Managing Renewable Energy Risk in the Brazilian Forward Market: The Impact of Hourly Hedging

Abstract

A shift towards a carbon-neutral generation matrix is underway worldwide. In Brazil, where long-term forward markets drive investments, this trend is not different. For instance, long-term contracted renewable generation investors face the so-called price-and-quantity risk, which materializes whenever a generator falls short of producing the contracted amount and has to purchase this deficit at high spot prices. Notwithstanding, some renewable sources exhibit relevant hourly complementary generation profiles, e.g., wind and solar in the Northeastern Region of Brazil, suggesting a synergy that can be explored through exchange mechanisms to mitigate the price-and-quantity risk. Therefore, in this work, we investigate adecentralized approach based on hourly swaps, i.e., the exchange of forward contracts with different delivery hours. With these new hedging instruments, renewable agents can adjust their current flat forward positions and modulate them according to their generation profile and risk aversion level, thus minimizing the exposure to price-and-quantity risk through a pure financial market mechanism. We evaluate the benefits of the proposed mechanism through market equilibria using real data from the Brazilian power system. Results provide relevant evidence that the proposed hedging instrument should be beneficial to market agents and even foster higher long-term forward involvements with lower risk levels.