Energy exchange to launch in Brazil, aims to boost power trading

(Reuters) – A new platform for power deals in Brazil will launch next year, its backers announced on Tuesday, marking the first such energy exchange in Latin America’s biggest economy and an attempt to boost trading of energy financial products in the country.

Named N5X, the new exchange is a joint venture between the L4 Venture Builder fund backed by bourse operator B3 (B3SA3.SA) and European Energy Exchange’s Nodal Exchange.

It plans to start operations in 2024 and initially offer a service to register power purchase agreements between buyers and sellers in Brazil’s free power market, where generators can ink long-term power supply deals directly with large consumers.

The exchange also plans to pursue regulatory approvals so it can offer electricity derivatives and a clearing house to facilitate deals.

Brazil is the world’s sixth-largest consumer electricity market, and the No. 7 power generator, with an installed capacity of more than 190 gigawatts, according to N5X data.

The country’s electricity sector has increasingly embraced financial markets, including energy derivatives like futures contracts in recent years. But despite the initiatives, the trading volume of energy financial products remains modest, with most deals still linked to the physical delivery of electricity.

“There is an opportunity for the volume traded to be greater,” N5X CEO Dri Barbosa told Reuters, noting the total volume of power generation currently sold through financial products significantly lags the international average.

The new platform will adopt the role of a central counterparty. That could also boost traded volumes because Brazil’s power market lacks such a clearing house able to mitigate default risks that face electricity sellers and buyers.

Currently, energy traders have to assess credit risks of all of their counterparties, which imposes costs and is seen as limiting liquidity.

Barbosa said the joint venture partners hold “a long-term vision” for the exchange.

“They know that this is not a three-year project, it’s not a five-year project, it’s a very long-term project,” she said.

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