelligence partner who is supposed to show the client the alternatives, advantages and disadvantages, and the associated risks so that well-informed decisions are made. It is a whole new world.