The application of financial market instruments in the free energy market in Brazil will help reduce the risks of negotiations in the country, says the head of Risk and Strategic Analysis at N5X, Erick Takarabe.
The company intends to establish a settlement and clearing house in the country with a central counterparty, which should help to more efficiently manage market risks.
“We would allow access to financial market participants to also operate within the energy market”, says the executive.
Continues after advertising
For him, it is important that the free energy market now has this figure of the central counterparty, which intervenes between buyers and sellers, as occurs in the financial market.
“In the event of default on some sides, it honors the non-compliant party”, he explains.
Continues after advertising
The discussion comes at a time when there are rumors that some suppliers are unable to honor contracts and need to renegotiate sales.
According to Takarabe, today the three main threats in the free contracting environment in the country are market, counterparty and systemic risks.
Continues after advertising
Market risk is related to the variation in trading prices. Today, quotations are based on the difference settlement price (PLD), which fluctuates greatly due to the influence of climatic factors, as the majority of generation in the country comes from hydroelectric, wind and solar plants.
Read more:
“The influence of time and climate on the risk factor is very large,” says the executive.
Continues after advertising
Furthermore, there is still a risk between counterparties, which arises from the fact that today most negotiations in the free market are bilateral.
“If one goes bankrupt, all the counterparties it had in the market also suffer the risk of the contract becoming invalid”, he explains.
The scenario also leads to systemic market risk, which is related to the possibility of successive failure of traders, in a “domino effect”, if an agent defaults.
According to Takarabe, the creation of a central counterparty would bring a safeguard structure to the market, which would guarantee the availability of resources in cases of possible defaults. The resources would come from guarantees deposited by traders before starting to operate.
“In the event that one fails to honor and becomes defaulting, the central counterparty can use these deposited guarantees to honor the defaulting party,” he says.
Also know:
Free market: contract negotiation
In operation since June 2024, N5X is an exchange for trading electricity contracts on the free market. The initiative is a partnership between the L4 Venture Builder fund, supported by B3, and Nodal Brazil, from the European Energy Exchange (EEX) group.
Takarabe was recently hired by N5X to create the clearing house within the “energy exchange”. He was responsible for a similar operation in the Brazilian financial market, when the union between BM&F and Bovespa took place, creating B3.
“My big job was doing the modeling, defining the risk system, the risk model”, he explains.
According to the executive, the creation of the central counterparty can help attract large financial institutions to operate in the free energy market in the country and provide more liquidity to the sector.
“Many participants, not only from here in Brazil, but also from abroad, are interested in entering the market to provide liquidity. Having more participants to make more turnover in this market would be a benefit”, he says.
One of the next challenges in establishing the clearing house will be obtaining operating licenses from regulators, such as the Securities and Exchange Commission (CVM) and the Central Bank.
“The idea here is for us to be able to put together a structure, a functionality very similar to B3. Obviously with its peculiarities given this market, which is very specific”, he states.
Ricardo Bellino from Ensina
How to negotiate and persuade
Learn the art of persuasion from an elite negotiator; learn how to influence and convince people with the strategies of Ricardo Bellino, one of the biggest dealmakers in Brazil.