Market design and public policy for Battery Energy Storage System penetration: Case study Brazil

Abstract Battery Energy Storage Systems (BESS) can serve as one of the solutions for grid reliability concerns derived from the increasing share of renewable sources in the Brazilian electricity mix. However, the economic feasibility of BESS projects in Brazil is currently uncertain, as regulatory gaps and systemic flaws in the current electricity market structure impose significant challenges for BESS operations. This article argues that Brazil must implement a new electricity market design to accommodate and value the capabilities of battery storage technology. Drawing insights from California’s successful adoption of BESS, this work proposes a solution for Brazil that includes a bid-based market with a two-settlement mechanism. Unlike California, the zonal-pricing approach better fits the reality of hydro predominance in the Brazilian electricity market. The typical water cascade problem in Brazil requires a tailor-made solution, such as separating financial transactions from the physical management of hydroelectric power plants. The transition to a new market design must enable policymakers and market participants to simulate their operations within the new market environment. The general purpose of this work is to invite law experts to participate in the discussions concerning a new electricity market architecture for Brazil by contributing to a more comprehensive understanding of the economic issues involved in this subject.