How Brazil’s first capacity reserve auction of 2025 could impact battery demand

Changes to Brazil’s first capacity reserve auction of 2025 could undermine the expansion of the procurement regime to include battery energy storage systems (BESS) in the second exercise of the year, according to Markus Vlasits, chairman of Brazil’s energy storage trade body.
Image: Matrix Energy

In early January 2025, Brazil’s Ministry of Mines and Energy (MME) published rules for the first Capacity Reserve Auction (LRCAP) of the year. The procurement exercise, to secure enough electricity capacity to meet expected grid demand, has been expanded beyond the original gas-fired and hydroelectric generation facilities to also include biofuel power plants.

Contracted sites, for the 2025 to 2030 period, can secure 10-year deals.

“We expected the directive ordinance to be released before the rules for the battery auction, which we expect to be released in the first quarter,” said Markus Vlasits, chairman of the Brazilian Association of Energy Storage Solutions (ABSAE), referring to the second LRCAP of 2025, which will include BESS. “There is no indication of the volume of contracts; this is information that the ministry does not disclose. Now, the creation of a new [biofuel] product for existing thermal plants is something that is worrying, because it creates a large volume of supply and the expectation of a large number of contracts for this auction.”

The rise of small-scale, “distributed” electricity generation in Brazil, outside the remit of national electricity system operator the ONS, has meant a boom in “non-dispatchable” generation facilities – which cannot be switched on or off in line with grid demand patterns.

Brazil’s 35 GW of distributed generation capacity – mostly solar arrays – already meet around 28% of the demand of the National Interconnected System (SIN) grid, which encompasses almost all of the nation’s grid electricity users. However, those solar and wind sites may not be available to supply grid power during peak demand hours, from 7:00 p.m. to 9:00 p.m.

Abundant generation from distributed sites, during lower grid-demand periods, has driven around 4 GW of load shedding and the ONS believes that figure could rise to 40 GW in future.

“The ONS has a power deficit from 7:00 p.m. to 9:00 p.m. … the thermal plants would … displace other sources, those that can be shut down and, currently, the sources that the ONS can shut down are renewable sources,” ABSAE’s Vlasits told pv magazine. “And with that, the price of energy will increase.”

Source: PAR/PEL, ONS.

High generation costs

In 2021, the first capacity reserve auction held by the federal government contracted more than 5.1 GW of thermoelectric generation capacity powered by natural gas, fuel oil, and one biomass facility, with a total cost to consumers of BRL 3.4 billion ($559 million) per year, over a 15-year contract. The average price paid for the power capacity available from those plants was BRL 824,553.83 per megawatt, per year, for an average electricity generation cost of BRL 900/MWh.

The maximum reference value for the first LRCAP of 2025 will be the BRL 1,504/MWh production cost at the Paulínia UTE biogas site – the highest variable unit cost recorded in December 2024’s Monthly Operation Program figures.

“If we are not careful, contracting a large volume of thermal plants will not only impact the BESS market but will be bad for SEB [the Brazilian electricity sector] as a whole, and risk having a marginal contracting of BESS, with the argument that it is a new technology that still needs to be tested,” said Vlasits. “But that is not the case; this is a technology widely used in the world, with [analyst] BloombergNEF projecting that 200 GWh of projects will be integrated globally by 2025. It is a simple installation, basically pressing a button and injecting active power into the grid.”

The ABSAE chair said the MME, and especially its Secretariat for Planning and Energy Transition, recognizes the value of batteries and intends to contract BESS in the planned energy storage auction. He added, however, there is also pressure to contract existing thermal plants.

“We are building a technical relationship with the MME team,” said Vlasits. “Now, it is striking that a new [biofuel] product has been included [in the LRCAP auctions] and the pressure we perceive from agents interested in creating new products for the auction, the inclusion of existing thermal plants, is problematic. Because these are structural decisions that will contract power for 10 years.”

The first LRCAP of 2025 will aim to procure nine thermal power and one hydroelectric source, as outlined in MME ordinance 97/2025.

Regulatory burden

Vlasits also fears the impact of regulation suggested by the Brazilian Electricity Regulatory Agency (Aneel) for the inclusion of BESS in the second LRCAP, details of which were outlined during public consultation about the inclusion of energy storage.

“We must recognize and congratulate Aneel for the robust ordinance, which encompasses several applications, from large projects close to the [electricity] load to [energy] storage systems associated with [electricity] transmission and distribution assets,” said the ABSAE chair. “This … is very interesting but it also means that new business models will always emerge that will need to be considered.”

Vlasits is concerned about how long it will take Aneel to consider the contributions made in the latest round of that consultation exercise, which closes on Jan. 24, 2025. “After that, will it take another year for the results of the analysis to be released?” he said. “We need to be more agile than we were in the first phase of the consultation.”

An area of concern is the electricity Transmission System Usage Amount (MUST) tariff applicable to BESS. Under Aneel’s proposal, that figure would be the highest of either the charge for consuming grid power – to charge batteries – or of feeding it into the grid, while discharging. “For the auction projects, it is necessary to have clarity about the MUST rules and the authorization,” added Vlasits. “Without this, how are we going to present proposals?”

The ABSAE chair added, of the MUST proposal, “In addition to being complex – because it can change over the years of BESS operation – this can impact our operating costs. There is a conceptual inconsistency: if BESS will have a generation license, which is in line with practice in other countries such as the United Kingdom and the United States, then why would it be subject to paying the [grid electricity] consumption tariff?”

Another inflationary factor relates to a government tendency to gear the LRCAP auction to standalone BESS, which would require their own grid connection, rather than co-located batteries which could use the connection of an associated solar or wind farm. “All the decisions they are making make our solution more expensive,” said Vlasits. “They want standalone BESS because it offers more flexibility but it becomes more expensive since they will have to contract an independent connection infrastructure.”

The LRCAP expects co-located BESS to depend on the electricity flow margin at a connection point. “In practice, we will have little participation because the coupled plants are in places where there is no margin,” added the ABSAE chair.

Unlocking the storage market in Brazil

On Jan. 29, 2025, at 10:00 a.m., in a webinar held by pv magazine Brasil, Chinese electrical equipment maker TBEA will show how batteries are key tools to decarbonize, modernize, and make the Brazilian electrical system more flexible. Sign up here!

From pv magazine Brasil.

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