Thermal and Hydro Integration and Risk Management in the Brazilian Electricity Supply Industry

Market-oriented reforms in the electricity supply industry worldwide have changed the decision investment context. Risks, such as the real need for new capacity and the return on investment, which were formerly borne by consumers or by taxpayers, now have to be faced by investors. However, even when scarcity prices efficiently reflect the tightness of supply in electricity markets, the reliability of the electric service may be jeopardized by uncertainties affecting revenue and investment perspectives. This paper uses the Brazilian experience to discuss the main issues which have to be addressed by investors and policy makers in order to improve reliability through better thermal and hydro integration and concludes that despite its remaining weaknesses, improving the energy exchange framework may remove important barriers to attract new investment and establish an adequate integration between thermal and hydro power generation.