El Niño phenomenon influences Brazilian energy market, generating risks for 2027

The advance of El Niño is causing notable changes in the free energy market in Brazil. While the recovery of reservoirs, driven by intense rainfall in the South, resulted in a decrease in negotiated values for the coming months, contracts valid from 2027 onwards have begun to reflect a greater perception of risk.

This change is observed in the data from BBCE, one of the main trading venues in the sector. In the period between the end of May and the close of July, short-term contracts registered a 44% drop, while titles destined for the following year showed appreciation.

This contrast highlights the apprehension of generators, traders, and consumers regarding the impacts that the climate event may cause in various areas of the country. The possibility of lower precipitation in the North and Northeast regions, combined with the potential reduction in wind generation at the end of the year, raises questions about future supply and could lead to price increases.

Specifically, energy traded for September in the Southeast region was quoted at R$ 138.32 per MWh at the end of July, representing a 14% drop compared to June and a 44% drop compared to the last business day of May. Contracts for August ended the month at R$ 188.86 per MWh, accumulating a 23% retraction over the previous two months.

Conversely, contracts scheduled for delivery between February 2027 and January 2028 followed the opposite trajectory, with their values rising 1% compared to May and 4% compared to June. Although the increase is modest, the divergence between short-term and long-term contracts draws attention, as this behavior is not common.

The explanation for this dynamic lies in how the Brazilian electrical system reacts to hydrological conditions. Energy production depends significantly on the amount of water stored in reservoirs; thus, periods of abundant rainfall tend to favor price drops, while drier periods exert an opposite pressure.

In the South, the recent situation helped mitigate quotations. Data provided by BBCE shows that the region received, in July, a volume of rain equivalent to 256% of the historical average. The improvement in reservoir conditions helped reduce the perception of scarcity in the short term.

However, the same climate phenomenon can generate different results in other parts of the national territory. The projection of lower rainfall in the North and Northeast intensifies concern about water availability for hydroelectric generation throughout 2027.

This assessment gains relevance due to the growing importance of the North in the electrical system, especially after the commissioning of the Jirau, Santo Antônio, and Belo Monte power plants. For industry participants, climatic conditions in this area will be crucial in defining the market behavior next year.

Wind generation can also be affected. The forecast of less intense winds during the traditionally productive period for plants in this segment introduces another layer of uncertainty into the outlook. The decrease in wind strength in the Northeast may reduce supply precisely at a vital time for this generation modality.

The free market, where consumers negotiate directly volumes and delivery times with traders, currently has about 80 thousand clients and represents 42% of the energy consumed in the country. Currently, this model is accessible to medium and high-voltage consumers, such as shopping malls, industries, and airports, with expansion to residential consumers planned until 2028.

BBCE centralizes approximately 30% of transactions in this market. In 2025, the platform moved R$ 90 billion in energy contracts, which helps measure the importance of the prices recorded in this environment for sector agents.

The effects of El Niño are not limited to free market negotiations. The so-called captive market, where consumers do not choose their supplier directly, can also feel the repercussions, although the passage of these impacts to tariffs occurs differently.

A scenario characterized by lower water availability tends to demand greater participation from thermal power plants. Since this alternative has a higher operational cost, its use can raise system expenses and, consequently, pressure the tariffs charged to consumers.

The electrical sector has already implemented preventive actions in light of the climate outlook. In July, the Electric Sector Monitoring Committee, linked to the Ministry of Mines and Energy, advanced measures to strengthen supply security.

Among these actions, the anticipation of the supply of five thermal power plants that had been contracted in a capacity reserve auction held earlier this year stands out. These plants were scheduled to begin operations in 2027 and 2028, but were activated ahead of the original schedule.

However, this anticipation generates costs, as the plants begin receiving remuneration before expected, and consumers end up bearing this expense through system charges.

Therefore, the behavior of the contracts demonstrates two distinct moments: the improvement in water conditions in the South favors lower prices in the immediate horizon, but the possibility of adverse climatic conditions in other regions maintains a high degree of caution for the year 2027.