Title: Credit risk in the pool-implications for private capital investments in Brazilian power generation [An article from: Energy Policy]
Author: K. Rocha, F.A. Alcaraz Garcia
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This digital document is a journal article from Energy Policy, published by Elsevier in 2006. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

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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 B- 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.