ADDED VALUE TO ELECTRIC POWER FREE CONSUMERS IN BRAZIL BY FLEXIBLE CONTRACTS: AN APPROACH BY THE OPTIONS THEORY

Abstract

The process of restructuring the Brazilian electricity sector, begun in 1997, has given rise to a market for free negotiation of power supply between large consumers and producers. The bilateral agreements establishing the quantities of energy to be delivered, duration and price have become the main negotiating instrument in this scenario. With the passage of time, these power supply agreements have become more sophisticated, incorporating more flexible features. Among these are the options by the purchaser to choose the quantity of energy to be supplied (amount option) or to substantially reduce the amount or even to cease the supply during a predetermined interval (reduction option). This study examines the value of these flexibilities in the Brazilian electricity market. We modeled and valued the flexibilities as call and put options, using monthly energy price simulations, and ran sensitivity tests in relation to the size of the flexibilities, the prices contracted and the risk-adjusted discount rates. The results provide evidence that the joint value (aggregated to consumers) of the options for choice of quantity and reduction can exceed 20% of the contract value.