Electricity market design and renewable energy auctions: The case of Brazil

Highlights: • A competitive auction model is fundamental to develop the renewable energy sources. • Well-implemented and designed auctions can reduce risks to contracting power plants. • Effective and efficient auctions start with a comprehensive regulatory framework. • Long-term contracts reduce risk for investors. • Receivables of the contract as part of the guarantees allow the investors to have access to funding. Auctions have recently become the most widely adopted approach globally to procure renewable energy projects. Countries starting to use auctions often struggle to secure sufficient bidder interest – resulting in limited competition levels and high project prices. Brazil, a pioneer in the use of auctions to stimulate investment in renewable energy projects, offers important lessons on not only how auctions can be designed and implemented to stimulate competition and deliver effective investment outcomes, but importantly also shows how auctions form part of the country's electricity markets and can be integrated in a country's broader institutional and policy framework to ensure long-term success. This paper presents the detailing and specifications throughout the process of contracts and auction design definition to integrate renewable energy sources (RES) into the electrical matrix, from the institutional and procedural side to policy implications of securing the revenue stream and addressing off-taker risk between the sellers and buyers of electricity sector.