The Relationship Between Climate Change and Pricing in the Free Energy Market

Objective: This study aims to investigate the relationship between climate change and electricity price fluctuations in the Brazilian free energy market, with a focus on drought periods. The goal is to demonstrate that there is a significant correlation between extreme weather events, such as prolonged droughts, and price behavior in this energy contracting environment. Theoretical Framework: Brazil’s electricity matrix is predominantly hydro-based, making it vulnerable to seasonal variations in rainfall. Both the regulated and the free energy markets are affected by hydrological fluctuations, albeit with distinct pricing mechanisms. This study draws on literature and institutional data related to energy pricing structures, climate change impacts, and the formulation of the Spot Price for Differences (PLD). Method: The methodology is based on bibliographic and documentary research, with data collected from official sources such as INMET (National Institute of Meteorology), ANEEL (National Electric Energy Agency), CCEE (Electric Energy Trading Chamber), and ONS (National Electric System Operator). The study analyzed data from 2020 to 2023, especially during the 2021 drought, covering reservoir levels, PLD variations, and energy tariff adjustments. Results and Discussion: The analysis shows a strong correlation between low reservoir levels and rising electricity prices in the free energy market, as evidenced by historical PLD peaks and significant tariff readjustments. These findings highlight the sector’s sensitivity to adverse weather conditions, even in a more flexible environment like the Free Contracting Market (ACL). Research Implications: Keeping electricity prices competitive is crucial for national economic performance, as price increases directly affect industrial competitiveness, cost of living, and energy security. The study emphasizes the importance of climate forecasting and energy planning as tools for mitigating economic and environmental risks. Originality/Value: This research contributes to the literature by demonstrating that the free energy market — although more dynamic and decentralized — is still highly vulnerable to climatic factors. The PLD, a key price indicator in the ACL, responds directly to changes in hydrological conditions and the need for more expensive and polluting thermal generation.