Marcelo Sá (Head of LatAm Utilities at UBS) has released a report assessing the recent sharp drop of spot prices in Brazil. Below we present his analyses and thoughts related to this topic, as well as his considerations about how this is likely to impact companies´ valuation and, consequently, be perceived by investors.
Sharp spot price reduction may not be sustainable
The spot energy price fell this week to the minimum of R$40/MWh from R$233/MWh mainly due to: 1) higher rainfall (ENA) estimates for the S/SE regions, reducing the need for thermal generation; and 2) the start-up of the Xingú-Estreito transmission line (4,000MW), allowing the North region to export more energy to the SE/MW regions.
The spot price model used in 2018 is even more sensitive to changes in rainfall estimates, so if the rainfall outlook changes, there could be another price swing. We have seen big price swings in previous years, normally between May and June (see Figure 9). Although the sharp spot price reduction may not be sustainable, it has affected energy contracts for 2H18, reducing the average price to below R$200/MWh
from around R$260MWh.
Despite the price reduction, CCEE increased its spot price assumption for 2018
On 2 April, CCEE disclosed updated forecasts for the generation shortfall (GSF) and energy prices. CCEE now estimates an average 2018 spot energy price of cR$204/MWh for the Southeast/Midwest sub-markets, above last month’s forecast of cR$183/MWh.
The main reason for the increase is a change in how the Sao Francisco river basin will be represented in the model. Moreover, CCEE maintains its GSF assumption for 2018 of c.13%, below the 20.6% GSF in 2017.
Engie, Copel, AES Tiete and EDB are likely to have long positions in 2018
Anticipating a high GSF again in 2018, gencos such as Engie, Copel, AES Tiete and EDB have increased their volume of uncontracted capacity; therefore, they are likely to have long positions in 2018. Thus, EBITDA could be much higher than in 2017 if GSF is not as high. The short-term outlook of a lower spot energy price in 2018 is positive for highly contracted gencos such as Cesp, which need to buy energy on the spot market,
and negative for highly uncontracted ones, such as Copel and AES Tiete, which have to sell energy at lower prices.
A lower spot price could put downward pressure on long-term energy prices In our 16 January sector note, we reduced our long-term price assumption to R$150/MWh from R$175/MWh on the back of a lower-than-anticipated marginal cost of expansion and lower long-term price expectations, as per Dcide and Comerc.
In ourview, long-term energy prices will fall even more if the spot price remains low for longer. We reiterate our negative view on gencos, as we see downside potential to consensus estimates, given a worse outlook for energy prices.
GSF estimate: CCEE 2018 GSF forecast remained flat at 13.0% vs. 13.1% in the previous month. Given MRE energy allocation in 2018, GSF is likely to hurt results in 2H18.
See Report provided by UBS: