Why Brazil Needed a New Market Model

This paper discusses how the issue of supply adequacy is treated in the Brazilian power market, analyzing lessons learned from past experiences and describing the solutions that are being implemented to reconcile competition in generation with an adequate supply. The primary goal of the initial reform process is Brazil was to ensure sufficient capacity and investment to serve reliably the country's growing economy. This work discusses the difficulties that were identified in its design in terms of supply reliability and the proposals and reforms introduced by two governments to correct them and to implement a design that reconciles competition in generation with a guarantee of adequate supply. It is shown that, due to the high influence of hydroelectric power, Brazilian spot prices do not provide clear economic signals for system expansion, which in turn make bilateral contracts a key element in the market design. Another difficulty that must be addressed is the need to provide adequate expansion in an environment where there is high uncertainty on demand growth levels