Quantity-before-Price Auction: Evaluating the Performance of the Brazilian Existing Energy Market

Rodrigo Moita and Leonardo Rezende

No 6, Business and Economics Working Papers from Unidade de Negocios e Economia, Insper

Abstract: In this paper we study the outcome of the six first “existing energy” auctions in Brazil. Under the current regulatory regime, the bulk of the trade between existing generators and distribution companies is done through bilateral eight-year contracts, negotiated in auctions organized by the regulatory agency. These so-called existing energy auctions follow a specific rule that we call quantity-before-price auction. In this paper we develop an auction model to study this type of game and take the model to the data. The structural model enables us to estimate the opportunity cost of selling energy for each generator, which is the price they expect to obtain in the free market in the future. We find that, while auction prices have steadily risen, the opportunity cost has increased even faster over time, indicating that the generators anticipate a faster increase in energy prices than what is measured by auction prices.

Pages: 21 pages
Date: 2008
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