A dual-market strategy for evaluating wind energy investments in Brazil: a real options approach

Brazil changed the remuneration format of supplementary energy auction contracts in 2018. As a result, electricity generation companies that win these auctions are now remunerated based on the energy they supply as specified in the contracts. As a result of this change, electricity generation companies shifted their focus towards the free energy market (ACL), which typically offers more attractive prices per kWh. While the regulated market (ACR) typically offers lower remuneration, companies still show interest in participating in this market due to additional benefits beyond electricity sales, including priority access to transmission line concessions. On the other side, wind energy projects become susceptible to more price volatility as companies increase their participation in the ACL market. Consequently, the increased volatility has important implications for determining the best timing of plant construction since by delaying the investment decision, companies may take the opportunity to benefit from more favorable market conditions in the future. Understanding the premises and dynamics behind this dual-market strategy will provide insights into the decision-making process for wind power producers in Brazil. Therefore, there is a need for a comprehensive and integrated analysis methodology that addresses the uncertainties and interplay between joint participation in the ACR and ACL markets for wind energy projects, allowing for a more realistic assessment of the economic viability of this dual-market strategy. This paper addresses the problem using real options analysis (ROA) to investigate the viability of wind power projects installed by companies that participated in Brazil's energy auctions for the regulated market in 2018 and 2019. The findings indicate that even though wind power projects may have higher exposure to a volatile market, the option to defer is not always advantageous for these projects. In addition, the study also found that when analyzing the volatility of project returns, it is crucial to consider the proportional participation of projects in each market (ACR and ACL) since projects with higher participation in the ACR market tend to exhibit lower overall volatility in their returns.