Credit risk in the pool—implications for private capital investments in Brazilian power generation
✍ Scribed by Katia Rocha; Francisco A. Alcaraz Garcia
- Publisher
- Elsevier Science
- Year
- 2006
- Tongue
- English
- Weight
- 266 KB
- Volume
- 34
- Category
- Article
- ISSN
- 0301-4215
No coin nor oath required. For personal study only.
✦ Synopsis
The new Brazilian Electric Sector Regulation of 2004 introduced two negotiation markets: the regulated pool and the free market. Competition in the pool is enforced via energy auctions, where the winning generator has to sign long-term power purchase agreements simultaneously with all distributors at the bidding-price.
To estimate the appropriate credit risk spread of the pool, we implement a clustering methodology to rank and rate the distributors. The results show an average spread between 5.75% and 8.5%, which corresponds to a credit rating of BÀ according to the spreads available in Reuters 2004. This estimation is at least 208 basis points higher than the credit rating Ba1/BB+ assigned to the distributors by the National Electric Energy Agency (ANEEL) in the periodic tariff revisions. Distributors with higher risk/spread are located in the South-Southeast, compared to the low risk/spread ones concentrated in the North-Northeast.
We estimate the opportunity cost of capital in real terms in the range of 13-16% to account for the credit risk of the pool. Essential to determine the bidding price at the auctions, this estimation is higher than the 11.26% opportunity cost estimated by ANEEL. The pool's credit risk has to be taken into consideration, especially for compensating new private capital investments in Brazilian power generation.